How to navigate through a hard market?

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Paul Martin and Colin Rooke define the insider term “hard market” and what it means to be the best in class.

Listen to the full episode here, or read the full transcript below.

Paul Martin:

Welcome to Risky Business, Commercial Insurance with Butler Byers. Paul Martin here, the CKOM business commentator. And joining me, Colin Rooke, the Commercial Risk Reduction Specialist at Butler Byers. And Colin, over the last year or two, we’ve been talking about something that in the industry, they call a hard market. Now that is an insider industry term, but it really means that the industry, insurance industry generally, has not been doing very well financially. The cost of claims has exceeded cost of revenue from premiums. And so they’ve had to kind of rearrange the way they do things.

And let’s spark the conversation between you and I that if you are looking to buy insurance, you really have to scramble and make yourself look good to an insurance company because right now, they’re not real crazy about taking on every risk. They’re actually very, very selective. So we’re starting to see, I think you’ve indicated to me, that there are some early preliminary signs that maybe this hard market thing might just be … the end of it may be in sight. Might be a long ways away, but it might be in sight.

Do you want to just elaborate on that? The hard market’s been something that’s not fun for those who buy insurance. What are you seeing right now?

Colin Rooke:

Yeah, Paul, you made a really good point on how the hard market works. We talked about, it’s been sort of a downward slide for the past five years. Now, if you talk to any business that’s buying insurance, they would say, how am I coming out ahead, I’ve had increases for four or five straight years? But I will give it to the insurance markets. I mean, they’re looking at their loss ratio saying, for every dollar taken in, we’ve paid out a dollar 50 and we’re going to have to increase rates. But they didn’t do it overnight.

So, they didn’t look at the book and say, everyone’s going to get a 300% rate increase. We’ll return to profitability. They do do it over time. Just, when you’re in year four and five of it, it seems like a really, really long haul. And you’re delivering bad news over and over and over again and referencing the same thing, but it really is a cycle. They say, okay, well, our ratios are high. We have to work towards returning to profitability. And so that’s going to take time. And there’s finally, in the first six months of 2021, there’s finally some light at the end of the tunnel.

Now, losses, catastrophic losses, are quite low. Now someone might say, well, what about all the fires in BC and Alberta? Yes, that’s very costly to government. But in the whole swing of things, there’s not a lot of property damage. There’s some, but we’re not talking levels of the fires of Fort McMurray where, essentially a city’s burned to the ground. A lot of trees, yes. But not really property claims, as far as insurance companies are concerned. So very, very few cat losses, catastrophic losses.

And then, the results of COVID, where people aren’t moving around as much. They’re not driving as much. There’s people working from home. And so a lot of lines of business, outside of cyber liability and maybe directors and officers, we’re really seeing claims reducing. And back to the level of the true accidents, the things that you maybe couldn’t have of predicted. The water main snapping underground, which you really had no control over. So we’re now seeing, essentially the most profit in the insurance industry of the last 20, 30 years now.

So I say that, and you could say, okay, so I should start seeing premiums decrease. I can’t wait to talk to my broker. I’m going to get a reduction, probably, because they’re making money, so the hard market is over. Well, they’re very, very cautious. So they don’t think it’s any effort on their clients’ part that’s reducing the frequency and severity of claims. They’re basically saying, there’s a pandemic. And frankly, we’ve been very lucky with weather.

However, for some, there is room to move. I mean, there is more capital available. They are able to increase their level of risk tolerance. And so for the great risks, or if you’re a great risk that no one knows about this is the time to say, there is room there and I am one of the great ones. And even though you might be continuing to charge more for most of my competitors, here’s why I’m the one that should take advantage of the breathing room that is now in the market.

Paul Martin:

I love that terminology you used. I mean, it means any small business or business owner, any business actually, could aspire to be Gretzky. You called them, be one of the great ones. We should talk about a great one. What’s it take to be the great one? In business, in terms of how I’m perceived by an insurer, how do I get to be the guy who’s going to where the puck’s going to be, not where the puck is?

Colin Rooke:

Really good Gretzky analogy, again. And a really good point. So for anyone listening, you could say, well, that’s me. I haven’t had a claim in 5, 10, 15 years. I mean, I’m exactly what the insurance industry wants. And unfortunately, that’s not true. We use the term best in class all the time on this show. And I don’t know, maybe the insurance companies are listening, but that’s really something that’s thrown around on a day-to-day business, best in class, but it’s very, very difficult to define.

So again, as a listener, you would say, well, again, if their job is to pay claims when there’s losses, best in class would be those with no losses. Couldn’t be further from the truth. Best in class might be the way the building was constructed. It might be the organization chart of a management group. It’s the employee manuals that are … or the procedural operation of a board of directors and how they review themselves annually. It would be your cyber controls and how often you are revisiting those.

So it’s not really … in fact, it’s in almost in no way defined as loss history. The insurance markets say, that’s just luck. And that’s the business we’re in. You could go 100 years with no claims, you could be one of the great ones. And you could go every year with a claim and have the same operations exactly. And there’s just, there’s that luck component.

But for those that we really want to push back and say, we know there’s credit savings available. It’s everything you’re doing proactively, trying to get to where the puck’s going to be, saying, I haven’t had a cyber incident yet. And we’re going to put in a ton of effort to make sure that never happens. And then you’re going to work with a broker like us that’s going to share exactly what you’re doing to the market.

Not just filling out the apps. Writing a detailed risk management report to suggest, this is why, if there’s credit available, if there’s breathing room, if there’s relief, you can take on this client and not affect loss ratios or combined ratios. And then save the increases of the trailer of the hard market for those that really aren’t doing anything other than relying on luck.


Paul Martin:

The word luck has come up a few times in today’s program. And I’m really intrigued by that because lady luck goes both ways. Doesn’t it? I mean, the insurance companies have been saying, we’ve been lucky with weather. But it’s not about being lucky when you’re the company trying to buy insurance. When you’re saying to your broker, get me some coverage. Because luck doesn’t come into play there.

You actually have to produce something that is the exact opposite of luck. You have to show a broker. Show real production, real evidence that you’ve taken the steps.

Colin Rooke:

Exactly. And for anyone listening, if you’ve ever filled out an insurance app for a broker that’s sending out insurance apps, there’s really no area where you can explain why you’re so different. Why you’re a great risk. I mean, some of these apps at the bottom might have room for a line or two about any special comments you’d like to add. But if we’re just looking at claims history and construction details and revenues and number of employees and splits between US and Canadian operations, that is just the basics to go into the algorithm, to get the conversation started around rate.

The system will say, for this type of class … it’s going to look at every similar business on the books. And it’s going to say, statistically, we lose money on these and the rate needs to be here. There’s got to be a reason for an underwriter to either, sort of on their own power, or go back to a supervisor to say, there are a lot of credits available, or even some credits we’ll take now. And this is one of those accounts that, frankly, we really want. This is going to turn the tides for us. But there’s got to be that detailed report, that plan, that explanation of the why.

And if you’re just filling out an insurance app … and if all your conversation’s around operations, not risk and forward thinking, it’s not going to happen.

Paul Martin:

We’ve got to take a little break, Colin. We’re going to pick this up … you’re always triggering interesting thought processes for me. So I want to explore one of them when we come back. And we’ll just take a look at, what does this mean from management’s perspective? You’re listening to Colin Rooke, the Commercial Risk Reduction Specialist with Butler Byers. This is Risky Business, back after this.

Welcome back to Risky Business, Commercial Insurance with Butler Byers. Paul Martin here, your host. And joining me, Colin Rooke, the Commercial Risk Reduction Specialist with Butler Byers. Colin, before the break, you were talking about best in class and how you have to kind of reposition yourself and make the case. If I’m a business owner or a manager listening to this program, I’m thinking, oh man, that’s a lot of work. And aren’t they supposed to do that job for me? And what’s this all about?

But if you just look at the flip side of that coin, I mean, this is your job as management, right? Get to be the best in class. So this is just one more discipline that’s going to help you achieve that. And you’ve got some guidelines and programs and formats that will actually help me be better at running my business and make my business better. Which ultimately, will be a really much better place or much better thing to sell at the end of the day.

Colin Rooke:

Yeah. I couldn’t agree more. For those that get it, this is just … for those businesses that say, we want to be the best at what we do. This is just part of that. If you have a large supply chain, if you have thousands of customers that rely on you every single day, wouldn’t you want to have a full and complete disaster recovery plan in the event you suffer a major loss? And I would even venture further to say, the best companies, that’s how they think. And they are doing that, which is part of why they’re the best.

Or you look at cyber, incident response planning. Again, you’ve got, could be millions of people that rely on you. Take Amazon, for example. They need to have a plan in place. And I promise you, they have several, they have dozens in the event of data breach. And you say, well, how do they get to where they are? Well, it’s that level of thinking. So it is part of the day-to-day operations. This shouldn’t be a chore. This should be partnering with someone that’s going to help you in different areas of your company, really do what you’re already doing as a trusted advisor. And just change the conversation from insurance to risk.

Paul Martin:

Well, that’s interesting, because today we’re talking about the hard market. But really, in your repertoire or your library of information that’s available to any client … or a prospect, even. A prospective client, someone who isn’t even part of your client base. They can come to you and say … you could provide them with something on, here’s the disaster recovery plan you talked about. Or here’s the cyber incident management report.

But you could also do … you have them available on employee engagement. I mean, it’s not just one topic. This is like the whole manual for running a business. It’s kind of like taking an entire four year course at university, and it’s all available for free. Just call Colin up and he’ll give it to you.

Colin Rooke:

Yeah. Even for those organizations that say, we don’t even have an employee safety manual, or we did it once and it’s so out of date, give us a call. I’ll get you a current version. You are free to use it as is or revise it how you see fit, it doesn’t matter to me. But we can check the box. We can educate and say, okay, go through this, make sure it’s relevant. And here’s what I want you to do. Circulate it to everyone. And then, put in your calendar a quarterly reminder to review it. Even if every employee does not listen and actually review it, you’re doing your due diligence and you’re reminding them to do it, which is 10 times more effort than most.

And so it doesn’t have to be a huge undertaking. It’s just a matter of reaching out and having a conversation around what you have, what you don’t have. What you need, what you don’t need. Putting a plan together. And we do really focus on making it easy. But then again, we share that knowledge. We reference that, hey, they didn’t have an employee safety manual. They do now. And if you’d like a copy to the insurance market, here it is. You’ll find it’s extremely thorough. And now, it’s that simple. It’s done.

Paul Martin:

Yeah. I just wanted to circle back around on that, and to kind of summarize this. So I go through all of this … steps that you’ve talked about. I do these things. I mean, first of all, makes me a better manager. Makes my team better. Makes me a better business, which ultimately, increases my value.

But how does the insurance company look at me like this? I mean, that’s ultimately what we’re talking about here. So why does this elevate my profile in the eye of the underwriter?

Colin Rooke:

Good question. It shows the forward thinking. It shows that you are aware of your risks, and you have plans in place to those. You mentioned employee engagement surveys … and I’ve said this in the past. But you might survey the organization and say, we are doing fantastic. And that’s perfect. We’ll share that. Or you might survey the organization and say, there’s a lot of work to be done. Well, to an insurance company who is, let’s say on for the property, disengaged employees don’t go back to the office to unplug the coffee maker, so to speak.

Really stereotypical. But the disengaged employee does not get back in their car on Friday at seven o’clock and realize they were the last to leave and that thing’s still on and it may run all weekend. The engaged ones do. And we sell that story to the insurance market saying, why would an engagement survey affect the property rate? Well, these people care about where they work. In fact, they love working there. Turnover is so little, that these people bleed the colours of their organization. Versus, honestly, I don’t even know if they would put out a fire if they saw it.

Paul Martin:

Colin, we’ve got about a minute left before we run out of time today. So I want to go back to where we started this conversation. And it’s that there are signs on the financial markets that the insurance industry, the health of the insurance and industry, financially, is improving. That the numbers in the first half of this year show increased profit.

So am I reading this right if I get the conclusion that the steps that have happened so far are making some progress, but it’s not fair to say that the insurance company’s out of the woods?

Colin Rooke:

No. They have not forgotten how bad it’s been, despite a little breathing room. But again, there is breathing room. We just have to really exploit and sell those businesses putting in the effort. And I can assure you those that aren’t, or there’s really no story, they’re going to remain in the same spot for any length of time. I mean, there’s other industries where there’s no end in sight to the hard market. But again, if we can explain the operations the right way and show the effort, there is room.

Paul Martin:

To put another metaphor on it, this is a concert and we’re all lined up to get into the concert. And in the concert, the performance is better coverage, lower rates. Only the first few are going to get in. So what you want to do, what you’re saying is, let me help you get to the front of the line.

Colin Rooke:


Paul Martin:

You’ve been listening to Colin Rooke, the Commercial Risk Reduction Specialist with Butler Byers. I’m Paul Martin, thanks for joining us. And we’ll be back with the Risky Business next week.