Filed Under:Markets, Commercial Lines

Small & Regional Carriers: Still Raring to Go, After 2011 Cat Losses

Local knowledge, personal touch help little guys go up against insurance Goliaths; mutual structure is also an edge, execs contend

Even before the Bastrop conflagration came to be known as the costliest wildfire in Texas history, Dave E. Talbert and employees of the insurance company he leads were on the scene, handing out hot dogs to the blaze’s victims.

“We took shifts,” says the CEO of Hochheim Prairie Farm Mutual Insurance of Yoakum, Texas, recalling the aftermath of the September 2011 devastation. “We’re less than 100 miles away. You could smell the fire at our office.”

And when CEO Daniel E. Stone reported to the office early the morning after a March 2, 2012 tornado leveled Henrysville, Ind., his staff was already there, some with their spouses, getting ready for the road trip to begin to help clients reassemble their lives. He went with them and talked one-on-one with his policyholders.

The stories told by Talbert and Stone point to an important point of differentiation between small and large insurers: The “we-are-one-of-you,” personalized approach to providing insurance is what separates small carriers from the big dogs, they say.

And 2011, a year marked by catastrophes, was an opportunity—albeit an unwelcome one—for everyone at small carriers, from the top executive down to junior claims personnel, to show policyholders how well their companies could perform when they were needed most.

‘UGLY’ NUMBERS; BUT WITH CLAIMS COME OPPORTUNITIES

Like many of their larger brethren, small and regional carriers had a tough 2011.

“Our numbers are ugly,” Sandra Parrillo, CEO of Providence Mutual in Rhode Island, says of the insurer’s 2011 financial results.

But, with some exceptions, the little guys were able to weather a year of extraordinary storms.

“Our surplus is down modestly, but we paid every claim,” notes Parrillo. “It was a rough year, but we did what we had to do.”

Providence Mutual, which insures homes, automobiles and small businesses in New England, New York and New Jersey, experienced a catastrophe every quarter in 2011. It received about 8,200 claims, significantly more than its yearly average of 3,200.

Surplus at Hochheim Prairie dropped $12.6 million, to about $80 million. Germania Farm Mutual Insurance, also in Texas, saw catastrophes take a $17-million bite from surplus. Indiana Farmers doubled its catastrophe losses compared to 2010.

Ohio Mutual Insurance recorded about 4,200 catastrophe claims in 2011, and the group had $20 million in catastrophe losses—double its annual average.

“You get into this business knowing you’re going to have bad-weather years,” says James J. Kennedy, president and CEO of Ohio Mutual.

But to hear Kennedy tell it, the claims-packed year of 2011 presented thousands of opportunities for his company. “Every claim we took this year was a chance to show we have the resources to compete with the big guys,” he says. “People have to believe we’re as good as anyone. It’s the best advertisement.”

THE BEST MARKETING MONEY CAN’T BUY

Leaders of small/regional insurers often speak of the neighborly service they provide—an “alignment with our customers,” as Kennedy says. Or “localness,” as a marketer at Indiana Farmers phrases it.

“Being local is important because we know the region, the weather, the culture and the communities,” says John Donohue, chairman, president and CEO of Arbella Insurance Group, a New England insurer based in Massachusetts. “When weather causes pain and hardship, we feel it because we live here too.”

And this local emphasis—and ability to empathize—is a core part of the business strategy of small/regional players.

While customer satisfaction remains a priority to every insurance company no matter its size, small/regional carriers, without big advertising budgets, have to rely very heavily on the value of their insurance products and word of mouth.

“The number-one goal is the customer experience,” says Paul Ehlert, president of Germania, a rural property insurer. “We had many opportunities in 2011 to establish the value we bring.”

Parrillo notes that within 90 days of Hurricane Irene, 90 percent of her company’s claims were settled. Perhaps even more telling, 98 percent of its policyholders say Providence Mutual performed as expected or better than expected, she adds.

Talbert says Hochheim Prairie fused “stronger connections” to policyholders because of the company’s response to claims.

“When people get hit, that’s when they are going to make judgments about the value of the product,” says Chuck Chamness, president and CEO of the National Association of Mutual Insurance Cos. “That kind of opportunity can pay dividends for years.”

FEELING IS MUTUAL

Most small/regional insurers adhere to the mutual business model—another advantage over giants, in their view.

“Our focus is on policyholders,” says Parrillo. “We have no other motives—no one else to answer to.”

Shareholders of stock-structured companies may not be so aligned with the insured, executives at smaller carriers say, adding that many of those shareholders likely aren’t even policyholders with the company in which they hold stock.

“If we are doing this job to please a lot of stockholders, this doesn’t work,” Kennedy says.

Adds Stone, “We don’t answer to investors’ expectations.”

Policyholders are “the only reason we exist,” Talbert adds.

Many small/regional mutual companies have been in business for more than a century. Providence Mutual, for one, has been around since 1800.

“These are companies that are built for the long haul because they can think long-term as opposed to quarter-by-quarter,” says Chamness.

Additionally, leadership at these smaller insurers is typically well-tenured.

“They have seen the heavy catastrophe cycles and been through the hard- and soft-market cycles,” adds Chamness. “They’ve seen it all, and they don’t overreact.”

“When those in the C-suite have a shorter duration in their positions, you tend to develop short-term strategies,” Stone adds.

Strong reinsurance partners are critical elements of small/regional insurers’ success.

For instance, Hochheim Prairie was able to recoup $48 million of its $161 million in insured losses in 2011 via reinsurance treaties. About $40 million of losses Germania took from the Bastrop fire were absorbed by its catastrophe program.

And tight relationships with independent agents are also standard parts of the game plan for successful small/regional carriers.

“Independent agents are the best way for our clients to buy insurance,” says Kennedy at Ohio Mutual. “They know the area and what we are looking for and can explain the policy to an insured.”

HARD LESSONS LEARNED

While 2011’s catastrophes may have provided the chance to showcase the claims-handling skills of small/regional carriers, the year also, of course, delivered plenty of hard lessons.

Ehlert says Germania hadn’t budgeted for the type of destruction caused by the Bastrop Fire. Going forward, the company will be more conscious of brush and vegetative overgrowth on its properties, he says.

Homes with metal roofs fared much better in the fire, Hochheim Prairie found. The insurer discovered the discounts it offers these homes are indeed valid.

Parrillo says the frequency and severity of claims in 2011 has allowed the company to assess itself from an operational perspective. How quickly were representatives able to get into the field? How well did the independent claims-adjustment firm handle its tasks?

“If you don’t use last year to learn, you’re missing a great opportunity to grow,” she says.

Interestingly, despite the losses they endured in 2011, many small or regional insurers say they would write the same risks again, given the chance. Talbert says Hochheim Prairie isn’t going to change a thing—that the fires were an anomaly: “We couldn’t have underwritten against this. We know what we have. We’re standing firm.”

DIVERSIFYING BOOKS

Going forward, a growth strategy many small/regional carriers believe is important to their futures: diversifying their books of business, particularly by looking at lines other than homeowners.

Providence Mutual will “look for greater product diversification,” says Parrillo. The company rolled out an auto-insurance product several years ago, she notes, and is so far excited about the response.

Germania, too, will encourage growth in auto lines to mitigate weather volatility in the homeowners’ line, says Ehlert. Likewise, Kennedy says Ohio Mutual will “reinforce the package concept,” cross-selling its products.

Each company says it will look for rate increases to adequately price homeowners business.

“It’s not tricky,” says Stone of Indiana Farmers. “You risk-manage properly. You take rate and maintain sound reserve philosophies.”

In the face of severe losses, it’s important to remember the business upon which your company was built, says Talbert: “If we ever stray from what we have been and who we are, then we’re probably in hot water.”

Hochheim set a goal of 5 percent growth in property in 2012.

“We’re not nursing our wounds,” adds Parrillo at Providence Mutual. “We’re raring to go.”

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