Sometimes writers and consultants are too long winded. They takea roundabout way to avoid bitter reality. But for those who preferbrevity, I'll get to the point: This market sucks. It is the worstinsurance market since 1933. Commercial net premiums written todayare less than what they were 5 years ago. We also have the mostsignificant exposure decreases since the Great Depression. We havesevere deflation in the commercial insurance market. Some agenciesare working very hard and yet their growth is zero percent. Zeropercent growth in some parts of the country is great.

I am seeing agency owners and employees more scared than everbefore. I get the impression some employees have been charged bytheir executives to find growth or else. These companies absolutelymust find a way to grow and they must do it now. This desperateneed for growth is likely exacerbating the soft market.

Making the situation more dire is the fact that quite a fewinsurance carriers are the walking dead. My analysis of a number ofcarriers suggests many are in trouble because they lack the capitalto grow, and they lack the ability to generate sufficient profitsto build capital internally. This combination is going to put thesecarriers in a financial vice grip when the market finally turnshard. Based on my research, many carriers do not have the abilityto grow responsibly on a sustained basis under these soft marketcircumstances or possibly even maintain their current revenue base.I am not suggesting they will become insolvent, although that is apossibility. The more likely scenario is that some carriers willnot have the surplus to support the significant premium growth thatusually accompanies a hard market.

Carriers that are overly dependent on reinsurance will findtheir abilities to benefit from higher prices limited too ifreinsurance rates increase significantly before retail ratesincrease. The same type of squeeze will occur for carriers withbreakeven loss ratios that are too low because loss ratios arealmost guaranteed to increase significantly before rates increaseproportionately. Those carriers with inadequate breakeven lossratios will then be faced with significant losses and if they donot have adequate capital with which to absorb those losses untilrates increase sufficiently, they will have to make significantcuts some way and somehow. Of course, some will be tempted tounder-reserve with hopes of recovering before their under-reservingcomes to light. Some will place this big bet, even in light ofSarbanes-Oxley.

My suggestion that some companies may manipulate reserves is notan uncommon concern. Witness the recent analysis by the stockanalyst who wrote that AIG was under-reserved by $11 billion. LastJanuary, A.M. Best wrote that they “remain concerned that a numberof companies continue to prematurely release loss reservespertaining to more recent accident years to enhance current-yearunderwriting results, leaving open the potential for adversedevelopment on these accident years and reduced profitability infuture calendar years.” I don't believe pretending such behaviordoes not exist furthers the best interest of the industry.

I can already hear the protests from insurance companyexecutives, association directors and possibly regulators, claimingsuch behavior will not occur and no one should sow such seeds. Butthis industry is littered with the debris of companies which havedone exactly this. Just look at the last hard market. Thecommercial lines industry was likely broke in 2001-2002, but by notpublicly acknowledging the situation and with a lot of luck, mostcompanies escaped with their lives. Consider these facts:

1. Total reserve increases between 2002 and 2005 were $53billion, according to Standard & Poor's

2. Consequently, the industry was under-reserved by at least $53billion in 2001

3. In 2001, total premiums equaled $329,692,905,000, so thedeficit equaled 16 percent of all premiums

4. Almost all of this deficit was commercial lines, so the moreimportant measure is the deficit that's relative to commercialpremiums

5. Commercial premiums were $152,117,332,000 for a commerciallines deficiency of 35 percent

6. According to A.M. Best's January 2006 Review/Preview, “Forsome [carriers], a 25 percent reserve deficiency could render aninsurer technically insolvent”

7. In other words, in 2001, the commercial lines P&Cindustry was insolvent by at least this one measure.

Maybe the weak carriers will become lucky again. Many of thesecompany executives know their tenuous position and that is onereason why agents sometimes see ridiculously low pricing thatcannot be justified by any reasonable person.

That said, the insurance companies are making considerableinvestment income and surplus continues to build overall, althoughnot necessarily with specific carriers. While surplusdecreased
significantly due to investment losses in 2008, it did not decreaseenough to eliminate all of the extra surplus. Now, with the stockmarket rebounding and exposures still decreasing, combined withlarge investors seeking something to invest in, surplus continuesto increase, further exacerbating the soft market. With so muchcapital, I suspect losses will have to be substantial before a hardmarket really sets in.

For agents in general, this is not good news. I know many agencyowners whose entire growth plans consist of waiting for the nexthard market. Even in the best of times, this is a lousy marketingplan. In the past, it has occurred regularly enough to allowmisaligned self-congratulations, especially when the power of theeconomy driving exposure growth was added to the mix. Every agencymanager should use account growth rather than just commissiongrowth for that reason. Account growth is a much truer measure oforganic growth and really, organic growth is the only growth thatresults from hard and smart work.

Agencies seeking growth are going to have to work harder thanever. They will have to write many more new accounts, probably forat least another year. Rates and exposure growth are not going toinflate results. This is where an agency finds out what it's reallymade of.

The great news is that those agencies who are situated forgrowth through good management have possibly a once-in-a-lifetimeopportunity. So many agencies and even large brokerages are notprepared, so considerable low-hanging fruit exists today and morewill exist tomorrow. Some firms lack the capital wherewithal tomove through the next year without cutting staff. They lack theability to make acquisitions, develop producers and keep all oftheir carriers satisfied. Even though carriers today are so hungryfor any business that they will appoint agencies or maintaincontracts for almost zero premium, they quickly will pull contractswhen the market hardens. The opportunities are almost infinite foragencies that are adequately capitalized, have good procedures, andhave good producer management qualities.

All of this bitter reality is really a ray of hope for a selectfew agencies. I have never seen more opportunity building forsmart, hard-working agencies and carriers. Is your agencyadequately prepared to capitalize on these opportunities?