Sometimes writers and consultants are too long winded. They take a roundabout way to avoid bitter reality. But for those who prefer brevity, I'll get to the point: This market sucks. It is the worst insurance market since 1933. Commercial net premiums written today are less than what they were 5 years ago. We also have the most significant exposure decreases since the Great Depression. We have severe deflation in the commercial insurance market. Some agencies are working very hard and yet their growth is zero percent. Zero percent growth in some parts of the country is great.

I am seeing agency owners and employees more scared than ever before. I get the impression some employees have been charged by their executives to find growth or else. These companies absolutely must find a way to grow and they must do it now. This desperate need for growth is likely exacerbating the soft market.

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

Carriers that are overly dependent on reinsurance will find their abilities to benefit from higher prices limited too if reinsurance rates increase significantly before retail rates increase. The same type of squeeze will occur for carriers with breakeven loss ratios that are too low because loss ratios are almost guaranteed to increase significantly before rates increase proportionately. Those carriers with inadequate breakeven loss ratios will then be faced with significant losses and if they do not have adequate capital with which to absorb those losses until rates increase sufficiently, they will have to make significant cuts some way and somehow. Of course, some will be tempted to under-reserve with hopes of recovering before their under-reserving comes to light. Some will place this big bet, even in light of Sarbanes-Oxley.

My suggestion that some companies may manipulate reserves is not an uncommon concern. Witness the recent analysis by the stock analyst who wrote that AIG was under-reserved by $11 billion. Last January, A.M. Best wrote that they “remain concerned that a number of companies continue to prematurely release loss reserves pertaining to more recent accident years to enhance current-year underwriting results, leaving open the potential for adverse development on these accident years and reduced profitability in future calendar years.” I don't believe pretending such behavior does not exist furthers the best interest of the industry.

I can already hear the protests from insurance company executives, association directors and possibly regulators, claiming such behavior will not occur and no one should sow such seeds. But this industry is littered with the debris of companies which have done exactly this. Just look at the last hard market. The commercial lines industry was likely broke in 2001-2002, but by not publicly acknowledging the situation and with a lot of luck, most companies escaped with their lives. Consider these facts:

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

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

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

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

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

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

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

Maybe the weak carriers will become lucky again. Many of these company executives know their tenuous position and that is one reason why agents sometimes see ridiculously low pricing that cannot be justified by any reasonable person.

That said, the insurance companies are making considerable investment income and surplus continues to build overall, although not necessarily with specific carriers. While surplus decreased
significantly due to investment losses in 2008, it did not decrease enough to eliminate all of the extra surplus. Now, with the stock market rebounding and exposures still decreasing, combined with large investors seeking something to invest in, surplus continues to increase, further exacerbating the soft market. With so much capital, I suspect losses will have to be substantial before a hard market really sets in.

For agents in general, this is not good news. I know many agency owners whose entire growth plans consist of waiting for the next hard market. Even in the best of times, this is a lousy marketing plan. In the past, it has occurred regularly enough to allow misaligned self-congratulations, especially when the power of the economy driving exposure growth was added to the mix. Every agency manager should use account growth rather than just commission growth for that reason. Account growth is a much truer measure of organic growth and really, organic growth is the only growth that results from hard and smart work.

Agencies seeking growth are going to have to work harder than ever. They will have to write many more new accounts, probably for at least another year. Rates and exposure growth are not going to inflate results. This is where an agency finds out what it's really made of.

The great news is that those agencies who are situated for growth through good management have possibly a once-in-a-lifetime opportunity. So many agencies and even large brokerages are not prepared, so considerable low-hanging fruit exists today and more will exist tomorrow. Some firms lack the capital wherewithal to move through the next year without cutting staff. They lack the ability to make acquisitions, develop producers and keep all of their carriers satisfied. Even though carriers today are so hungry for any business that they will appoint agencies or maintain contracts for almost zero premium, they quickly will pull contracts when the market hardens. The opportunities are almost infinite for agencies that are adequately capitalized, have good procedures, and have good producer management qualities.

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

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