While rates have been generally flat in the Inland Marine marketplace in 2015, premium growth continues as the slowly improving economy drives exposure increases — and overall, the line remains profitable.
In fact, Conning's 2015 Midyear Inland Marine Segment Report notes the estimated 2014 combined ratio for the line is an enviable 83, and notes the last time Inland Marine posted an underwriting loss was back in 2001. This consistent profitability — even through periods of economic turmoil — has not gone unnoticed, and over the past several years new entrants have brought plenty of competition into the space, exerting pressure on rates.
Despite challenges in the insurance marketplace and in insureds’ industries, the slowly improving economy means Inland Marine is still a good market for insurers. The Conning report says net premiums written grew 8% in 2014, after increasing 5.7% in 2013.
“We may not have the margins of five or 10 years ago, but profit is improving and we’re still growing,” says Andrew Cadelli, vice president for Inland Marine at CNA. “That trend is still going.” Pricing, he says, may be lower in some instances, but rate reductions that do occur are being offset by companies getting better terms and conditions or higher deductibles.
Ultimately, success in Inland Marine comes down to an effective portfolio-management strategy, says Cadelli — balancing tougher lines like Construction with some of the more specialized lines. For those who get it right, he says, the line remains “more consistent than any other line of business I’ve seen.”
But as tempting as the steady overall profits are, succeeding in any of the various lines that make up the Inland Marine marketplace takes a certain level of expertise — and those newer competitors that do stick around end up in a battle with existing players for the necessary expertise, making the overall talent shortage in the insurance industry more acute in this sector.
“It used to be you had a lot of concentration of expertise within given companies,” says Cadelli. “Now the talent is fractured and split all over the marketplace at a lot of smaller firms.”
A pool of talent is being traded back and forth as underwriters become opportunistic or they find these new markets willing to pay above market value, he explains. “Major carriers are spending top dollar for this talent and, as we’ve seen in other areas, it is a practice that is not sustainable for the long term.”
Cadelli says CNA goes to the marketplace for talent if the right expert and culture fit is available, but the company focuses much of its energy and resources on developing its own talent through its training program. CNA's top experts, he says, train the new wave, creating an internal talent pipeline.
Still, developing talent in-house does not make a company entirely immune to the battle for expertise in the Inland Marine space. “If you ask anybody sitting in an Inland Marine role in any company what their largest challenge is, it's disruption to business—business continuity due to turnover. I think there are very few companies that don't experience that,” Cadelli adds.
Role of new capacity
Construction and trucking are the dominant Inland Marine lines, and when new capacity enters the marketplace, those two areas tend to be the initial focus. “Trucking is probably the most common,” Cadelli says, noting that cargo, auto physical damage and higher-hazard construction lines are generally the entry points for new players with no existing Inland Marine infrastructure, products or distribution — which make up the majority of the new capacity he sees coming into the marketplace. He says these carriers try to do a good job underwriting tougher accounts in those lines to get their foot in the door, amass scale and build relationships before moving into other more specialized lines.
Dan Hooker, Bellingham Underwriters, a division of Arrowhead General Insurance Agency Inc. that specializes in trucking, describes the capacity he is seeing in the cargo space: “It seems there are more competitors in the space and the rates they are charging are cheaper than in the past. Additional competition includes new admitted U.S. products and Lloyd's syndicates with capacity for higher limits motor truck cargo, Inland Marine and contractors’ equipment placements.”
Hooker says Bellingham also underwrites Auto Liability for truckers but new competitors and new carriers are wary of the Auto Liability associated with trucking risks. They are more interested in the cargo and other Inland Marine sectors, and rates are more competitive for those lines.
Cadelli agrees, stating that, for cargo, “Pricing and margins there are the lowest of any product line I have.”
Competition may be most pronounced in the largest Inland Marine lines, but it's not limited to those spaces. Don Fiorini, Business Development, OnPoint Underwriting, a division of Arrowhead, specializes in logging equipment, and says he's seeing new competitors. He notes that it's a 50/50 split between existing players branching out into logging and new competitors trying to break in.
Joe Tracy, president, Travelers Inland Marine, says, “If there's one thing that's always a constant in our space, it's competition — people getting in, leveling off and leaving.” But the profits that lure companies are not easy pickings, there for anyone. “You can look from the outside in and say, ‘That seems easy,’ but once you get in, and you want to be committed to it, you have to go all in. You have to have laser focus on who you want to be; you have to understand the clients, understand the brokers who service those clients, and speak the language not just of insurance, but of the industry you’re insuring so you’re credible. You can't dabble.”
Once that reality sets in, new players will either make that commitment or exit. “Some people get it and want to invest,” Tracy adds. “But the vast majority want the quick hit and will maybe use the Inland Marine opportunity to offset some of their other shortfalls and balance their portfolios. As soon as the tide turns, they’ll look to bigger opportunities, divest from investing further in Inland Marine and move on.”
Value through service
As in many insurance and reinsurance lines, successful Inland Marine players are differentiating themselves by providing expert services in addition to capacity. In cargo, Cadelli says CNA uses a select group of producers because they take a consultative approach, offering on-call safety managers and working with insureds to improve safety standards and security.
Travelers, meanwhile, has a dedicated cargo theft special investigation group that works with insureds. Tracy says in the past five years, the group recovered more than $30 million in stolen goods for insureds. “That doesn't even include preventative measures this group of experts have shared with clients to prevent thefts,” he adds. Travelers also provides risk-control services in trucking and construction to help insureds address talent shortages in those industries—workers in construction and drivers in trucking.
Hooker, speaking from a managing general underwriter perspective, says Bellingham has to differentiate itself in the eyes of insurers, as carriers are scrutinizing MGUs more than in years past. “Bellingham Underwriters has two separate clients we serve in the managing general underwriting arena: the retailers seeking a quote for their transportation risks and carriers who are seeking an underwriter to act as their distribution source,” he notes. “If we don't make a profit for our carriers, we won't be around very long.”
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