What makes an insurer succeed through all phases of the market?
Take a workers' comp insurer that is satisfied with achieving an industry-average performance, say by focusing on balance sheet and operating ratios. It is going to produce poor long-term returns. It will be jolted, perhaps even ruined, by adverse trends which actuarial methods and claims systems are poor at reporting.
To prevail throughout market cycles, a workers' comp insurer must struggle for real competitive advantages. Each advantage is limited in time or scope. Each is, in some respects, fragile.
The insurance executives who do this well are entrepreneurs. They are adept at perceiving and executing on competitive advantage. They can raise money and build teams.
Employers Holdings Inc. (NYSE: EIG) is an example of a traditional insurer which has evolved into an entrepreneurial one. Its origins are in Nevada's monopolistic state fund. In 2000 it was privatized into a competitive mutual insurer. In 2007 it transformed itself into a stock company.
It focuses on two market opportunities. One has been small businesses. The other is the California market which it first entered in 2002.
The State Fund of California was overextended and needed to shrink. The opportunity to make money in a state undergoing reform is open to all entrants, but for a few golden years only. Woe to those who dream it will last.
Take CRM Holdings Ltd. (NASDAQ: CRMH), for example, based in Bermuda. Despite its entrepreneurial culture, it found its stock price clobbered this spring due in part to regulatory action by the state of New York.
Other entrepreneurial, publicly traded workers' comp insurers include Amerisafe Inc. (NASDAQ:AMSF) which covers employers in hazardous industries; SeaBright Insurance Holdings Inc.(NASDAQ:SEAB) which covers employers in the construction sector; and Zenith National Insurance Corp.(NYSE:ZNT), which operates mainly in the California and Florida markets.
When Bruce Cochrane, founder of a New England insurance program called Renaissance Plan, launched his program back in 1994, he was blessed with several advantages. Insurance brokers who founded it or later joined used it to place their most favored accounts; there was at the time a huge residual market pool full of prospects and the venture made use of advanced loss management techniques such as early return to work.
Those advantages no longer prevail, at least not in Massachusetts. The marketplace today isn't as receptive as it was a decade ago to the launch of new workers' comp insurers which may require tens of millions of dollars in initial capital.
A venture capitalist told me recently that investors focus on pricing advantages, the underwriting approach and quality of management. That's another way of saying investors focus on competitive advantages and having the management team in place to capture and protect those advantages.
PETER ROUSMANIERE is a Vermont-based columnist for Risk & Insurance®.
August 1, 2008
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