Navigating the bumpy road ahead with an eye toward insurance’s future
Besting today’s market challenges will require bringing in new talent, focusing more on loss control and reinforcing strict underwriting principles.
There’s really no way to sugarcoat it.
The new year has brought with it one of the most challenging marketplaces for insurers we’ve seen in decades. While that frustrating fact may leave you ready to break at least one New Year’s resolution and reach for chocolate ice cream to indulge a feeling of self-defeat, don’t give up just yet. If we work together as an industry and agree to align our focus toward what’s best for us as a whole, 2023, and the years ahead, will provide a fertile environment for our industry to prosper in ways that will not only benefit our profit lines, but our employees, customers and communities as well.
It comes down to three things: bringing in new talent, renewing our focus on loss control and reinforcing strict underwriting.
State of the market
It’s difficult to recall a time when we’ve seen quite so many pressures colliding — inflation, social inflation, supply chain interruptions, talent shortages, reinsurance issues, and of course, the weather.
Like it or not, a significant drop in inflation is not expected. Social inflation is not likely to see a change either, although we are seeing more of a focus on reining in some of the runaway verdicts the industry has seen in recent years.
And, that talent crisis we’ve been talking about for nearly two decades in our industry is unlikely to correct itself this year either. That said, the market downturn may delay some retirements while others might return to the workplace to supplement declining investment returns. But, in large part, the demand for talent in our industry will continue to be strong as baby boomers retire and younger professionals seek out what they perceive to be more lucrative, vibrant and promising fields elsewhere.
But it’s not all doom and gloom. In the lumber and building materials industry, the specialty niche where my company operates, the industry has continued to perform well. From a profitability standpoint, we are in excellent shape, but others across the insurance industry likely cannot say the same. That said, we are not seeing as aggressive of a market as we have in the past several years.
Additionally, in this environment, even if you are fortunate enough to have an underwriting profit, the declining market is likely putting tremendous pressures on your surplus. Fortunately for us, mutuals have the benefit of not having to report to stockholders. We are committed to and only accountable to our member policyholders. As a result, we are not susceptible to the pressures of reporting to stockholders who may need to see immediate results. As a member-owned mutual, we are often able to consider a more long-term view when it comes to our portfolio.
What is weighing on mutuals, particularly smaller mutuals as well as other carriers, is the cost of reinsurance. We’re experiencing a late market. Reinsurers are sitting on the sidelines waiting for the best deal before they announce their terms and conditions. They are no longer buying lower layers and this is causing problems for smaller companies. As a result, a number of smaller mutuals are looking for affiliation partners, discouraged by the reinsurance market.
Resolving to do better
We don’t have to sit by and watch our prospective talent get wooed into other industries. We don’t have to sit by and let preventable claims happen. And we cannot continue as an industry to deviate from basic underwriting principles simply to win the business. If we do not collect enough premium to protect against the risks we insure — this is particularly critical for those of us on the high-severity side — those catastrophic claims will be devasting for us as insurers as well as the policyholders. And reinsurers will continue to keep their distance.
We can play a role in a faster recovery for our own industry by focusing on the following:
1. Attract new talent: All of us in the industry need to take a step back and say, “What can I do to bring a young person into insurance/?” We haven’t done enough to attract new talent to the industry and now the issue has been exacerbated by a national labor shortage and post-pandemic work-life balance expectations. We know young people want inspiring work, and to work for companies where they feel appreciated and that they know are focused on social good.
We need to seek these individuals out. In many cases, that means welcoming students studying risk management or other fields as interns.
At Pennsylvania Lumbermens Mutual Insurance Company (PLM), we work with high school students participating in a work study program with Cristo Rey Philadelphia High School as well as interns from regional universities. We need to show these students what our industry and our companies are all about. Let them sit in with different business units from underwriting to marketing. Let them meet the team and expose them to company culture. Explain the financial and career benefits of working in this field.
Also, make sure new candidates know your company cares about their professional progress, as well as about the community. At PLM, we keep our employees inspired and engaged with continuing education incentives. Our industry is largely perceived as profit focused, but we need to convey to potential candidates that ours is a business rooted in taking care of others. We do this in the policies we write and in the charitable giving and volunteering we do across the industry.
2. Focus on loss control: In helping our policyholders do better, we’ll do better. We must, as an industry, take a more determined position on loss control. It is our responsibility, and that of our agent and broker partners, to encourage our insureds to follow through with training programs and to use the risk management technology available to them.
For example, commercial auto losses continue to weigh down claims. But with the right training and tools, policyholders can take steps to reduce losses — in turn reducing future rates. Tools are available, like cameras and motor vehicle reports, but too many policyholders are not using the tools or processing the information. The industry has to take a tougher stance in insisting that insureds consider the use of these risk management tools as a basic standard of care.
Loss control stretches beyond commercial auto. Good risk management programs are available to insureds from recognized authorities like the Insurance Institute for Business & Home Safety. Insurers, agents and brokers can work with their policyholders to help them understand how to build structures to withstand some of the weather we’ve seen in recent years.
3 . Hold to strict underwriting standards: We need to tighten our coverages and get our values up and aligned with the right rates. While this may be fundamental, when we do this our books of business and our results will respond. For the benefit of all, insurers need to look across their coverages and make sure they are correct and have been carefully explained to the insured.
Stricter underwriting and accurate pricing reflecting actual risk will be key as we move forward with a focus on insureds who abide by appropriate risk management measures.
The new year will certainly bring its challenges — that’s without a doubt. We can tackle some of those as an industry by focusing on our basic principles of sound underwriting and aggressive risk management. Tack on bold, new initiatives to attract talent to the industry, and we’ll be set for success in 2023 and beyond.
John Smith (jsmith@plmins.com) is president and chief executive officer at Pennsylvania Lumbermens Mutual Insurance Company (PLM). With more than 40 years in the insurance industry, he has been a part of PLM since 1998.
Opinions expressed here are the author’s own.
Related: