Lower prices with a catch

Yeah, it’s a good point and good timing. In our industry, we’re three quarters of the way into the year, but we typically get the data from right now, for example, the first two quarters that data is in. But to take a step back throughout Covid, so from 2020 to end of 23, we talked about the hard market and prices increasing, returns being very low or negative for the insurance industry. And so there’s a very select few groups that would’ve fared through that time to say, my pricing was relatively stable. And those would be very small simple accounts typically. But then we talked about the value of, okay, even though pricing is going up, there is still discounts or there is still room.

So do you want to be on the far negative end where you’re saying, well, my premium has doubled or tripled, or do you want to say, although I’ve received an increase, it’s only 15% because I’m putting in the work? So we talked about again, what happened from 2020 to end of 23, and the result of that is that end of 2023 was a very strong year for return on equity in the insurance industry. It well above three and five year averages. So they would say this stance, this pricing, these rate increases have worked, industry wide.

So you say, great, okay, so what happens now? So they’re making more money. Are we going to see prices come down? And the answer really is no, not necessarily. So now we’ve got banks cutting interest rates, and we’ve talked about this in the past where the insurance industry is very reliant on banks’ rate of return. Why? Because they take all your premium and it doesn’t just sit somewhere, they invest it. So then they say, okay, so we have pricing where we want to be. We’re growing, however low returns is going to impact our returns. So now you say, well, we’re going to deviate, so we’re going to deviate from our higher pricing. We got to get into growth mode, we got to get more on the books. So that’s great for the consumer because we have insurance companies saying, go get new business, not at whatever cost, but certainly they are out trying to get new business.

And then we have a third factor though that’s going to impact all of that. And then I’ll get to the point because we’ve got catastrophic losses throughout North America, Canada certainly, but North America wide as well. And so you say, okay, now we have to grow because the returns aren’t great, but we’re actually paying out a ton of money in these natural catastrophes, so we still have to grow. We still have to get the returns up. We don’t want to go back to where we were. So they are going to be very selective in who gets the real discounts, the deep discounts, I can’t believe it type stuff. And so you want to put in the work. You need your story told effectively to be that customer, not the one on the outside looking in saying, well, I really haven’t seen a change at all despite all these markets being in growth mode. So you have to put in the work because they’re still concerned about all the money going out on the backend for these catastrophes.

It’s an interesting comment that you made, and I guess intuitively we understand this if you’re in business, but it sometimes very healthy just to say it out loud so that it’s very clear. But insurance companies really deal with two things when they’re looking at pricing. One is what are the losses that are coming in and how do I manage those? How do I pay for them? So I have to charge enough in premiums to do that, but also they are buffeted by financial markets and as interest rates go up and down, so does the sort of way they can make money. And we’re in this mode where central bankers have been attacking with higher interest rates to defeat inflation. Looks like they’ve wrestled it to the ground to quote an old phrase. Now interest rates are coming down, but that you would think on the surface that should be good news. But actually for financial players, like an insurance company that actually has serious implications or significant implications for their ability to make money.

Yeah, and a lot of people will come and say, well, if the whole industry’s making money, are we going to see rate relief? No. If you are taking in record premiums and not paying claims, you want to maintain that. The real driver of growth are these unpredictable returns in the market. And so again, great spot to be in, but they aren’t unaware of these rising claims. And so as a policy holder, what you really need to think about is the underwriting requirements that are going to be needed to okay, the deep discounts, the real discounts to see real savings to be the best in class as a term that we’ve thrown out. And so they’ve got more capital to deploy, but they’re going to be selective with it. And that’s where we come in. That’s where, again, you focus on underwriting information for sure, but more of it you have to ask the questions that the insurance markets aren’t asking. You have to build the case. At the end of the day, we are your advocate. We lobby our clients to the market and the more risk mitigation we can discuss, the more discussion around just the understanding of the nature of the risks of our clients and how they intend to address it and where there’s issues and the work being done to solve those issues. That is the most important component in today’s market.

I love the way you describe it because storytelling is kind of what those of us in the media have been all about. And here you’re talking about it from an insurance perspective. I think that probably might raise an eyebrow or two or surprise people, but it makes sense when you talk it through is that you’re making your case when you go to an insurance company, you’re making your case for why I deserve a different premium than what would be off the shelf, if I could put it that way.

Yeah, absolutely. You have to really consider what is being said about my company. So again, back to the catastrophic losses. I mean, if you are anywhere near a major exposure, so you’re an area subject to wind, to rain, to hail, to earthquake, just flooding in general, forest fire, you’re not going to see what could be available to you unless you can educate the underwriter on what steps you’ve taken to minimize losses. They’re already going to say, okay, in your industry, let’s say it’s manufacturing, I am told to be more aggressive. I am told to get new accounts on the books, but the area you’re in concerns me. And so they’re just going to move on. And so you say, well, there’s a lot I could do to mitigate these risks or they’re not going to know that. And just saying that, well, it’s low risk isn’t going to help you. It’s that story. It’s putting pen to paper and really selling how you think and what you plan on doing today and into the future.

Colin, we got to take a little break. I want to pick this up when we get back. 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. I’m Paul Martin, and joining me today, Colin Rooke, the Commercial Risk Reduction Specialist with Butler Byers.

And Colin, just before the break, we were talking about efficacy and the effectiveness of storytelling and the fear of saying that I’ve got an insurance broker who’s a better storyteller than someone who makes a living telling stories. I want to explore this a little bit further and just that the root of it all, you can tell the story all you want, but you have to have some meat in the story, right? There have to be some facts. You have to be able to demonstrate to the insurance company, Hey, this client that I’m bringing forward as a broker is better than all the rest, and here’s why. And so what is the why in all of this? So if I am owning a company and I want to get in on the right side of what you’re talking about here, what’s my responsibility in this? What do I have to do?

Well, you’ve got to get advice. You have to say, again, you got to think proactive. You got to think, the decisions that I make today, how is it going to impact me in 5, 10, 15 years? Think like a visionary. If you are planning, let’s say an addition to your building or you’re looking at a new location, reach out and say, okay, get some advice and say, how does this property look to the insurance market? You might be saving some money moving on the outskirts of the city, but ask the question, what are the long-term ramifications of this type of investment? Don’t build it first, ask later. Collaborate with someone that understands your level of risk.

And again, it’s not just about saying you’ll save 10% off the property premium. It’s really about ensuring the discount means so much more than just the discount. It’s the insurance market saying you are less likely to burn to the ground, which nobody wants. You’re less likely to flood, which you do not want to go through. And so sure, savings aside, or how about you’re not going to have employees with respiratory problems if you install a proper dust collection system. And so again, it’s about sure, some savings, but it’s also about, we’ve talked about just being a better performing business overall.

I’m going to jump on you too. I want to touch on, because everything so far has been property related, and I just want to give a quick update too on what’s happening in the casualty side, the liability side, and it’s kind of interesting. So you’ve got, in the casualty side, you have primary, so your regular insurer, whatever limits you buy there and you have excess. And so that’s the liability you buy over and above what you’re typically purchasing from your normal carrier. So this is kind of strange and very kind of a different way of looking at things.

The primary liability, so your regular liability, that has not changed much. They’re still concerned about paying out major claims, but the excess liability has gotten quite affordable. There’s a ton of competition in that market if you’re telling the story, correct. So a neat thing to look at now is do I reduce my primary liability add in excess because there’s a play there because there’s a lot of discounts available if the broker knows what they’re doing and if your story’s being told. So I’m just touching on that. There’s strategy around placing the policy as well that you need to consider. And the strategy itself will improve if the story improves, if there’s more to talk about.

That’s interesting, and you really just don’t get that from the annual renewal form that comes out, you don’t get that nuance. The notion of engaging in a dialogue with a broker that’s regular, consistent and ongoing makes a big difference in the way you position your story, as you say. But I guess also you just have to simply do the work too. You have to have to explain why you’ve taken certain moves and kind of just diarize it or categorize it or summarize it so that it’s actually available information that the broker can assemble into a coherent manner that the insurance industry will accept or understand.

Exactly. I mean, at the end of the day, you should say, there’s a plan in place for my account. I understand what we’re doing, why we’re doing it. I understand what’s being said and how it’s being said. And so you should say there’s strategy. I understand the strategy, working a strategy both on the storytelling side and on the purchase and placement of my account. They’re working together. And that is how the process should be.

It is actually more than a transactional relationship. Then there’s part of it. It’s basically a teamwork exercise, isn’t it?

Yeah and it needs to be, if you want to feel like again, you have appropriate pricing, you have a team that’s working on your behalf, that understands your company, and therefore the premiums you’re paying feel reasonable but also understandable due to the effort being put in. And the alternative is you fill out a short application. Sometimes there’s follow-up questions, or sometimes there’s follow-up applications, very generic, all goes to the same place, and you’re just given a price. And if you’re on the fringe of these cat areas or there’s just nothing more being said, you’re not going to get these credits that are being ordered by the insurance industry. And so again, you want to make sure that you’re confident in the approach to the account to make sure reasonable premiums are available to you.

Colin, we’ve only got about a minute and a half left before we run out of time, but I just want to sort of circle back to where we began this conversation today. And if I read it right, the insurance industries had some success financially, they’re kind of in growth mode now, but they’re being very selective about who they want to grow with. And I think your point is figure out how as a customer of the insurance industry, you’re one of the select few that they say, yeah, we like the look of your account versus all the other ones we’re looking at.

Absolutely. So they have more capital, so more money to deploy than they’ve had in a very long time, but they’re going to be incredibly selective with that capital as opposed to a blanket approach where they just need clients. And the other big change for the larger files is that you have markets that can write the whole account. We haven’t spent a lot of time talking about subscription policies, but that’s often the case for a bigger risk. And so it’s nicer when you have one policy with one insurer, but again, and they can do it, but they have to be convinced. They have to say, you know what? We’re going to drop all the other players. We’re going to take it all in-house. In the event of a claim, you’re just dealing with one insurer, not several, which again, if you’ve been through that, you want to avoid that if possible. And so telling that story discounts, the whole policy should be written by one insurer, but they’re going to be selective because of concern of catastrophic losses in Canada and North America.

But it’s a good news story though, is that the hard market appears to have succeeded. It’s over, or at least it’s easing. And insurance companies are getting more interested in doing business, but they’re going to be very choosy about the new clients that they take on, or additional risks they take on from existing clients. And you have to be able to make your case to be among the chosen ones, if I could put it that way.

Yeah, absolutely. So you might see some flat renewals, meaning very little change, but if you’re looking for, well, what about some discounts? I mean, it’s been three or four years of significant increases. It would be nice to go the other way. You need to be one of those customers.

You’ve been listening to, Colin Rooke, Commercial Risk Reduction Specialist with Butler Byers. I’m Paul Martin. This is Risky Business. Thanks for joining us. So we’ll talk to you next time.