A business author in the United States is urging businesses to shed unprofitable lines of business to remain competitive, but brokers say the call to action does not apply to them.
“No one has the luxury of sustainable competitive advantage anymore,” according to Rita Gunther McGrath, author of The End of Competitive Advantage. “When competitive advantages shift, you need to be able to reconfigure your company before it’s too late. That means identifying projects, products or lines of business to exit.”
McGrath said a lot of businesses spend a majority of their time thinking about new products and services to offer. “Now ask yourself this: How much time do you spend deciding what to stop doing? Most firms focus a lot on cultivating new initiatives and very little on pruning back.”
But many insurance brokers in Canada think there is “no such thing” as brokers exiting unprofitable lines of business.
Their job is to find insurance for their clients, they say, and so they are duty-bound to find an insurer that offers a product to the consumer – even if that potential client is at a high risk of being unprofitable (such as a hunting tour guide or a dynamite factory, for example).
As one source put it to Insurance Business, insurance carriers dump unprofitable brokers much more than brokers are likely to pare their unprofitable carriers.
One added wrinkle in insurance is that some lines of business, like auto insurance, is regulated, so that brokers must place the business no matter how unprofitable it might be. Facility Association, for example, is a market of last resort for brokers to place high risks that can’t find coverage in the voluntary insurance market.
But if brokers take on any and all risks, how do they ever manage to stay in the black? What do brokers do to “prune back” their unprofitable business, in the words of McGrath? Brokers do have options.
“There have been plenty of examples in the market over the years where brokers have either chosen to re-balance their portfolio (sell off their personal lines book to someone who can handle it more profitably), fire an unprofitable client, or have been forced to take action by an insurer because of a poor portfolio loss ratio,” said one broker.
