AA&B seminar looks at a changing market

PEOPLE can debate whether the insurance industry is in a hard market or headed for one, but there's no question that the market has changed and that agents, underwriters and other insurance professionals need to adjust their approach to doing business. That, in a nutshell, was the overall message

One of the speakers, Jeffrey A. Packard, senior vice president of Commonwealth Risk, praised the insurance industry for the indispensable role it plays in the nation's economy, yet also took it to task for its seeming inability to be a steadier partner for its clients. The wide swings in insurers' earnings and product pricing that come about when markets harden leave the industry open to criticism that it doesn't know how to run its business, he noted, as well as to defections to alternative markets. To minimize the client distress caused by a hardening market, Packard said, client communication is vital. Whereas agents might simply inform clients of lower renewal rates by phone, he said, they'd better show up in person when they have to tell them that rates are increasing sharply.

One of the people attending the event, Kari Sampson Berry, a marketing specialist for Culbert Davis Co., an independent agency in Sioux Falls, S.D., provided an excellent example of how to prepare clients for higher prices. She said that for many of its long-term clients the agency prepares Excel spreadsheets showing how their losses and premiums have changed over the past 10 years. Trends are shown for property/general liability, workers comp and umbrella liability insurance. Typically, the charts reveal that a client's rates have dropped dramatically over the past decade while claims have remained steady. The agency's producers go over the spreadsheets with their clients 90 days before expiration. The clients also see the spreadsheets at the time they receive renewal quotes. Berry said the spreadsheets have been extremely helpful for justifying rate increases to clients and ultimately retaining their business.

Mark Kjeldgaard, CPCU, ARM, a policy strategist and project coordinator at Pinnacol Assurance, a Colorado workers compensation carrier, provided insight into why the insurance business behaves as it does. In his presentation, he explained that more than a little psychology is involved in how the workers compensation and other insurance markets operate. As insurers pursue revenue and market share in a soft market, they are apt to delude themselves about the attractiveness of individual risks. Underwriters allow themselves to believe that new management or loss-control procedures will make a claims-- prone business a better risk than it actually is; misclassifications (leading to lower premiums) are rationalized, and the liberal use of credits seems justified. Out of a sense of selfpreservation, underwriters take a short-term view of risks, preferring the option of "losing your job later" if losses eventually become intolerable to "losing your job now" if they fail to offer low enough quotes to keep business on the books. When alarm bells start sounding in the offices of upper management, as they are now (Kjeldgaard noted that the National Council of Compensation Insurance expects the 1999 accident-year combined ratio for the workers comp market to be 135%), the process reverses, and underwriting may become inordinately conservative.

Len LoVullo, CIW, president of LoVullo Associates CMGA, a managing general agency in Buffalo, N.Y., noted that the tightening market creates problems for intermediaries. LoVullo, who also is the current president of the American Association of Managing General Agents, noted that while MGAs' first loyalty must be to the companies for which they underwrite, they also feel the pressure to respond to retail agents' desires for low rates.

In today's market, LoVullo said, it is important for the heads of MGAs to tell their underwriters that it's all right to say no. Ironically, he noted, fledgling underwriters often are more comfortable with this message than those who have been in the business for 10 years or so-all of it during a soft market, however. A member of the audience mentioned that one of her underwriters recently stuck to a renewal quote that was several thousand dollars higher than the previous year's premium. The underwriter fully expected to lose the business but wound up keeping it, since all competing quotes were even higher. LoVullo noted that as such experiences multiply, they will reinforce underwriters' resolve, and momentum for more realistic prices will build. Members of the audience added that agents-and their clients-now seem to be willing to at least listen to the case for rate increases. A year ago, they weren't.

That doesn't mean that agents and insureds always will stick with insurers as the cost of coverage increases. William Yurek, president of Chicagobased Avreco Brokerage, noted that alternative-market mechanisms like "rent-a-captives" are becoming popular for some risks. He said that Avreco has arranged rent-a-captives for groups of doctors and other risks with medical-malpractice exposures. Such vehicles allow clients who are willing to retain a larger-than-usual amount of risk to benefit from investment income and underwriting "profit," if their losses turn out to be less than anticipated. Agents can become involved in rent-a-captives, Yurek said, in which case their compensation takes the form of negotiated fees rather than commissions.

There was much discussion about the nursing-home market at the Hard Market Consortium. Karl J. Amidon, senior vice president of Aon Re, in general expressed doubts about the existence of a hard market, noting that reinsurance still remains available for most treaties and programs except those requiring the participation of a large number of reinsurers. He said one exception, however, was in regard to professional/general liability for nursing homes, where he said he believes a true hard market exists.

Speakers at the event cited numerous factors for the problems in the nursing-home market, and many acknowledged that the nursing-home industry has done its part to bring the crisis upon itself. A chronic shortage of skilled employees was cited, a problem exacerbated by the low prevailing wages in the field. Fran O'Connell, vice president of health-care services at Shand Morahan, a Chicago-based E&S insurer, said that a nurse could make more "working at McDonalds" than at a night shift at a nursing home, where he or she might have to look after as many as 15 residents with varying degrees of incapacitation.

In some states-specifically Florida and Texas-the passage of residents rights laws is leading to an explosion of litigation, noted Michael R. Ragan, DMD, JD, senior vice president of CNA HealthPro. A residents rights law also was recently enacted in Alabama, he noted. Under these laws, Ragan explained, plaintiffs must show that a negligent act took place, but they don't have to prove that damages resulted. Actions leading to a resident's loss of dignity or respect are among those for which nursing homes can be sued, he said. As a result of the litigation engendered by the laws, nursing-home insurance rates are rising 300% or more for some facilities, he said, adding that average rates per bed are $3,000 in Texas and $6,900 in Florida. The few insurance markets remaining in Florida are underwriting risks stringently, Ragan said, especially for-profit institutions.

But even in the nursing-home market, there is a difference of opinion about the existence of a hard market, especially outside of Florida and Texas. Joseph Palumbo, president of American Marketing Center, a surplus-lines brokerage doing business in Ohio and three Mid-Atlantic states, said there was a "pricing crisis" but not an "availability crisis" in his area. While rates have climbed sharply to $100-$175 a bed from $20-$50 a bed, he said coverage remains affordable. Nor does Palumbo expect the market in his area to get much worse.

In this market, however, he said there is no place for sloppy submissions. "You can't get an underwriter to even look at an application that is not complete," he said. A good summary also should accompany a submission, he said.

Underwriters, meanwhile, have many new tools they can use to evaluate risks, Palumbo noted, including an abundance of online data. He mentioned that the federal government posts such information as individual nursing homes' staffing levels and inspection results at www.medicare. gov. (The applicable part of the site is www. medicare.gov/NHCompare/Home.asp.) "If you're an underwriter and have a poor price, you have no one to blame but yourself," Palumbo said, in light of such resources.

The surety market, meanwhile, is in good shape, according to Michael Dougherty, vice president and chief marketing officer of CNA Surety, although there are signs of trouble ahead, particularly in contract surety. "I call it `Hang on to your hard hats,'" he said.

A booming economy and a tight labor market have made it difficult for contractors to find qualified workers, Dougherty said. And while projects remain plentiful, contractors are leveraging their balance sheets to the max to obtain sufficient bonding lines to cover the work. As contractors' resources are stretched, both the frequency and severity of surety losses are beginning to rise, he said.

Meanwhile, the consolidation currently taking place among surety companies and the attendant shift in CEOs and the rest of senior management are adding to the instability of the market, Dougherty said. The carriers' reinsurers also are beginning to balk, he noted. In the past couple of years, he said many "have lost their shirts" on the excess-of-loss treaties they've been writing. Consequently, surety companies likely will have to either retain more risk or pay more for reinsurance, Dougherty said, which could lead some of them to step back from the market.

In this changing market, Dougherty said, agents may find underwriters looking for updated financial data on contractors on a semiannual or even quarterly basis, rather than just annually. Now would be a good time, he said, to get a contractor's CPA and banker more involved in the account to improve the contractor's access to capital and otherwise strengthen the bonding program. "The best time to get bank credit is when you don't need it," he observed. Contingency plans, in the form of backups for the contractor's current banker and surety, also are advisable, he said.

Several other speakers also provided their views on various aspects of the changing marketplace, including Letha Heaton, vice president of sales and marketing at Shand Morahan; David Stevoff, an E&S wholesaler with Heath Insurance Brokers of Illinois; and Kieran Dempsey, managing director of Avreco. Scor Re was the official sponsor of the American AGENT & BROKER Hard Market Sales & Marketing Consortium.

In 2001, American AGENT & BROKER plans to conduct several seminars of interest to retail agents, MGAs and others in the industry. Details will appear in the magazine as arrangements are finalized.