As competition heats up, eroding underwriting profits across the industry, regional insurance carriers are carefully reviewing their books of business and putting renewed focus on the most profitable segments.
But as these carriers rethink their toughest risks and seek to limit exposures to perils like earthquake, wildfire and flood, agents and customers face the prospect of incomplete coverage programs.
The problem has multiple fixes that range from simply bulking up reinsurance protection to selling renewal rights on unwanted business. However, neither of those are particularly appealing alternatives to carriers looking to keep costs down and retain customer relationships, according to Bill Tormey, chief operating officer of Griffin Underwriting Services, a Bellevue, Wash.-based general agency and wholesaler with binding with Certain Underwriters at Lloyd’s of London. Instead, his firm, which he refers to with the acronym “Gus,” helped to craft a novel solution giving admitted companies an on-ramp to the excess and surplus lines market about 10 years ago—one that he thinks is becoming increasingly valuable today.
Carriers are focused on “how to deploy capital in its highest, best use,” Tormey said, sharing his takeaway from a recent industry M&A adviser’s conference. “They start with the proposition that we want to be all things to everybody, but they quickly get to the place of all things to everybody is just not possible,” he said.
That’s where Griffin can make a difference, he noted, explaining that business that is unprofitable to admitted market regional carriers, or even a national writer with too much concentration in a peril in a certain region, can be a golden opportunity for E&S players with diversifying businesses and greater pricing flexibility. Underscoring the point is a “Gus” marketing document starting with the unlikely phrase: “Give us your tired, your poor, your unprofitable business.”
Tormey said his firm first reached out for “unprofitable” business roughly a decade ago when a major national personal lines carrier made a decision to get out of the standalone earthquake insurance market in the Northwest.
“We saw that they were exiting the market,” he said. “It was a pretty small part of their company at the time. Now, it’s a pretty big part of their organization [in that] their agents now have more to sell.”
Why the planned exit?
“It was a powerful calculation as they looked at their potential exposure relative to the premium that they were receiving and then the reinsurance costs associated with that business. They decided, ‘This just doesn’t make sense.’” But the consequences would be severe for the primary carrier’s agents. “If our agents lose this capability, then it’s likely that they potentially lose the customer. And if they lose the customer, that hurts us in terms of maintaining distribution,” Tormey said, recalling the carrier’s thought process.
“How can we make sure that we can sell the business we want to sell to our customers and also give our agents the tools to be able to keep the customers [for business] we don’t want to do?”
For this particular carrier, Tormey reports the decision to allow Griffin to help place some of its earthquake business with Lloyd’s started with only three states. “Now, we are selling everything we have in all 50 states through their agents,” he said. “There’s no channel conflict at all for the carrier. We basically do the business that they don’t want. We don’t compete at all with them on the fundamental business of personal auto or personal admitted homeowners business”—their bread and butter lines.
The carrier keeps its distribution force intact, Tormey emphasized. They simply tell their agents, “If we don’t write it, you can get it through this other source,” pointing their agents in Griffin’s direction.
After doing this for a national carrier, Griffin has gone on to offer a bridge to the E&S market for the agency forces of Super Regional carriers. Among them is Seattle-based Grange Insurance Association, ranked No. 108 on Insurance Journal’s 2017 ranking of Super Regionals compiled by Demotech. (Editor’s Note: A different company with a similar name, Grange Mutual Casualty, is ranked No. 39.) Griffin helped Grange manage the “concentration of risk challenges in high wildfire areas [while] helping our agents place risks that fell outside of our appetite,” Bob Horn, Grange’s director of marketing, confirmed.
“We partnered with them. We contacted their agents and sent out quotes,” said Tormey, noting that Grange agents looking to place wildfire-exposed homeowners business in six Western states can offer a nonadmitted product available through Griffin.
Tormey also noted that wildfire-exposed property is generally a burgeoning E&S market, with drought conditions prompting admitted insurers to steer clear of the peril in Western states.
A larger Super Regional faced a slightly different situation unrelated to any natural catastrophe exposure in property lines. Instead, the West Coast carrier found itself with a good-sized book of personal umbrella business in Florida, the remnant of a legacy program.
“They had gotten behind on their pricing,” which meant the umbrella book needed high double-digit rate increases in order to turn a profit, Tormey reported. The prospect of getting those rate hikes was dim, he said, explaining that the Florida department would not allow such hefty price shocks.
The carrier concluded that this was a product they weren’t going to continue with. “It wasn’t foundational to their organizational structure,” he said.
Tormey explained that the carrier was changing its internal systems and a cost/benefit analysis of retaining the umbrella product in its portfolio prompted the decision to drop it. “The cost to do the programming in their new systems was higher than the value of having that particular product in their portfolio,” he noted.
“So, we helped them. As they exited that business, we offered a quote right behind it to the agent. ‘We know your carrier is getting off this business. Here’s a quote to replace that.’”
“This play for them is really around giving their customer or agent a soft landing in the process,” Tormey said, stressing the dual benefit of allowing carriers more flexibility in making capital deployment decisions about where they want to grow, where they want to shrink and how they accomplish it.
“They can create some goodwill with regulators and with their distribution partners by working with another company to offer a more streamlined approach to replacing the business,” rather than approaching each policy decision on a one-off basis.
Agreeing that it’s somewhat similar to the concept of Florida takeout companies, Tormey sees a distinction in Griffin’s national market capability. “We did this with an organization in Connecticut because they were exiting a dwelling fire program where they couldn’t get necessary rate,” he reported.
Tormey is eager to meet with carrier CEOs, COOs and CFOs at the 2017 Super Regional P/C Insurer conference this week, to offer others the option of having an E&S market alternative in their toolbelts as they make tough decisions to improve their bottom lines. “It’s the opportunity to not just leave their customer and agent hanging” in the process, he said.