Response to Market, Choosing a Strategy Critical

The speed at which insurance providers respond to the market is critical and their timing in choosing a strategy is critically important, Dennis Rowe, Penn National CEO, said during the Alabama Independent Insurance Agent’s annual conference and exhibit in Destin, Fla. Rowe said Penn National deals strictly with independent agents.

“At Penn National our only means of distribution of our product is the independent agent,” Rowe explained. “We don’t do any direct business or use general agents; the lifeblood of the independent agent is critical for us and hopefully we are an important refuge as they go forward.”

Rowe’s presentation gave an overview of the insurance industry over 25 years.

Years ago it was not very difficult to develop a strategic plan that went out as far as five to seven years, according to Rowe.

“Today, it is difficult to develop a five-year plan and typically we look three years out,” he said. “The first two years are fairly certain, the third year is fuzzy and beyond that it’s hard if you consider some of the things that have occurred over recent years.

“One of the things I look at when we talk about marketing trends and what is happening today I believe that here again market conditions will change.”

Rowe said there is a plus side when you talk about the peaks, valleys and the troughs from a rate standpoint for property and casualty operations.

He said the things you look at are: When does a trend begin? How do you adjust for it as a company and as an agent? and, When does that trend start to cease and when do you start back out of what is called a soft market into a hard market?

Rowe said what is really critical as these shifts or trends begin is who is going to respond? Who is going to respond first?

“All of a sudden rates will become depressed and you start looking at rate structures and pricing that are going to lead to some bad numbers on your bottom line,” he said.

Rowe emphasized the speed of that response is critical. For most companies when they sense changes taking place they have to decide, do you jump onboard then or do you wait a little longer, what is your strategy? He said timing is critical.

“The strength of various organizations today has been strained by the soft market of the 1990s and although there was some recovery in 2000, 2001 and 2002, we have not had an extended period of recovery,” Rowe explained. “Other dynamics are taking place, the stock market is not as strong as it was, the duration of some of the fixed assets on income instruments companies are using are becoming shorter, consequently we see return-on-investment dropping and the percentages are not there like they were in the 1990s.

“Consequently,” Rowe said, “companies are very dependent on underwriting income to make dollars, and if their capital is going to shrink they are going to have problems.”

He said we all deal with cycles of highs and lows and that there is no way to tell when it will begin, how long it will last and how you are playing that market.

In 1975 through 1978 Rowe said there was a hard market, there was a 20 percent growth range, and the same growth prevailed in 1984 to 1987. Then a trough occurred throughout most of the 1990s. A hard market emerged in 2000, 2001, but the amount of real premium growth in that period was small.

“You have to ask, how much rate inadequacy existed during that soft market and how much reserve strengthening took place,” Rowe said. “2004 is the first time in more than 25 years we finally came back on the plus side and actually had an underwriting income for the industry for the year. I can not emphasize strongly enough that along with the recovery from the standpoint of rate, performance has not been sustained, and looking forward we can not say we are enjoying the luxury of having rate accuracy because rates are flattening out.

“The good news from our perspective is that if rates are flattening out and we see modest cost of living increases, we do have many lines of business today. It’s not like you are dealing with rates that are already inadequate,” he said. “Our rates are adequate and it is our goal to keep them there.

“With that in place we should see some more positive underwriting results in at least 2005 and perhaps into 2006 if things continue in the way they have been going,” Rowe predicted. “This is contingent also on the past and a multitude of things that could occur that could certainly affect performance.”

Rowe showed graphs demonstrating what he hoped would be sustainability in the 2007 rate structure. He said it depended on no dramatic changes on the horizon.

Rowe displayed a listing of more than 200 reinsurance companies that were members of the Reinsurance Association of America in 1983, he fast-forwarded to 2003 and showed the same list with only 12 companies left.

“That’s a really radical shift from a reinsurance standpoint,” he said. “That brings into play questions about the solvency of these organizations and how they are rated by A.M. Best. He said it is an area where you have to keep your eye on the ball and pay attention to the solvency of such carriers.”

“For the first time in many years, companies have positive cash flow,” Rowe concluded. “Positive cash flow means that after you pay your claims and all your expenses you have money left to deposit in the bank.
“As those dollars start to dissipate they are cutting into investment income, and if investment income isn’t as strong as it needs to be, the first thing that usually happens is that some companies will begin using their reserves to show a better bottom line,” Rowe said. “When you borrow from Peter to pay Paul there’s a real chance that if things don’t come back and if you don’t have some good years you can become insolvent.”