I Used to Walk to School and Home Uphill Both Ways

An interview was recently published in a major industry publication with a notable ex-CEO of a prominent insurance company. Throughout the article, the ex-CEO bemoaned how power and profit has shifted to brokers from companies.

In some ways, the specific brokers he listed (and certain of their peers he did not list) definitely have gained specific powers rarely historically held by distributors. I agree completely, and I am with him that I cam not sure this is good for anyone but those few, and maybe not even them in the long run.

However, what really sharpened my attention was his claim that 50 years ago, two-thirds of the profits went to the underwriter/carrier, 20-25% to the distributor and the remaining 5-15% to miscellaneous vendors. By comparison, he advised that today carriers only get 40% of the profit or 20-25% less than they used to get. He claims distributors now get 40% of the profits.

To be fair, the article did not define profit, and insurance companies use many definitions of profit – including underwriting profit, pretax profit, operating profit, net profit, so on and so forth. So maybe his assertions are more applicable to one definition than others.

Carrier Profits

His statements sounded like parents who claim to have walked to school and back home uphill both ways and usually in 2 feet of snow. So, I checked with A.M. Best for its carrier profitability data throughout the past 50 years. In 1967, the P/C carriers combined ratio was 100.2. It did not exceed 103 until 1981. The 50-year average combined ratio (unweighted) is 104.2. Since 2003, the average combined ratio has been 100.0. Somehow, someway, insurance companies have better underwriting results now than virtually ever.

Here are some more numbers. In 1968, the carriers made a profit of $1.056 billion. In 2016, their profit was $44.276 billion. Since 2003, the companies have made $699.153 billion on a pretax basis. That is just shy of three-quarters of a trillion dollars.

So maybe the complaint/observation is that while profits are good (and insurance company profits have been very, very good during the past 15 years), the profits could be better if distributors were not being paid more now than they used to be paid. I admit that I have only been in the industry for 30 years, so I have no first-hand knowledge of what agents/brokers were paid 50 years ago. I have met many, many old-time brokers who told stories about how their commission rates used to be far higher.

Unfortunately, A.M. Best does not have the detailed breakdown of carrier expense ratios from 50 years ago, but it has total underwriting expenses. One might expect, although it is not guaranteed, that underwriting expenses would have increased if distributors were being paid so much more today. In 1967, the average underwriting expense ratio was 29.5 percent. In 2016, it was 27.8 percent. The low point was in the mid-1980s, when it was just above 25%. The percentage has held relatively stable between 27-28% for the past 10 years.

So, the combined ratio has improved, profits have skyrocketed and underwriting expenses have decreased. I do not see broker profitability increasing. Based on various stock market websites over the years, I have tracked publicly traded brokers’ results. Their five-year average (non-weighted) pretax profit margin for the years 1999-2003 was 14.9%. The five-year average ending in 2017 was 14.2%. Maybe they are taking more of the insurance dollar and just spending it, which might be why their profit margin hasn’t materially changed in all these years. Or maybe they are not getting more of the insurance dollar (the former might just be more accurate, but the companies are not suffering as a result).

My point in writing this article is not as a refutation. My point is that words matter. I think the former executive has an excellent point relative to the power shift, but to suggest that companies’ profits are injured as a result, that is a tough case to make. Even if it is true, I am not sure it yet matters.

Another reason is to enlighten readers that the industry has been immensely profitable for the past 15 years. Any companies having profitability problems are having personal profitability problems. Their peers are doing just fine. Don’t believe people who are crying wolf – that is just a tell, as they say in poker – that a particular company has problems but wants its agents to believe the problems are indicative of the industry.

Power Shift

My last point is that power is shifting, without a doubt. Companies are going to complete many mergers in the next few years, partially to bulk up and regain the advantage or just to sustain their positions relative to distributors. One reason some companies are buying or investing in insurance agencies, particularly new insurtech agencies, is to regain and gain more control over distributors. A reason companies want agents to use service centers is to gain some control over clients, and therefore distributors. Companies are acutely aware of their stress point, and they are working hard to protect themselves.

Agents who are unaware of these forces may get caught in the middle. They are not getting the benefit of the power shift, but they are feeling the pain of the companies’ defensive measures. That is a dangerous position (and many awesome methods exist for making this situation work to your benefit if an awareness and willingness to proactively manage your organization differently exists, along with the understanding of these market forces versus just keeping to the old ways).

What I wish the interview and the interviewee would have expounded upon were these market forces and how these changes affect other distributors, consumers and carriers beyond the false premise that carriers as a whole are suffering. Going forward, every agency needs a strategy for how it will deal with these forces. This strategy needs to be extremely specific.

I have never before been a big proponent of strategic planning for regular agencies because mostly, if those agencies just did a solid job of blocking and tackling, they would excel. Going forward though, a strategy is critical not only for survival, but for the opportunity to thrive.

Article By: Chris Burand

Source: Insurance Journal