If you like to watch The O'Reilly Factor, The Partners' Perspective will be similar to the Talking Points segment. If ESPN is your thing, think Break Down segment. We will address topics related to the insurance industry and we will discuss how these topics impact private equity transactions and portfolio companies.
For the first Partners' Perspective, we will focus on the current hard insurance market and the "Lessons Learned from Underwriting Cycles." We have summarized the lessons into a handy Top Ten List.
#10 - What? Mike Ditka's Pills Don't Work For Soft Markets, Also?
Unlike the economy, where money supply and interest rates can be managed, the insurance underwriting cycle must work through its, um, ups and downs naturally. The good news, as we are witnessing currently, is that the hard market usually doesn't last too long.
#9 - Loss Reserves Are For Wimps
The balance sheets of most commercial insurers are dominated by the reserves to pay future claims. It is difficult (if not impossible) to predict future claims with any degree of certainty. No other industry prices its product (premium) before knowing its costs (claims). This retroactive approach is the fundamental fuel for underwriting cycles.
#8 - We Love Contractors! No, We Don't. Yes, We Do.
Have pity on Sybil, your local underwriter. She gets confused as to whether or not she has an appetite for a certain risk. It depends on where we are in the cycle.
#7 - Once You Blow Up A Balance Sheet In The U.S., You Can Always Go To Bermuda
The enduring theme in the aftermath of 9/11 will be continued rise of the Specialty/Bermuda market. Specialist carriers with clean balance sheets and a niche underwriting focus will continue to garner greater market share. Traditional carriers will continue to be burdened by past mistakes and will focus on economies of scale to lower the cost side of their profit equation.
#6 - Buy Low, Sell High (Repeat As Necessary)
Mergers and acquisitions will continue to fuel the growth in the insurance industry. Bigger is not better. Bigger is just bigger. Insurers need to manage and price risks better, not simply improve their economies of scale. Brokers need to provide real service, not just amass resources for the Fortune 500.
#5 - Hmmm, This Asbestos Thing May Have Some Legs To It
What previously unforeseen liability will rear its balance sheet zapping head over the next decade? If the insurers knew, "It" would already be excluded from your policy. If the big brokers knew, they would already be holding free seminars on how to avoid "It" (then pitch you for your workers' comp or D&O business). "It" will come. "It" will force carriers to take a reserve charge, cause restrictions in coverage, and cause premium increases.
#4 - Occurrence Form? We Don't Need No Stinking Occurrence Form!
General liability insurers replaced the occurrence form with the claims made form. D&O insurers allocated a portion of every claim to the corporate entity which was not covered under the policy. "Side A" only coverage was added for another separate premium. Next, of course, claims made by certain plaintiff's attorneys will be excluded from your D&O policy. (You're not sure if we're kidding, are you? We are-for now.)
#3 - All Carriers Make Money In A Hard Market - Unless They Wrote Enron
An underwriter has never been fired for saying "no" to a risk. But, you can bet your P&L that plenty of them were fired for saying "yes" to the wrong risk.
Enron, Kmart, Qwest, Adelphia, Global Crossing, and Acme (Wile E. Coyote's company) led the parade of less than stellar results despite the highest premiums in a generation. High premiums do not offset bad decisions. High premiums do make good decisions look even better.
#2 - All Brokers Make Money In A Hard Market - Unless They Embark on "Transformation" Or Own A Mutual Fund
Insurance companies charge a premium. Insurance brokers charge a commission. When premiums go up, commissions go __________________ ?
c) Depends on whether or not you tried to lock in a revenue stream by switching to a fee during the soft market when commissions were depressed and now you are stuck with a fee that is below market commission levels.
Equity Risk Partners has one fundamental purpose - to help private equity firms and their portfolio companies buy insurance. We focus on doing that one thing very well. We do not own a mutual fund. We do not own insurance companies and mandate our "objective" brokers to use them.
We work really hard on your behalf and we get a percentage of the premium as compensation.
#1 - They Are Cyclical
We hope that you enjoyed the inaugural edition of The Partners' Perspective and that we were able to inform and entertain you. As always, we appreciate your continued support of Equity Risk Partners. We look forward to having an opportunity to be of service in the future.