AIIA Conference: Bell Calls Market ‘Impressive’; Rowe Says Response, Timing Are Critical

The Alabama insurance market is “impressive” and the state has a “healthy market, trending upward,” Alabama Insurance Commissioner Walter A. Bell told members of the Alabama Independent Insurance Agents during their annual conference and exhibit in Destin, Fla.

The speed at which insurance providers respond to the market is critical and the timing in choosing a strategy is critically important, Dennis Rowe, Penn National CEO said.

Bell cited statistics showing the insurance industry is the largest contributor to Alabama’s general fund.

“We have a lot of things going on in the state right now and you have a lot going on in your industry,” Bell said.

Bell said the overall picture of Alabama’s property and casualty “side-of-the-house” shows that in the in the year ending 2003, more than $5 billion in insurance premiums in personal lines, automobile, homeowners, commercial, perils, ocean marine and fire policies.

“Costs of regulation are minimal compared to what we collect for the state,” he said. “Last year Alabama collected $240 million dollars in insurance premium taxes, the largest contributor to the general fund in the state of Alabama, without which I do not know what the state would do.”

Bell pointed out there are about 65,000 licensed insurance agents in Alabama with 29,000 domestic agents, ranked pretty high also. Bell estimated a total of about $14 billion in insurance premiums written in Alabama, which ranks the state 24th.

Taking the long view

Rowe’s presentation gave an overview of the insurance industry over the past 25 years. He pointed out that years ago it was not very difficult to develop a strategic plan that went out as far as five to seven years.

“Today, it is difficult to develop a five year plan and we typically look at three years out,” Rowe 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 the past 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. He said there is a plus side to it when you talk about the peaks, valleys and the troughs from a rate standpoint for property and casualty operations?

“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?

“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 you are going to lead to some bad numbers on your bottom line.”

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

“The strength of various organizations today has been strained by the soft market of the 1990s and even though there has been some recovery in 2000, 2001 and 2002, we have not had an extended period of recovery,” Rowe said. He said 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.

Rowe explained that consequently, 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.

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 recover from the standpoint of rate, performance has not been sustained and looking forward we can not say that 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. 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.

“For the first time in many years, companies have positive cash flow,” he explained. “What positive cash flow means is that after you pay your claims and after you pay all your expenses you have money left to deposit in the bank.

“As those dollars start to dissipate you are cutting into your investment income and if your 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,” he explained. “When you borrow from Peter to pay Paul in that way 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.”

Topics Training Development Market Alabama