Picture the P/C underwriting cycle as rolling waves on the open Atlantic Ocean. There are crests (hard market) and troughs (soft market) as underwriting profitability goes up and down. In this analogy, the insurance company represents the boat. Customers should ask themselves – how safe is their boat and can it weather the ups and downs of the cycle? Are they riding the S.S. Minnow? The RMS Titanic? (And hopefully, as their agent, you’re not quoting Jaws by telling them “You’re gonna need a bigger boat!”)
Here’s a simplified definition of the underwriting cycle:
Hard Market Soft Market
Rates increase Rates decrease
Competition decreases Competition increases
Underwriting profits Underwriting losses
While not perfectly timed, these cycles tend to oscillate every 6 years (barring a catastrophe). Changes in the cycle can be erratic and unpredictable. So where do we find ourselves, approaching the end of 2015?
- Decreasing cost of reinsurance
- Citizens depopulating policies back to the market
- New carriers entering the Florida market
- A sharp rise in losses due to water, hail, and Assignment of Benefit claims
- Carriers relaxing underwriting guidelines
- Deteriorating underwriting results
- Company/agency mergers and acquisitions
Easy guess, right? Soft as a pillow. So – continuing the analogy – as captain of the ship, how do you steer your clients away from trouble?
Building relationships and servicing customers becomes critical. With the number of options for homeowner’s insurance, customers need your trusted, expert advice. Soft markets are also times to focus on writing new business and attracting new clients. In-force premium may be decreasing, but are there other endorsements or coverages you can sell?
As underwriting results deteriorate, you will see which companies are true underwriting companies. Rating a stucco on frame home as masonry block construction might give a great market rate, but is it actuarially sound?
An article in The Insurance Insider summed it up by saying, “When times are good, anyone can make money. But the soft market throws into sharp relief the divide between good companies and average companies.”
The same can be said for your agency. Find ways to differentiate your services and sell those carriers you know will be around when the next wave approaches.