New entrants in cat-prone areas ‘burning’ independent agents

New entrants in cat-prone areas ‘burning’ independent agents | Insurance Business

New entrants in cat-prone areas ‘burning’ independent agents

Managing rates in catastrophe-prone areas is extremely challenging. Being cost-competitive in coastal markets with significant wind and storm surge exposures requires enormous expertise, underwriting knowledge and access to historical data.

SageSure Insurance Managers is one such firm that targets America’s most challenging markets. It relies entirely on working with insurance agency partners in catastrophe-prone areas to place high-risk property insurance.

After a relatively benign catastrophe period post-Hurricane Sandy and prior to 2017, lots of opportunistic carriers saw coastal catastrophe-exposed markets as ripe for business. Specialty firms like SageSure suddenly faced competition from a lot of new entrants and independent agents were bombarded with options. This is a cyclical trend, which doesn’t always end well for the broker and end-consumer, according to Terry McLean, CEO and co-founder of SageSure Insurance Managers.

“A common trend we’ve seen in catastrophe-prone areas is new entrants coming into the market and competing primarily on price. They charge a low price to try and win market share but when they realize their loss experience isn’t as good as they want it to be and their catastrophe exposure is driving up their reinsurance costs, they increase their rates dramatically. We call it burning their way into the market,” McLean told Insurance Business.

This is a real challenge for independent agents with clients in catastrophe-prone areas, McLean explained. A key value proposition of the independent agent is the promise of the trusted and stable relationship. If new carriers offer low rates, then dramatically increase their rates, and then exit the market, the agents effectively get “burned” over and over again.

“This ‘burning the market’ trend sometimes works in our favor and sometimes works against us,” McLean commented. “We consider ourselves a specialist in catastrophe-exposed markets. We’re well-known and highly regarded by our producers, so they know we’re not going to cause them problems. However, when we try to enter new areas, agents are sometimes skeptical about working with a new partner because they’ve been burned so many times.

“Independent agents have all these new carriers knocking on their door and unless there’s a compelling reason to work together, they’re increasingly rejecting the business. This is part of the problem and is creating a bit of a vicious cycle. The new entrants can’t get the business, so the only way they can attract is with rates, which are often unsustainably low. Once they start writing business, they realize their prices are too low to make return targets or to pay for losses and reinsurance, so they end up in a bad place.”

While this is a common problem in catastrophe-prone markets, it doesn’t mean independent agents should ignore competition around price. Rather, they should be careful about “selecting partners who are aligned with their goal,” according to McLean. Successful business could take some digging by the agent to work out why and how one carrier is charging seemingly lower rates.

“Agents can ask how one carrier is able to defy the rest of the market and charge a lower price. If their answer is simply that they want to offer a lower price, then that’s not good enough in and of itself,” McLean added. “The track record of lots of new entrants is that they don’t have much market data upon entry, so they’re taking their best stab and charging a low price without having historical experience. There’s a relatively decent chance that if their prices seem way lower than the rest of the market … where there’s smoke, there’s fire.”