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By CYRIL TUOHY, managing editor of Risk & Insurance®

In February, Euclid Black, AAMGA president, Tom Albrecht, past president, Curtis Anderson, incoming president, and Bernie Heinze, executive director, flew to London where, over the course of a week, met with more than 100 people in 27 meetings.

Q: Speaking with Bernie last week, it sounded like it was good news all around?

A: It depends what the good news you are referring to. The good news is that our AAMGA trip to London was very beneficial. We have a fair number of members that are located in London and work in the London or Lloyd's marketplace. We believe it proper to go see them and give them updates. Each year we meet with some of the same people and with new people so it allows us to give them updates on what AAMGA is and is all about and current happenings as well as get feedback from them on issues that they have that may be similar or different as those of us in the U.S. There was a lot of discussion about the economy and the insurance industry and how it would be impacted. We heard a lot of different viewpoints.

Q: What were they?

A: There were a certain number of people that saw the current soft market cycle ending and providing a great deal of opportunity to those of us in the surplus lines arena.

Q: Ending by when?

A: That was different for different people, but somewhere in 2009. Most probably were (talking about) 3Q to 4Q, but it takes time to get passed through to the different levels. There were a few that said they didn't see any real action occurring until 2010. I believe that by second half of the year we'll start seeing things changing. From the insurance side, the market's been soft, prices have been reduced, along with catastrophes and losses that have increased because of price reductions. We see opportunity for the carriers to now level off and get back to more proper pricing. Then, the conversation, in almost every case went to, "well, OK, but what's the economy going to do? If the economy is still terrible, then how are our customers, if we either flatten or raise their price, going to be able to afford it?" Most were fairly optimistic that the economy will start coming back by the middle of the year. There was actually a headline in one of the London papers that said something to the effect that this was the worst recession ever in Great Britain and that it might take seven to 15 years to properly come out of it. That was obviously a very negative report. Most of the people we talked to said they were just a bit behind the United States but they had all the same problems and they really didn't expect to see the economic picture improve until next year.

Q: Is it possible to have a recession where buyers are squeezed by the economy with less revenue, yet facing harder rates? Isn't that what's happening right now?

A: It is and I suppose the best way to explain it might be that the rates are going up because they need to. The carriers' loss ratios have gone up substantially so they've got to raise rates because you buy insurance for the promise to pay a claim so you want these guys to be solid financially so they can pay the claim. So if they are raising the rates, what the insured will probably see is still a lesser price. Let's say last year his particular insured had $1 million in receipts and his coverage is rated on receipts; this year because of the economy his receipts are only going to be $500,000 so instead of his price going down 50 percent because the rate hasn't changed, the rate will go up so his price will go down, but not 50 percent. So that business will have a lesser price but a higher rate and thusly they can still buy insurance and the carrier they buy it from is a financially stable carrier because they are making sure they get the right rate for the exposure.

Q: If an insured has less money to spend yet rates are going up, the wholesale broker is put in a harder position to help the insured work it out, no?

A: No because what we're doing is offering coverage roughly at the right price, which is what we're always supposed to be trying to do--get the best coverage for the best price and unfortunately the market gyrates up and down a bit--so there are times when the best price is lowering and times when the best price is increasing. It's always key to find the best coverage no matter what the market or the economy is doing. Our job is to sell the insured the proper coverage they need at whatever the market price is and because we have access to many carriers we have the ability to shop that on their behalf.

Q: How do the insurance market changes and the economy affect the wholesalers?

A: Many wholesalers right now are laying people off and are concerned about the economic issues. There are some wholesalers that are instead gearing up to take advantage of the opportunities of the changing marketplace. The business that's gone into the standard market at too low a price is going to come back into the wholesale market, so there should be a good opportunity as we progress into 2009 and 2010 for the wholesaler in most lines of business.

Q: How are they gearing up?

A: They are either taking on new lines, they are either hiring new salespeople, they're buying new software and new technology. With any business there's investment that you've got to make in order to get the best fulfillment from the opportunity when it arises. Some wholesalers will see the glass as half full or believe that the economy is going to be bad longer and in order to keep their margins stable, they need to lay off some people. Others are looking at it with just a different view. They are saying the market is changing, the economy is improving and so we're going to spend those investment dollars so we're ready when the time comes.

Q: But if a carrier is accepting a risk at a price considered too low, that's not the buyer's problem.

A: That's correct, unless the carrier accepts too many risks at too low a price and goes broke before they realize it, and now it is the buyer's problem because now they have no insurance coverage. The standard lines industry is typically looking for more innocuous risk, less catastrophic risk, less new and unproven risk, classes on which you can't get data and statistics. But when they get aggressive, they lower their price and their underwriting standards and they get a lot of business that they are not really supposed to be taking. That's good for the customer at first glance, but if you write a lot of this and it takes them a few years to realize it, then by the time all the claims start coming in, it could just put that carrier out of business and that's part of what causes the swings in the marketplace.

Q: What kinds of things on your trip came as a surprise?

A: One of our biggest issues in our industry is technology, automation, simplicity/efficiency, that we've been talking about for many years. The London marketplace is working to try and create efficiencies for the benefit of the U.S. wholesalers. They seem to be on the same page with what we're trying to do here in the U.S. It was a pleasant surprise, if you will, that we might be making some progress towards some simpler technology that allows us to be more efficient.

Q: Hasn't London been doing that for awhile?

A: They've been working on it for a while. They've had numerous failed attempts and this time it looks like they might be heading down a road that they can actually get to the end of. They have a project which they call the ATLAS project. They are also adopting the ACORD standard which is a very integral piece with most companies, wholesale and retail brokers. As London adopts the same standard that's used in the U.S. this will allow the automation process to be easier.

Q: In terms of pricing, did anyone give you more specific percentages at all?

A: They did, but it probably wasn't exactly consistent across all the meetings we had. We heard in the past year anywhere from flat to down 30 percent as far as the pricing. We pretty much heard for the future anywhere from flat to up 5 percent, to 10 to 15 percent. In the reinsurance marketplace, those markets that had reinsurance treaties that renewed effective 01/01 went up anywhere from 5 percent to 25 percent. Eventually that increase from the reinsurer to the carrier has got to get passed all the way down.

Q: So, definitely some hardening there?

A: Yes, we have seen a tremendous increase in loss ratios in the last couple of years. The marketplace went from posting record profits and combined loss ratios in the 80's, to now starting to post combined loss ratios in the high 90's and some exceeding 100. There's no investment income to cover up improper underwriting these days.

Q: That's right. But that may be an opportunity for the wholesalers to really come in and help. Who benefits from that the most? And at whose expense?

A: The insured's carrier probably benefits the most because they now have the proper price for their product but the wholesaler's job as the intermediary is to place the proper coverage. As the price does move up and down with the numerous markets there's the ability to shop on behalf of the insured to make sure you've got the best price and the best coverage. The carrier's going to benefit the most but that's only if the loss ratio is good.

Q: Remind me how the (wholesale brokerage) process works?

A: A potential insured contacts their local independent retail agent or broker. That person then goes to the carrier to get the coverage placed. If they don't have a carrier who will accept that risk, they then go into the surplus lines marketplace to the wholesale broker or the MGA. Those terms are interchanged quite a bit. "Wholesale broker" is the broadest definition. MGA typically has underwriting facilities and capabilities on behalf of carriers and works more as an underwriter than they do a true broker. They then work with the carriers in the marketplace to place the coverage and it goes back to the retail broker who gives it to the insured and they decide whether they want it or not.

Q: Why would a carrier turn down an insured in the first place?

A: That could be for lots of reasons--new in business, poor loss ratio, difficult class of business, inadequate pricing. All of those reasons throw a risk into the wholesale or surplus lines marketplace.

May 1, 2009

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