Wham! That's what Charles T. McCloskey Jr., vice president of a New Jersey-based wholesaler, heard when, just months ago, a $100,000 cosmetics account up and left his Ridgefield Park managing general agency for carrier One Beacon. He felt the sting.
"I got cut out," he says. "The standard market got the business."
Courtesy of the industry's big names like State Farm, AIG, Nationwide and St. Paul Travelers, life's getting tougher for McCloskey, as well as Michael D. Miller, president and chief operating officer of Scottsdale, Ariz.-based Scottsdale Insurance Co.; Michael J. Riordan, executive vice president of Ft. Lauderdale, Fla.-based Hull & Co. Inc.; James A. Roe, president of Indianapolis-based Arlington Roe & Co; and Thomas M. Kuzma, president and CEO of Scottsdale-based Nautilus Insurance Group.
About 18 months ago, managing general agents were seeing standard-lines carriers take back accounts in the $200,000 range. The nibbles have turned into bites. Now, managing general agents say they've seen standard-lines carriers compete for accounts in the $100,000 range, says Miller.
So it should come as no surprise that managing general agents are finding they have to work harder to earn their keep. Yes, it may even mean that some agents will have to cut back on their number of weekly golf outings.
"It's getting tougher for us, there's no doubt about it," says McCloskey. "Where there were three markets, there are now six or seven, even in specialty areas like liquor liability in hard-to-write states."
Supply is plentiful, and agents are feeling it. "There's a bit of the standard market seeping back in," says Scott M. Anderson, with the Fargo, N.D.-based Concord General Agency and president-elect of the American Association of Managing General Agents.
Standard-lines carriers, having paid out huge amounts in hurricane-related claims, are in some cases facing astronomical reinsurance premiums. To pay for it all, they need income.
To get it, they need to capture more market share. The easiest way to execute such a "land grab" is to lower prices, broaden their risk appetite and pull back from the messiest risks, like property in high-risk hurricane-prone areas--Florida and Louisiana, for example.
When carriers become more aggressive and lower prices, the independent agents who represent them find there's less of a need to go to a managing general agent to shop the risk around.
What's happening isn't unusual, according to managing general agents, particularly for long-time observers of the industry.
It's happened before, says veteran Rollie Wiegers, chairman of the Arizona-based Colonial General Insurance Agency Inc. And it will likely happen again. So goes the laws of the insurance underwriting cycle. "We go though this about every five to seven years," he says.
He says that in softening cycles, standard-lines companies often cut rates by 10 percent or 15 percent. If they really want to decimate the competition, they may slice rates by as much as 50 percent.
"What they do is to get more cash flow, they will lower the rates, and the business that was coming to us that we were placing outside the standard companies, they come back and get real aggressive and take that back from us," Wiegers says.
When prices drop below a threshhold, managing general agents are more than happy to walk.
"We decide not to compete," says Anderson, president of the American Association of Managing General Agents. "We say we're not going to write it for less then this, so we lose the business. That means we have to look (for premium) in other markets and other types of business."
Not that the managing general agents are likely to suffer, at least not much. They know how to survive. They're nimble and often react quickly to changes in the marketplace. "Quite honestly, I think they are smarter than the primary companies," says Detlef Steiner, president of program insurer Sirius America Insurance Co.
"They are survivors," says one executive with a leading excess and surplus lines insurance carrier. "They are street fighters. You want them to be in a foxhole with you."
Managing general agents says they're prepared for the price battle--and survival. There's always a market for underwriting unique, specialized risks, according to them, even at a time when carriers are pushing hard to underwrite a greater portion of the "clean," simple risks.
"We get through with relationship and integrity," says Francis G. Johnson, president of Johnson & Johnson Inc., a Charleston, S.C.-based managing general agency. "Everybody's cutting prices, but I don't see the standard lines coming in and gobbling things up."
And, of course, it's just a matter of time before the carriers once again get "slaughtered" by losses and beat a hasty retreat, according to Richard Jeffers, president of the Alabama-based Ashland General Agency Inc.
For now, though, the price wars sparked by the aggressive entry of standard-lines carriers is likely to make life tough for agents like McCloskey in the near term. "They've definitely made the agent's life challenging," says Steve Bruss, vice president of Wing Insurance Agency, an Eden Prairie-Minn.-based agency serving the aviation market.
While much of the market for property/casualty has softened, rates have remained hard in the aviation market, he says. Insurance carriers have adopted a "take-it-or-leave-it attitude" with regard to insureds, says Bruss.
Carriers have tightened terms by asking for additional certification to underwrite flight schools, for example. "Coverage is down, and rates are up." In the cargo market, one of his clients is having a tough time finding coverage at reasonable terms. This has made life difficult for agents, Bruss says.
While agents and managing general agents may be having a tough time as the carriers squeeze distributors, the recent changes in the marketplace are for the most part great news for commercial buyers, the agents admitted.
With the July renewal season at hand, agents says buyers should shop as much as possible. Outside of property-catastrophe insurance and small niches like aviation, it's a buyer's market, and buyers have every reason to drive a hard bargain.
"It would be good for buyers. They would see their price go down after years of prices going up significantly," says Miller of Scottsdale Insurance.
But he also cautioned that the price fluctuations are also "dependent on risk characteristics" of clients, which means that for some unlucky buyers, they just may not be able to get the price break they think they deserve.
Buyers located in the Midwest and landlocked states are expected to benefit the most, as the standard-lines carriers enter a phase in which wholesalers are cut out of the deals entirely, and they compete more aggressively among themselves. "The standard market is coming in, and managing general agents and wholesalers have to become more aggressive and expand where we will do business," says Roe of Arlington Roe & Co.
Whereas two years ago, renewals might have gone to a wholesaler, they are now going to a standard-lines carrier, Roe says.
For the luckiest buyers, all this competition could mean a drop in premiums by as much as 30 percent to 50 percent, says Miller. He also says the market is neither hard nor soft, but "reasonable."
The price wars, while disruptive, are a normal part of the cycle, says independent agent Robert G. Slocum, president of The Slocum Agency Inc., in Warwick, R.I., a coastal state that carriers consider at higher risk.
Buyers are in good shape, as long as they realize that prices will one day go back up, and that when they do, prices may well shoot up by double-digit percentages to make up for the price-cutting that's happening now. "It's disruptive, but it's part of the game," Slocum says.
As long as carriers don't pull out of the market entirely, buyers will be well-served in the long run. It's when underwriters cease to offer coverage that fills Slocum with dread, because that's when there's just no way for him to find capacity at any price.
The danger of an extended price war is that it will eventually leave some carriers mired in red ink, forcing them to shut their doors in states where they do business. When carriers stampede out of a market and there are fewer carriers willing to compete for business, the remaining carriers in those states need to raise prices even more.
"As long as they (buyers) understand it's (the price cycle) going to come back around," says Slocum, buyers should be able to enjoy some hefty price breaks. And for the moment there's yet more good news for buyers who are not in the market for property-catastrophe coverage.
Excluding the spike in property rates for catastrophe coverage in Florida, parts of the Gulf Coast and California, "ISO expects strong capacity at year-end 2005 to fuel further cuts in rates in 2006, with industry premium growth for this year forecast at less than 1 percent," says Frank Coyne, chairman, president and CEO of Insurance Services Office Inc.
He says ISO expects underwriting results to improve as catastrophe losses recede from 2005's record level.
So, while these may be difficult times for some agents, and while it may be a dreadful time for agents with too much exposure to property-catastrophe coverage, for many a risk manager, it's a buyer's market.
Zurich Financial Services, St. Paul Travelers and Ace USA declined to comment for this article.
CYRIL TUOHY is managing editor of Risk & Insurance®.
July 1, 2006
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