How Not To Win In The "Soft Market"!

Robert D. Wurtz, CPCU
Principal, Aegis Corporation

What many have been waiting for since 1985 is now upon us! The insurance "soft market" is firmly with us. Insurance bargains galore! And what a time to get reduced rate coverage, what with levy caps and all!

Like so many "deals" ,though, there may be a lot of cut rate merchandise brought in just for the sale. Some people may think that this statement may require explanation since this is insurance and not Macy’s. After all, insurance is financial and a "dollar is a dollar". Right? Let’s examine this situation and look back to the last time this situation arose, 1984-5.

For readers who were on county boards in 1984-5, you probably have no trouble remembering how the period ended on December 31, 1985, but maybe are a little fuzzy on what the insurance market was like for the two years prior to that date. Let’s mentally revisit that period to remind ourselves of what was going on and what the results were.

During the last soft market cycle, many insureds had watched their premiums halve and halve again in 1984 and 1985. The Wisconsin Counties Association had an endorsed program, put together by a broker, which pretty much captured these premium drops and competed well in the market place as some thirty counties utilized the program. Another 30-plus counties found competitive rates outside the program through local agents and various companies. The coverage forms were relatively broad and getting better. Many counties tied themselves into multi-year rate guarantees and impressive guaranteed cost liability and workers’ compensation programs. Companies were paying flat dividends of 25% on workers’ compensation. Property insurance rates rivaled or even beat the Wisconsin Local Government Property Insurance Fund, and general liability and automobile rates were as low as 25% of the rates even three years prior.

True, there were rumors of some companies having financial problems. With the help of the Wisconsin Insurance Commissioner, Employers of Wausau, whose A.M. Best rating had dropped to a "C", became part of the Nationwide Group, several regional carriers were gobbled up by national carriers, but there were plenty of financially secure companies competing strongly for new business such as California’s Mission Group, one of the largest, fastest growing carriers around. Did not Mission set the pace for excess liability and specialty liability and were they not rated "A+" by A. M. Best. Finally, the insurance market was responding with "reasonable rates" and satisfactory coverage. There were many good insurance companies competing strongly to write your business.

Then, in mid-1985, something strange started to happen. The market still remained competitive but fewer and fewer companies were competing as the year wore on. By the end of 1985, competition had virtually come to a halt. Carriers were quoting renewals with price increases, sometimes significant, or failing to renew. There were very few markets willing to write any new business. Competition had virtually ceased.

What was happening overall was also happening to Wisconsin counties as the insurance carrier writing the WCA endorsed program sent out nonrenewal notices to all Wisconsin counties. The broker handling this program reassured the WCA and their county insureds that, "this was just a precautionary move on the part of the carrier to comply with Wisconsin insurance regulations because the carrier was having a problem negotiating the renewal of their reinsurance but this would certainly be cleared up and not to worry."

Unfortunately, the brokers confidence was misplaced, the carrier on the program failed to retract the cancellation notices and many counties found themselves going into 1986 with no insurance. As the first weeks of 1986 wore on, some markets were found to fill the breech. Agents’ scrambled to find markets and some counties purchased coverage from the Illinois Insurance Exchange at significantly higher premiums and less coverage. The newly reinvigorated Wausau stepped into the breech with both feet offering coverage to many counties. Some counties who were originally outside the WCA program obtained renewals from their old carriers such as General Casualty and CNA. Penco stepped in with their Aggregated Limits program. All these were options that were slowly becoming available but at what cost!

Many counties faced a doubling of their up front costs and an even greater inherent cost from drastically reduced coverage. No one could buy "occurrence" coverage any more. The only basis offered counties was on a fully "claims made" form. When the policy term ended for the year, so did the coverage. Claims which may arise for the 1986 or ‘87 years at some time in the future would not be covered unless the county kept purchasing extensions which got more costly as more years were added to it.

Personal injury and employment related coverage was not included unless the county purchased a very expensive, high deductible form called public official’s E&O. Counties were often required to buy their property coverage from the carrier to get the liability coverage at a cost significantly higher than the Local Government Property Insurance Fund. Law enforcement professional liability coverage was excluded from standard forms and counties who wanted the coverage had to purchase it separately. (Some carriers claimed to give it with "extended bodily injury", but a close look at the form showed that it did not cover the county if the act of an individual officer was found to be illegal. Not very inclusive coverage given the nature of the need.)

Counties which thought they had negotiated multi-year rate guarantees found that they did not hold if the carrier nonrenewed. Also, many new meanings for the term "rate guarantee" surfaced. Counties found themselves without coverage they thought they had, with substantial additional premium audits when they thought they had fully paid the premiums, stuck with retro penalties and the like. Many counties saw loss experience deteriorate materially as carriers "jacked their loss reserves" (not so much higher than necessary as higher than they previously thought necessary). Counties found themselves with paper from an "A+" carrier, such as one of the Mission Group companies, who was suddenly in receivership.

Was all this deterioration in the insurance marketplace the result of fraud or gross mismanagement? Actually, this type of result, which reoccurs cyclically about every decade or so, has an impetus more related to chaos theory than anything determined by individuals. Several forces outside the control of insurers, buyers, or regulators interact in a complex interplay to make long term prediction of the onset of this type of event, or "hard market" as it is called, practically impossible to predict, except to the extent that you know it will come.

Increasing competition for a limited universe of available business, corporate pressure on managers to show improved results, increasing leveraging of investments to maximize returns, legal trends, societal trends, governmental changes, and wind from a butterflies wings are all factors. All we can guarantee, is that the hard market with it’s attendant hardships will come. If you ride the wings of each incremental change, pushing your carrier to compete with the ever increasingly irrational market, you will reap the wind! When you look for fault for the market vengeance visited upon you and your county, look no farther than the mirror.

How do you avoid falling victim to this scenario? Prudence and moderation. Prudence implies knowledge and restraint. Do not be adventuresome with the public’s money. Go with what you know. If someone approaches you and says that this year they can do better than they could last year and beat the vehicle that has carried you well and truly for so long, ask yourself how can this be so? Then ask them, but hold on to your cynicism!

Be moderate in what you ask of you insurer and those competing for your business. Those not responding in a moderate manner, who offer too much or make extravagant claims, who tell you how poorly your carrier has treated you, avoid like the plague! If your carrier has been moderate over the past, not raising rates, improving coverage, instituting useful programs, ask what the competing carrier has done along these lines but be critical of the answers. You know what your company has done. The competitor needs proof. As we have said so many times before. your insurance cost is directly related to your losses and the costs of your risk and loss management. Ask the competitor what their underwriting expense ratio is. Ask what their claims handling philosophy for liability claims is. Ask what liability loss control programs they have in place. What limits do they provide? Do they have policy annual aggregate limits? Is their premium auditable? If they give a rate guarantee, do they have a renewal guarantee? Do they cover the county for it’s liability for the intentional acts, regardless of legality, of it’s officials and law enforcement officers? Do they pay dividends and how much? Have them provide you a dividend history but remember their premiums were higher in the past so future dividends must, of necessity, be lower if they cut the premiums.

Do they cover injunctive actions as policy triggers or were they part of the lawsuit against Wisconsin public entities in 1991 to preclude this trigger. This case cost Wisconsin public entities over a half million dollars in one case alone and the fact that Wisconsin County Mutual covered them has saved at least two hundred thousand dollars for three Wisconsin counties on one case alone. Carriers who were a party to this suit included Wausau, CNA, Crum & Forster, and USF&G. When they compete, you should remember! To forget is to repeat past error.

If you remember, you will always have the Wisconsin County Mutual available to provide very affordable, stable and effective coverage for your county. If you forget or ignore, it may be back to the roller coaster!