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Under Pressure: Small independent agents could be forced out of business by accelerated market hardening. (Industry Strategies).

The property/casualty insurance market was hardening before Sept. 11. But since that fateful day when terrorists seized four planes and attacked the Pentagon and the World Trade Center, killing thousands of people and causing claims totaling as much as $100 billion, the market has become even harder, making the near future a harsher prospect for struggling independent insurance agents.

Agent networks and trade groups agree that business conditions already were changing before the second week of September. The industry's net income after taxes for the first half of 2001 fell 75.6% from the prior year, according to the Insurance Services Office Inc. Agents said changes in carrier contracts were evident, with increased prices on renewals, but the tragedy has escalated this trend. As the annual date for reinsurance renewals--Jan. 1--looms, many agents are wondering how changes in that sphere will affect them.

As reinsurance premiums increase, carriers will look for ways to cut costs, the Iroquois Group, a network of more than 1,200 agents in 30 states, said in a statement. "In situations like this, the small independent agent is often most vulnerable," said the Olean, N.Y.-based group. "Many carriers perceive the small independent agency to be inefficient, cost-prohibitive and expendable. Without the support of a larger organization, small agencies may become one of the casualties of this crisis."

"There is a great deal of uncertainty and anxiety among P&C insurance agents about what is going to be going on in the next several months, the next year, and the next two years," said Gary Eberhardto, executive vice president of the National Association of Professional Insurance Agents, a trade association with about 11,000 members nationwide.

Independent agent Faith Bryan of Service Unlimited in Dubois, Pa., and a member of the Iroquois Group, said she and fellow agents are waiting to see what the future holds. "We are going to see the market get tighter and tighter and harder to do some of the harder-to-write business" in commercial lines, she said. She expects the impact to extend to personal lines as well.

A 26-year veteran of the insurance business who has experienced soft and hard markets, Bryan said market conditions determine which clients she pursues and when. "You can go after things in a soft market that you can't in a hard market," she said. "Once it gets to be too hard a market, then you know not to even go after certain types. You back off and go after the easier stuff. It's harder to get the larger accounts, so you try to get a lot more smaller accounts."

James A. Masiello, chairman of Strategic Independent Agents Alliance, based in Swanzey, N.H., said he knows of agencies that have more clients now than they had 10 or 12 years ago, but they're doing half the premium because the market had been so soft.

Bryan said shifting direction in tough times is crucial to agents' survival. To ease the strain, Iroquois is expanding its offering of property/casualty carriers and entering the life/health business so member agencies can broaden their revenue base. The network also is expanding its package of discounts and services to help agents cut expenses and strengthen their bottom lines, Iroquois officials said.

Even before Sept. 11, PIA was beginning to see more contract changes--a development that went beyond what would have been considered routine at that time, Eberhardt said. Since it takes a lot of lead time to prepare contracts and profit-sharing agreements, the industry was not yet seeing a flood of changes in the weeks immediately following the catastrophe. But Eberhardt said he expects that to shift, at least in terms of profit sharing, in coming months.

Coverage Cutbacks

Meanwhile, PIA has noted increased pricing on renewals. "Sometimes it's rather predictable, based either on the line of coverage or possibly location or class of business," Eberhardt said. "Geographically, I'm hearing from agents that it's more a matter in some cases of not having a market, than having a price that is too high."

For example, an agent in South Dakota recently told him about a client, a small cell-phone firm, that experienced a hail loss about two years ago. "The insured was nonrenewed, and the agent had to go to 20 different markets until he finally found a market to take the risk," Eberhardt said. "Yes, we're seeing price increases, but more than just price increases, it's nonrenewals, or certainly terms that are being changed, and coverage is being cut back."

Masiello tells much the same story. Before Sept. 11, an SIAA member was delivering renewals with a major company with rate increases in the 30% to 40% range, "and was not able to come up with other markets, which is all part of the hardening that was in effect," Masiello said. But with the situation after the catastrophe, "rates are just going to go right off the charts," he said.

His members in many parts of the country were reporting this fall that they were delivering "very significant" increases in renewals, Masiello said. "Some of this was already in place," he said, referring to conditions in the pre-Sept. 11 hardening market. But lately, the increases have been quite high; in the case of some umbrella policies, an insurance company was negotiating the rate with the reinsurer almost on a per-policy basis, "and it was a 68% increase," Masiello said.

Reinsurers' Reaction

What agents are seeing now is to be expected, he said. "The reinsurers that drive the market basically need to get some meat on their bones. The terrorism exclusion from coverages is very apparent. That's reality as of Jan. 1. When the new treaties are executed, you're just not going to get terrorism coverage," Masiello said.

With terrorism exposure eliminated from standard insurance, reinsurers will want to get whole as soon as possible, or certainly over a reasonable period of time, Masiello said. "I think the real hardening is going to be in the next six months or so, and then things will start to settle down again. We knew we were in for a very hard market anyway, so this has just exacerbated it."

Bryan said she has seen premiums for some of her commercial clients increase as much as 20%. "Other companies are not only doing the rate increase, but they have several tiers within the companies," she said. "An account may have been in one tier, When it renews, it's being put into a different tier which is a higher premium, plus then the rate increase. So in some cases, you're seeing more than that 20%."

William "Twig" Branch, president of the Iroquois Group, said he is concerned about the impact of Sept. 11 on thousands of independent agents. "It's as though the weather service has announced that there's a giant tidal wave 100 miles away and heading straight for the shore," he said.

While there's no way to stop the ultimate destruction, Branch said, agents can take action now to minimize the damage. They can promote front-line underwriting and give carriers quality business; sit clown with carriers at least once a year, if not quarterly, to develop mutually beneficial objectives; diversify partners because capacity will be very important in the coming year; and prepare for the worst by taking this opportunity to strengthen and expand carrier and customer relationships.

The previous market was so soft and rates were so low in certain areas that loss ratios "were just terrible," Masiello said. He predicts a significant increase in premium, which will have the tendency to automatically lower those loss ratios. "And that will help agencies that have good profit-sharing agreements with their companies, whether they're part of a group or not part of a group," he said. "I think agents will benefit from that as long as companies don't change their current profit-sharing agreements. I don't see them doing anything hysterical like cutting commissions or cutting agreements--I don't see that happening."

Group Benefits

SIAA members earn above what the typical stand-alone agency does, because they are able to produce higher numbers on a profitable basis, Masiello said. "Agencies that stand alone can get just so far. If they're not part of a large organization, they just are not going to see the benefit of the leverage or the ability for the whole group acting as one to create significant profitable business," he said.

Depending upon the particular network, other membership advantages can include access to previously unattainable markets and niche programs, plus the opportunity to obtain direct company appointments. In return, the networks usually ask agents to pay a nominal commission or membership dues or to give up a small stake in their operations.

Bryan said a benefit of belonging to a network is that her agency can work with about 30 carriers in property/casualty and life lines. "We do have the flexibility to price-shop" for customers, she said, "which a lot of agencies don't have. I would hate to be an exclusive marketer right now, because if their company's hit really hard by their reinsurers, they have no place else to go." Bryan said her agency has three locations, and the main office in Dubois has a book of business between $3 million and $4 million.

As many agents see it, joining a network is a way for their independent agencies to grow without orchestrating mergers or acquisitions. Moreover, by participating in these ready-made distribution systems, they can expand their business without necessarily having to hire additional personnel, add office space or invest in more technology.

Masiello said that in these uncertain times, his group's membership is growing. The SIAA's goal was to have 750 members by mid-October, and it reached 756. "Agencies are looking for places to go, for stability," he said. "Stability now becomes a big, big word. We just hit $1.77 billion in premium. That's a lot of premium, and it's a lot of stability, given a somewhat confusing, hysterical marketplace at the moment."

Iroquois is reporting premium growth of 28%, revenue growth of 42%, and net membership growth of 13% over last year.

Eberhardt said he has joined in lobbying efforts to gain federal assistance for the industry in the event that additional terrorist acts further cripple reinsurers. He calls the government help a logical step that is absolutely essential for the industry to maintain itself after Jan. 1. "Long term, this business is very resilient, solutions will be found, product will be out in the marketplace, and our members will be there to serve clients," he said. "How it's going to look, what it's going to cost--those are the things I can't put my finger on at this point."
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Title Annotation:property/casualty insurance market
Comment:Under Pressure: Small independent agents could be forced out of business by accelerated market hardening. (Industry Strategies).(property/casualty insurance market )
Author:Bowers, Barbara
Publication:Best's Review
Geographic Code:1USA
Date:Dec 1, 2001
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