Since the recent spate of insurer mergers and acquisitions, the spotlight has been on underwriting profitability and increasing returns for shareholders.

When the market consisted of eight or nine key players, it was difficult for insurers to assess whether a particular broker had a profitable book of business overall.

If their own experience was poor, it could have just been bad luck and competitors were reluctant to share their own figures to build a complete picture. A broker who had consistently produced losses could move his business around the market without anyone spotting that his portfolio of business was of poor quality or underrated.

It could be said it was insurers' duty to set premiums and terms to make a profit and the brokers' role was only to submit accurate details of the risks. Any underwriting losses were therefore insurers' problem.

Times have changed. The mergers have shown that in the main, if one insurer has an unprofitable book it is probably mirrored by other carriers. The size of the accounts with one insurer are now often so large that one-off losses do not distort the figures so much. The statistical base is bigger and insurers are judging brokers' performance primarily on the profitability of their book rather than other factors.

A broker with poor loss ratios now has nowhere to hide and is likely to face real difficulty trading in a hardening market. The current market conditions change underwriting optimists to pessimists with few underwriters taking a “Micawber like approach hoping for something to turn up to improve results. A poor book of business can only be changed by drastic action.

Profit shares are also an important part of a broker's bottom line and need to be maintained if a broker is to create surpluses to invest in the business in the future.

The result is that to protect their own interests, their bottom line and their future, the accountability for insurance companies' profits from their own book of business lies totally with brokers. If they abrogate this responsibility, they put their business at risk. So it is important that everyone involved in the business understands this switch of accountabilities.

Too often, a good insurer in the broker's eyes, is one who quotes low premiums and gives them everything they want. A good quote is one which undercuts the market substantially and enables a broker to secure or retain a case.

The fact is that anyone who is substantially lower than the market will lose money and will have trouble later.

In every case study over the last 20 to 30 years, an insurer who shows substantial growth against the market trend, follows this by underwriting losses and then needs to take corrective action. Brokers need to be aware of the aggressive insurers of the day.

So what are the drivers for underwriting profit – and what are the profit destroyers? From an insurer's point of view, the characteristics of the broker play a crucial part.

  • Client relationships: Long term sustainable profit is likely to arise when brokers are strong in their community and have clients who trust their judgement. This business is not so price sensitive and retention rates are high. The client accepts the brokers advice on all aspects. Business is done at above average rates and terms.
  • Size: Smaller brokers are normally more profitable for insurers than larger ones. This is because they lack the bargaining power to get good rates and negotiate higher commission. They tend to deal with longstanding clients on a strong relationship basis who are very loyal.
  • High quality servicing: A professional broker who services his clients well is likely to produce better results. The sums insured, indemnity levels and so on are usually higher and the risk information obtained better.
  • Re-broking policies: This is a prime profit driver. Any broker who floods the market for alternative quotes every year will produce heavy losses. The profitable broker has confidence in retaining his client, works with the existing carrier to refine terms and knows his market if he is in real difficulty.
  • Front line underwriting: Protecting the underwriter is important. Risk selection is one area that can help. Brokers should avoid those risks where they have doubts about moral hazard, housekeeping or attitude to risk. They should point out silly quotes to insurers – not clap their hands with glee. They should carry higher rates than are requested as often as possible.
  • Risk management: Many brokers are committed to a risk management philosophy rather than just paying lip service to it. Those who regard it as a cornerstone of their business and preach it to clients will produce superior profits.
  • Specialisms: Brokers who have in-depth knowledge of a sector, understand the risks and the hazard profile should provide good results. Their expertise enables them to carry a premium price and to avoid risks which could destroy profits.
  • Mix of business: Profitability in the past has been dependent on mix of business. Any broker with a large motor book has lost money for insurers over the last four years. Those with a computer account lost money in the late nineties. A balanced book or property bias is helpful.

    An in-depth analysis of a broker's business on all the above points will provide a good guide to an insurer to whether a broker is likely to produce long-term sustainable profits for them.

    The value destroyers tend to be:

  • Risk remote from brokers: Sub-broked business often produces poor results. The broker who has the relationship with the customer can often use these facilities as a dump for poor business, and for cases where he has lost his market. The information is often second-hand and risk improvements hard to implement. The exception to this can be specialist business.
  • Fast growing brokers from new business acquisition: New business is normally unprofitable as prices have to be very competitive. Any broker who is aggressive is likely to lose money for its underwriters in the short term.
  • Telesales: Brokers that acquire general business over the phone are also likely to cost the insurer dearly. This is because they have to be cheaper than the local community broker to prise the business away. This reduces the margin for profit and, in the longer term, there is no relationship with clients to carry a premium price.
  • Incentivised salesmen: Brokers who use new business salesmen – whose job is to produce results at all costs – are likely to be poor profit earners. They have little interest in the ongoing profitability of business secured and will sell on price and may in fact be economical with risk information.

    In addition, those brokers who have poor relationships, are not insurance experts in their field, re-broke everything, place every risk they can at the lowest price, are not interested in risk management, have no specialisms, or are motor biased are likely to produce long-term losses.

    Brokers need to take insurer profitability very seriously, protect their underwriters, act responsibly and maximise premiums whenever possible.

    This approach in some way is to overcome the current inadequacies of insurers who perhaps lack the in-depth underwriting knowledge they had in the past but also to ensure their own long term future.

    Insurers' profits should be a prime objective for every broker.

  • Tony Cornell is an independent consultant and can be contacted at tony.cornell@talk21.com


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