The Art of Adjusting® Podcast

Episode #68 - Understanding the Hard and Soft Insurance Market

• William Auten & Chantal Roberts • Season 3 • Episode 68

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The hard and soft market cycle remains one of the insurance industry's most powerful yet least understood forces. In this eye-opening conversation with industry veteran Chris Burand, we peel back the curtain on what's really happening within carrier boardrooms during the current market hardening.

Most insurance professionals under 40 have never experienced a genuine hard market until now. With remarkable clarity, Burand explains how we're potentially facing "the hardest market since the mid-80s" despite carriers posting record profits last year. This seeming contradiction points to the fundamental truth that hard markets stem from balance sheet weaknesses, not income statement problems.

The roots of our current crisis trace back to 2018 when carriers made a fateful decision to reduce reinsurance purchases, effectively doubling their growth rate while increasing catastrophic exposure. When devastating Midwest storms struck and investment losses mounted, the industry's surplus position deteriorated dramatically. What's particularly troubling is Burand's revelation that some major carriers have borrowed significant portions of their surplus or invested heavily in junk bonds, creating serious quality concerns beyond mere quantity issues.

For claims professionals, these market dynamics directly impact daily operations through staffing reductions, heightened scrutiny of settlements, and increased pressure to control costs. Understanding the "why" behind these changes provides valuable context for navigating today's challenging environment.

We also explore how third-party litigation funding, excessive verdicts, and problematic risk assessment models are creating scenarios where certain risks simply can't be priced at any level. These structural challenges suggest the current hard market may persist much longer than historical patterns would indicate.

Whether you're an insurance adjuster trying to understand why your job just got harder, a broker explaining premium increases to clients, or simply someone curious about the forces shaping the insurance landscape, this conversation provides essential insights into the trillion-dollar tightrope the industry is currently walking.

Ready to deepen your insurance industry knowledge? Subscribe now and join our community of claims professionals committed to mastering the art of adjusting.

For more insights, you might consider a career in liability adjusting or if you're searching for reliable adjusting services, visit Auten Claims Management.

To explore more about Chantal Roberts and her contributions to the industry, visit CMR Consulting.

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Speaker 1:

Hello, I'm Bill Auten of Auten Claims Management.

Speaker 2:

I'm Chantel Roberts of CMR Consulting and welcome to the Art of Adjusting podcast.

Speaker 1:

Today we're going to talk about life as an insurance adjuster from the perspective of property, auto liability or workers' compensation adjusters. Our goal is to bring interesting topics in the world of claims adjusting to people who are working as an adjuster now and to people who are considering a career as a claims adjuster.

Speaker 2:

I do usually try to find something that's funny.

Speaker 1:

We've had FedEx come into my office during a podcast before to sign something.

Speaker 2:

I think I threw up one time during a podcast.

Speaker 1:

You did, that's right you know.

Speaker 2:

So anything can happen, something. So I think I threw up one time during a podcast you did. That's right, you know.

Speaker 1:

So it's it, anything can happen she came back and her eyes were all watering and her face was red. I'm like are you okay? She's like I'm fine. You need to wrap this thing up. Such a trooper, such a trooper well, are we ready to get? Started then? Yes, of course, we course we are. Hey, chantel, how are you today?

Speaker 2:

I'm doing well, thank you. How are you?

Speaker 1:

Doing good, sun shining, it's beautiful weather, 72 degrees. Finally we're in the 70s. We're out of this miserable winter here.

Speaker 2:

See, I don't know, because it's spring and you know, I've got the little vest on and the sweater, because it's right at that thing where if you wear a t-shirt I'm cold and if I wear a sweatshirt I'm hot. So it's just like eh.

Speaker 1:

When you get to that point, just get really active and get your heart rate up, and then you'll know exactly what to wear.

Speaker 2:

What? What are you talking about? I know. Anyway, we have a guest today.

Speaker 1:

Yeah, yeah, I guess it's Chris Burand. Yes, okay.

Speaker 2:

So our good buddy, fred Fisher, contacted me with Chris and said you gotta know, chris, chris is the coolest person besides myself meaning Fred, not me, cause you know how Fred is. I love Fred. Anyway, he's like the coolest person ever. You got to talk to Chris and we're doing a podcast, or you know, like the seminar with Insurance Academy, and we're going to be talking about the hard and soft market, and so I'm thinking I love that. Not a lot of adjusters know about the hard and soft market.

Speaker 1:

It's kind of the other end of the business.

Speaker 2:

Yeah, it really, it really really is, but it does kind of impact us tangentially and so uh, by the way, if you want to. So anyway, Chris, welcome, Tell us a little bit. Well, I think I know a little bit. So I was going to say introduce yourself. You know, like I said, we're very casual here.

Speaker 3:

Thank you. Thank you for having me. Yeah, I've been in the industry now for a little over 35 years getting closer and closer to 40 years and I've been doing consulting for insurance companies, insurance brokerages, insurance agencies for the better part of that time. I got into the industry and underwriting at the very tail end of the last true hard market We've lost. We've gone through two generations without a hard market, really maybe three and and so to talk to people, yeah, I was here for the last really hard market. It's like there was, there was a, there was a hard market sometime in the past. It's kind of a funny conversation. So I do, I'm a certified business appraiser I think I have the highest in the industry and designation and then I'm also certified to do, you know, audits and expert witness, and then I also do a lot of work with analyzing carriers, analyzing the insurance market as where it's going to go and why, how it got here, which is obviously a topic for today.

Speaker 1:

Well, chris, just so that we can, you know, educate our listeners a little bit, why don't you go ahead and explain the difference between a hard and soft market, so everybody kind of knows the foundation of what we're talking about here?

Speaker 3:

Yeah, that's a great question. So historically, you know, until the mid to late 90s the mid to late 90s we would have a soft, a hard market about every seven years, and that would last for two years and then we'd go into a soft market and it was. You could almost, you know, set a clock by it. So a hard market is where there's reduced capacity, in other words, the insurance companies don't have the capital, ie the surplus, with which to write new business, and one way of looking at it is they can't afford to grow because their balance sheet isn't big enough. And so when that happens, it's not a matter of raising prices to become more profitable or anything like that.

Speaker 3:

Not a matter of raising prices to become more profitable or anything like that, it's a matter of saving enough money or getting new capital or getting rid of accounts so that the amount of surplus is again once again in line with the amount of premium that you have on the books. A soft market is the opposite of that, where insurance companies have more money than they know what to do with and so they start underpricing. Generally speaking, they start underpricing. They never intend to start underpricing, but inevitably they always do, and it becomes a price game. Who will write that account for the least amount of money?

Speaker 3:

And then, when the losses build or their investments tank and they lose their capacity, we go into a hard market. And, like I said, it used to last about seven years. The cycle we starting in 2003, end of 2003, we entered the longest, worst soft market in probably recorded history. For the origins of the US insurance market. Rates actually went backwards for three consecutive years. Wow, that had never, ever happened. And then now we are in the hardest market since at least the mid-80s, and it's a very different hard market from then, but it might even be a harder market than the mid-80s. This is a really awful hard market.

Speaker 2:

Yeah, but isn't it fun though? Oh, it's a blast.

Speaker 3:

I mean not really. It was kind of funny, you know. Your comment there reminds me. So many young people came into the industry during the soft market and they go. Oh, this is awful, we need a hard market and all the veterans were going no, no, no, no, no, no, no, no.

Speaker 2:

And and I have been in the in the market for 25 years, so I kind of remember, like the nineties, because my dad was in the market in the nineties, so I remember him talking about it. I didn't get into the market until, you know, 2000,. Basically 1999, 2000. But you know, I teach risk management and insurance and so I tell my students, who are all babies like they, I accidentally asked them when they were born. Um, I said, don't tell me, don't tell me, don't tell me. But they did anyway. And I feel really bad now because they were all like born in 2005. And I'm like, oh my gosh, I'm so old now. Anyway, um, like they've never experienced anything else.

Speaker 2:

And you and I were talking off the air about being expert witnesses, because I also am an expert witness and one of the things that I often point to, uh, some plaintiff attorneys when they hire me is guys, you think that this is a bad thing, but it's not. I mean because I've got a graph in my risk management and insurance book that shows how the insurance industry has been losing money for like 20-something years. I know that you get all of these big headlines that say so-and-so, is earning $5 trillion billion gazillion dollars this quarter. But that's not true technically. I mean, you know, anyway, I tell the students that it's like a pendulum it goes back and forth and back and forth, and I think you kind of talked about this. But why do we have these swings?

Speaker 3:

besides the fact of losing capacity, gaining capacity, spending money, not spending money, that sort of thing, yeah, so all hard markets and I know that what I'm about to say is going to surprise some people, I know it's going to upset some people, but all hard markets are a result of bad balance sheets. They have really nothing to do with income statements. It doesn't really matter what the profit margin is. So what you just said last year, the insurance companies as a whole made record profits. In fact, their profits, depending on how you measure them, were two to three times higher than normal. And yet we're still in a hard market, and that's because we still don't have enough surplus.

Speaker 3:

So surplus is what drives capacity and drives the marketplace Surplus, and it drives claims behavior too. We know it drives claim behavior from both sides. So what we have there is we have an insurance company has to, in theory is supposed to keep X dollars of surplus in the bank for every dollar of premium they write Doesn't matter how much money they make. If they don't have that money stored away as surplus, they still have a problem. Now, one way to get right is to make more money, more profit, and put it back in the bank. And so what you're saying yeah, they made a lot of money that doesn't mean they have it to spend. That's a really big, important point that plaintiff attorneys don't get, politicians don't get. A lot of insurance people don't get. But it's imperative for a healthy industry that we take those profits some portion and we just set them aside in surplus and leave them there.

Speaker 2:

And we just set them aside in surplus and leave them there. I was going to interrupt real quick because I think part of the issue may be the reason why people don't get it and I talk to my students about this is the insurance industry is like the world's worst for using the same words meaning different things, like liability. Liability could mean fault or it could mean the casualty policy that we're talking about, and I think one of the things that gets people confused about what you're talking about is you're saying you're being very direct and very specific by saying surplus, and that is absolutely correct. If I may compliment you as you're the expert, like I even know, like I'm going to compliment anyway, but everybody uses the word reserve Like we need to keep money in the reserve, and so I think this is where maybe plaintiff attorneys get confused, like, oh, you're making all of this money, and then what are your reserves that you've put on this file?

Speaker 2:

And dah, dah, dah, dah, dah, blah, blah, blah, and I'm like those are two different words too. I mean they're the same word but they're two separate things. And you know, there's the reserve that you got to put in your bank and then there's the reserve that you put on your claim file. And yes, both of that means that we're holding money back, but we're usually holding that money back in two separate bank accounts, you know, because we're not allowed to spend the surplus money. That's to keep us from going bankrupt.

Speaker 3:

Right right.

Speaker 1:

Right, the surplus has to be in a certain ratio with the written premium and if you're not, within what is it? Two and a half times or something is a minimum. A lot of carriers keep really close to that. A lot of other small mutuals tend to be very high. They'll have a real high ratio of surplus to premium and I know so.

Speaker 1:

As a carrier gets down to that two and a half or to that level where it's getting a little scary and I remember at the carrier I used to work at, we would have to do a report on on. You know, if there was a catastrophic loss that that took out all of the properties that we had insurance on in one event, would we be able to withstand it? You know it was like this stress test and a lot of carriers, especially bigger carriers, just would not fare very well if that happened. So when you're in a hard market, I'm guessing then that that number, that surplus number, is getting closer to the premium number, to where it's getting a little dangerous. What is the strategy for a carrier to then manage that?

Speaker 3:

Yeah, let me go back on one point you made there. The ratios that you put out there aren't quite there, isn't actually an official minimum. There's some myths out there that there are and that people abide by it. Um, but there's carriers that are pretty darn close to, depending on how you count things, far closer to a one-to-one well, I think that I think that rating came from um, from uh, a company that did our.

Speaker 1:

They would evaluate our reserves. It wasn't AM Best, it was.

Speaker 3:

Anyway, I digress, it was a number that one of one of our consultants threw out there a long time ago, but it's a good number and it's the way it used to be and I would argue I would like to see it that way for the safety of the whole industry.

Speaker 3:

But there's some that are playing it a lot closer than that to be, and I, I would argue, I would like to see it that way for the safety of the whole industry. But there's some that are playing it a lot closer than that today and that, especially if we started talking quality of surplus, not just quantity of surplus, that would definitely be a factor.

Speaker 1:

So talk about that quality versus quantity Is this? Does this mean the type of, maybe the type of investments they have that surplus in? Or what is? What is quality?

Speaker 3:

So quality is very fascinating and it's something that again, probably upset some people with my response for for pulling the, for opening the closet door, let's say to the skeletons that are out there. Opening the closet door, let's say to the skeletons that are out there. So some big, important carriers have borrowed a large portion of their surplus. They don't even have it's not their money, they borrowed it and now they have their collateral is the surplus.

Speaker 2:

That is not good.

Speaker 1:

No bueno.

Speaker 3:

Billions of borrowings.

Speaker 2:

Yeah, yeah, yeah. And I'm fascinated by this idea because I think I wrote a report where I lamb blasted another expert because he was rolling out the trope of insurance companies delay payments because of the float, and I absolutely hate this idea. You know like one adjuster is going to save the insurance company billions of dollars by delaying a payment by three weeks or whatever. But one of the things that I had done and I think this happened to be Colorado I had looked up Colorado's rules and I think the DOI had said you know, for this particular book of business it needs to be 1.5 times your total earned premiums. And I'm like God, that can't be right, because 1.5, if I'm bringing in $1, that's only $1.50. That is no cushion whatsoever. If you know something happens you know a hurricane, which is not going to happen to Colorado, of course you know what I mean Massive hailstorm instead.

Speaker 2:

Yeah, yeah. And so that's really surprising and I think for the adjuster point of view is guys, the reason why this is important for adjusters is a first question you're going to ever get anyone you know as an adjusters well, what does my premiums pay for? And then number two you know why are my premiums so high? And this would probably be this hard and soft market is probably part of it, getting that surplus and all of that kind of stuff. Oh, so anyway, wow, that is amazing.

Speaker 1:

So to avoid a hard market, we need to have insurance carriers saving more of their money. Yeah.

Speaker 3:

Not only that. So, to go back to your question about how do you fix it, is there's two ways to fix a deficit or surplus, very basic. First way is you go raise capital. This is why you see a lot of mutual companies now demutualizing because they're raising capital by becoming a stock company. You can go borrow money, like some major carriers and small carriers both have done Different form of way of raising capital or the other thing, and this is what you see happening and this is I saw the lawsuit that's being brought in California.

Speaker 2:

The antitrust, yeah, the antitrust one.

Speaker 3:

You guys are all getting off all of these accounts. Well, the question that might should be asked and I'm not saying that this applies to the carriers in question, I'm just saying might should be asked is one of the ways in which you write the ratio is you get off of risk. Instead of increasing your surplus, you decrease your premium risk. Instead of increasing your surplus, you decrease your premium, and that causes all kinds of other issues, of course, but that is one of the solutions.

Speaker 1:

Yeah, because you're exposing yourself to fewer opportunities for losses.

Speaker 3:

Well, not only that, but to get that ratio in, you get rid of premium, you just get rid of it. So in this hard market right now, a lot of agents maybe not the adjusters, but a lot of agents are probably pretty frustrated because they're having carriers say get off X amount of premium, we don't care if it's a good account or a bad account, just get off. Or they're selling divisions. Well, that's another way of getting off, of getting rid of premium. You sell a division. Yeah, you got to get rid of it. It's called right sizing that makes sense.

Speaker 1:

Yeah, that gives your your ratio looking better, the ratio of surplus to premium, and if you're smart about it, you'll go through your book and get rid of the the worst of the worst.

Speaker 3:

First, if you're smart, um If you're desperate, you just get rid.

Speaker 1:

You should talk to your claims people for that.

Speaker 2:

Well, you know, there's a lot of financial diets that I think insurance companies do. Usually, we feel it in the claims department and it has nothing to do necessarily with the hard and soft market, except that maybe they're tightening their belt. And the thought is and the way that I always explain it to attorneys, when I'm talking to attorneys or to the students is that think about being, you know, your normal everyday person. You got to tighten the belt in your budget. Where is that going to be? Well, that's going to be where the money goes out, like, I don't know, the grocery store or eating at the restaurants or going to the movies.

Speaker 2:

And unfortunately, everybody thinks claims is where the money goes out, because we don't necessarily take money in. Now, of course, fred and I both are like, by God, no, that's absolutely wrong, you're looking at it wrong, but it's hard to explain that concept to a lot of people. So one of the things that insurance companies will do will be the hiring freezes right around with the adjusters. I would think too, with the hard and soft market, does it tend to go with inflation at all? Because we've been seeing, of course, due to what was it COVID five years ago all of the prices of lumber and bricks and all of that go up. Is that part of it?

Speaker 3:

No, it doesn't really correlate to inflation. I've tested it, it doesn't. It correlates to one thing, and one thing only, and that is the loss of surplus relative to premiums, and the loss of surplus for this hard market in particular is due to bad investments more than his claims.

Speaker 2:

Okay, can we talk about that too? Because I think I told you about this via email when you and I were talking. I had released a book about a year ago and I was on a podcast tour and this one particular podcast that I was on was for wealthy individuals and it was talking about why have their premiums gone up? And yada, yada, yada. And I said, well, you know, remember back in like what was it 2008 when we had the little dip, and you know we're just now seeing how our surplus have run out? The guy totally didn't buy it. He was like that was 2008. This is 2024. And I'm like look, it can be two years, because what we're talking about is going through our savings. Remember, we're underpricing ourselves, so we're living off of our savings, so to speak, like trust fund babies, and the trust fund isn't bringing in the money anymore. We've spent it all because of the little dip and they totally did not buy that.

Speaker 3:

Right. So these bad investments were in give or take. It was in 2022. The market was already kind of trending this way, but the insurance carriers as a whole lost a record amount of money in 2022 to bad investments because their chief investment officers evidently thought that interest rates couldn't go up. Chief investment officers evidently thought that interest rates couldn't go up, and so I think it was about a $70 billion loss that year for investments.

Speaker 2:

Wow, that is a lot of money. Because, as I explained to people and this is is consumers, because consumers don't necessarily understand is that they think well, why is it the the investments? And and I said, well, have you I know you think that your auto premium is high at, you know, two thousand dollars a year or whatever for you and your husband, who just drive to church and back, and for your two cars or whatever. But have you had an accident lately? I mean even just a little fender benders, what $7,500 that is. That's not going to cover you getting into a car accident and goodness forbid if there's any injuries or it's your fault, so you've got to pay for someone else and blah, blah, blah. I said that's why we've got to have the investments, because your premium isn't going to cover it, and neither is your neighbor's premium and Bill's premium and, you know, chris's premium. There's not enough premium.

Speaker 3:

The average combined ratio so that's your expenses plus your claims is over the last 10 years, is 100%, which is a loser. Breaking even.

Speaker 2:

Breaking even if you don't include investment income Right, which is basically losing because there's no wiggle room. Well, I wouldn't go that extreme. Let's look at it from like a home point of view. Like, if my let me complain about my house, the city. I think we got like a new board member on our HOA or something, because, like everybody in the neighborhood has been popped by our city for code violations and you're like son of a biscuit. Come on on, dude, I've got a pencil pusher now watch your language now, chantelle you know I didn't go for them.

Speaker 2:

Some kind of pencil pusher here, yeah, whatever. But um, yeah you, thank goodness I have a little bit of an emergency fund, because now I gotta pay a landscaper to re-divert my sump pump drain, blah, blah, blah, blah, blah. Oh, I feel for you and if I had more money in my emergency fund I would make a great big old fountain with a cupid flipping off the hoa. But but I digress.

Speaker 3:

Yeah. So, chris, not that I'm better. So Swiss Re came out with a study a couple of years ago and they said primary property and casualty insurers could withstand a combined ratio up to 101.5 with no problem whatsoever. And this gets really deep, deep in the weeds. Probably not for your audience, but it's really not an issue with the investment income. I ask all insurance company CFOs this question that I get a chance to ask a question of, or CFOs in general. Everywhere I ask them this question and almost nobody gets it right. Very simple finance 101 question what are the two components of how much money you make from your investments? There's only two.

Speaker 2:

Well, don't look at me, I'm horrible.

Speaker 3:

That's your yield Rate of return. What's your interest rate? Right? Yeah, so that's your yield. The average yield used to be 5% for insurance companies, or so it dipped down to three. Last year it was at three and a half. What's the second component?

Speaker 2:

No, Liquidity, own it.

Speaker 3:

No, liquidity, see bill is a lot smarter in this issue than I am. I'm like uh, this is what cpas were invented for. Uh, cpa, get it right either. Super simple, I'll tell you the answer. How much money did you invest? Because it's your principal times, your yield right.

Speaker 3:

So the insurance industry has right now about a trillion dollars of principal, so you can have a relatively low yield and make a fortune right off your investments, as long as your combined ratio probably doesn't go above a 101.

Speaker 3:

So we have a little bit more wiggle room than insurance company people executives like to talk about. We don't have a lot of wiggle room, but we have a little bit, unless the value of the investments plummets like it did in 2022. And now the problem that has been caused and causing the hard market to be elongated is that the rates have gone up so fast that we are still out of whack in the premium to surplus ratio. The rates have gone up faster than the surplus has recovered and or the profits have recovered. Right now, that ratio for the industry as a whole is lower than any time, even after record profits last year, than in 10 years over 10 years. So we have some room to go before we're going to fit, before the hard market can be fixed. Um, now we have a shakeout coming because there's some carriers that, flat out, are not going to survive. They don't have any ability to recover, so it's just a long drawn out death. But then we have others that are going to. They're just incredibly strong and they're doing just fine.

Speaker 2:

Okay. So I have read articles. That's from big names. I won't mention them. We can talk off the air. But some big carriers who sat there and they've admitted on paper hey, the hard market is softening, it's ending, it's blah, blah, blah-ing and I'm sitting there looking at it going okay. Well, I am not a financial person at all, but if we've had 20 years of a soft market, I don't think three years of a hard market is going to cut it. I would predict at least 10. But I mean, what do I know? What do you think?

Speaker 1:

I think so. If interest rates they would have to go up quite a bit, and nobody wants that right now, do they?

Speaker 3:

Well no, if interest rates went up quite a bit, the value of their investments would plummet again and that would be a bigger problem.

Speaker 1:

The amount of investments in equities or in the stock market probably shouldn't be too significant of an investment for insurance companies.

Speaker 3:

That varies. There are some companies where probably 70% of their surplus is in common equities. The other thing that you have out there is you have carriers who have material portions of their bond investments are in junk bonds. They're not in regular bonds, they're in junk bonds. So interest rates go up. It's going to hit the junk bond part even harder, all else being equal, in theory at least, and so that would hurt those particular companies even more. So it's kind of there's a I would argue that we're, we're. We have a bit of a knife edge going on here as to how to balance this out. That being said, you have a company, you have some companies out there that have so much surplus that it's not even funny. So where some of that soft market might be entering and I've heard, I read articles along those lines most of my clients anywhere in the country they're not feeling too much outside work for a soft market yet Maybe a little bit here and there.

Speaker 3:

But is that the companies that have unreal? So there are companies out there that have four to almost $4 a surplus for every dollar premium and they've been riding the wave. Maybe those are the companies that are saying, okay, now we're going to go for market share because we can write for a lower premium. The companies that still don't have their financial act together it's time for them to go away. We're just going to go start taking their business Right now in the marketplace. That would probably be. I would expect that to start happening right now in the marketplace. That would probably be. I would expect that to start happening right now. Really good timing for that.

Speaker 1:

A lot of the small mutuals that are in my world here. They are very well capitalized, so their surplus is, like you say, four, some five, six times in some cases. Their surplus is, like you say, four, some five, six times in some cases and these these hard, soft markets really don't affect them as much. They'll all complain about the agents, all complain about it, of course, but because they're writing for all the carriers. But these small little mutuals that have, you know, less than a hundred million dollars in premium rituals, that have you know less than 100 million dollars in in um premium, some far less than that, um, seem to do pretty well.

Speaker 1:

But these are companies that have been. They're all formed back in the late 1800s and they're kept really small, very conservative. You know they've got 10 in equities, if, if, that uh as their maximum and everything else is these ladder bonds and they just kind of keep expenses low. They're a good model. But the big companies it's difficult to manage a big company. In the same way. I think Reinsurance is a huge part with these smaller carriers. Uh, that takes a huge chunk of their premiums, um well, but that happens.

Speaker 3:

So I, I analyze, I analyze 90 of all pnc premiums in the in the industry every year in detail. I mean I really do this and I'm not any longer a fan of delineating carriers by small or large mutual stock. It's all over the board. Bad management pervades all channels.

Speaker 2:

What my RMI book shows, when we're talking about finances, is what are some of the reasons why our companies go bankrupt? And one of the biggest ones is bad investments and bad management. And you're talking about, you know, the junk bonds and the bonds and all this kind of stuff. And I have a little pie chart that shows how or what insurance companies invest in, because I think we hear the word investment and we're all thinking stocks like stocks like Walmart and Pepsi, and you know, coca-cola and Google, and it's like no, no, there's, there's like, you know, property, there's real estate in there, and there's this and there's that. I mean, it's only like two percent or whatever, according to my little pie chart, but they get surprised by these sorts of things, I think.

Speaker 3:

Yeah, there's a lot more variety than people think and the good conservative companies are pretty vanilla. Vanilla is good in insurance, it really is. You get to tapioca in insurance and something usually is going to go wrong. So, yeah, rocky road, okay. So what about?

Speaker 2:

chocolate fudge, peanut butter chunk. Is that going to be okay? Do we need to get Ben and Jerry's in here Because they are a New York firm, bill's in New York. I think I sense a marketing sponsorship capabilities here.

Speaker 3:

I think that's a good idea too, yeah, so let's talk about combining what you just said, chantel, and what Bill said about reinsurance, because it's a really important point as to how we got to this place in the hard market and it's surprising to people and the reinsurance factor for these little mutual companies is going to become more problematic, especially for the ones in the Midwest. So there's two parts of the reinsurance story the generic one, overall for the industry, as all is back in 2018, which is really the approximate date of what has caused this hard market to be what it is is that the insurance companies as a whole forwent. In other words, they did not buy a record amount of reinsurance in 2018. So, if you take so for your listeners that may or may not know how this works, let's say you have $100 premium and you buy reinsurance that takes $5 off the books.

Speaker 3:

Your net premium is now $95. It's not $100. All right, your net premium is now $95. It's not $100, all right. So you've been buying reinsurance all these years and your direct premium is $100 and your net premium is $95, but you decide because you need to save some money, your expenses are too high or whatever. The case may be that you're no longer going to buy reinsurance, so your net goes back to 100 and your growth rate accelerates. So if I need to show higher growth and I'm running an insurance company, I just don't buy reinsurance and I get an immediate uptick in my growth rate. Immediate uptick in my growth rate.

Speaker 1:

So in 2018, the carriers as a whole more than doubled their net growth rate by not buying, reinsurance their net, not buying it at all or just increasing their retention.

Speaker 3:

Well, some carriers almost went to no reinsurance. Others just you know less, but the growth rate should have been about 4% in 2018. And it jumped to over 10% with really no material rate increases. That's how I identified what happened and I was able to later back into it and figure it out and confirm it. That was a really rather bad time to roll the dice because not that long after we had the duration shows in the supposedly safe Midwestern States and some of the carriers that rolled the dice happened to have a preponderance of a business in those states.

Speaker 3:

What made it worse, a lot worse, is that some of the primary mutuals, smaller mutuals that you may or may not have been that you're thinking of going back to a deal that was made with the politicians in around 1910 give or take um, these smaller midwest are mutuals by and large. Some larger had agreed to provide effectively what's called unlimited reinsurance property reinsurance to these little itsy bitsy mutuals and county mutuals. What have you? And the ratios came through. So not only did that mutual in their own backyard have really high loss ratios, they now have basically unlimited reinsurance loss ratios on everybody they had reinsured. Their reinsurance loss ratios per the NAIC at times went to 999.99%. Wow, the NAIC can't go to four digits.

Speaker 2:

Right.

Speaker 3:

Right. So we have a situation where some people decided not to buy reinsurance. The durations came through, they didn't have a spread of risk like they should have had, and then, a couple of years after that, we have interest rates go up, bond portfolios fall like there's no tomorrow and we have a surplus issue. It's that compounding of different events that's created such a horrendous hard market.

Speaker 2:

And I think the just to throw stones, just because we can and there's no one here to defend them. The reinsurance or the reinsurers you know, like back in Florida or or what have you. I mean they took their sweet time in reimbursing the underlying insurance carriers so that you know they're robbing Peter to pay Paul or what have you. And that's one of the reasons why some of our carriers in Florida and Louisiana went and saw that Florida and Louisiana went and saw that.

Speaker 3:

Yeah, yeah, and you, obviously you've got it as a carrier level. You need to do your due diligence on your reinsurers, right? I don't know if it's still true A few years ago. It was true, though and this goes back to the question of surplus is that there's no if I remember correctly, there's no regulation that requires the primary insurer to reconcile with their reinsurers what the reinsurance recoverables actually are.

Speaker 2:

So they. So the underlying doesn't have to say you owe me $5, and if the reinsurer gives them $3 instead of $5, there's nothing that the underlying can do. Is that what we're?

Speaker 3:

saying Well, this is a payable and a receivable right. I can say that you owe me $5 and the reinsurer can say no, I only owe you $3. And until it's resolved, they can keep their books that way.

Speaker 2:

Right, right, right and I think that might have been part of the issue with Florida as well yeah, because they're not getting all of the money and and then because they're relying on reinsurance to pay or reimburse right, maybe they're not keeping the surplus that they need to do, and and what so reinsurance recoverables is a calc is part of the calculation of how much surplus a primary carrier has, and so for a real strong carrier, you're looking for reinsurance recoverables to be an itsy bitsy amount, percentage wise.

Speaker 3:

There are some carriers out there that are probably in the 20% range of their surplus of their surplus.

Speaker 2:

If you just think about this as a as a book of business, you don't want to have bad debt on your book of business of 20%. You know, like bounce checks of 20%, it means you're not getting out of, you're getting 80 cents on the dollar or something like that and I am not a great business person, but even I know that I'm an insurance nerd, not a business person.

Speaker 3:

Like I said, some people might be upset on covering things here and they may argue, but I use the NAIC data, I use AMVEST data and the numbers are the numbers, as I have told several insurance company CEOs. If you don't like the numbers, then refile your NAIC filings.

Speaker 2:

Yeah, that is just absolutely and you said because this is one of the questions and I found it really, really interesting that the hard market actually started in 2018, which is a lot earlier than what most people think. I think most people think it started in what 2022, 2023, somewhere around there.

Speaker 3:

That was the approximate date of the start of it, because they didn't buy reinsurance and it was hidden for a little bit because of COVID, because the carriers had to give back so much money because no one was driving during COVID. So that distorted the market quite a bit for 24 months, but it really did start in in 2018. That's where that's where the inflection point is.

Speaker 2:

Yeah, so just for fun, what? What's your foreseeable like? When do you think is it going to be 2028, 2038, 2138, that we're going to go back into a soft market? I?

Speaker 3:

don't know. This is one heck of a market. I don't think that we're going to have an overall resolution to it either. We have some other issues that have now entered the equation that don't have really anything to do with surplus for the first time, that really are really quite new are some of the litigation out. There is creating a situation in which you can't price it. You simply can't price for the litigation potential, so it doesn't matter how much surplus you have, you just can't write it at any price.

Speaker 2:

We're talking and I'm going to venture a guess. The first one would be the nuclear verdicts, which, by the way I found out, was like a trademarked term and we shouldn't use the word nuclear verdict. But I mean, that's what everybody uses. It's like using Coke or whatever. To whatever, that's what we're going to say. So we should say like excessive, excessive verdict.

Speaker 3:

Let's use excessive verdicts, because it's not just the nuclear kind.

Speaker 2:

But it's also because my second guess would be the third party litigated funding.

Speaker 3:

The third party litigated funding is a real issue. It's a true, true issue, especially given the fact that we don't know the sources of some of that third party funding.

Speaker 2:

So if you don't know what that is, I'm going to give you my very uneducated, because I've only read one or two articles on it and half the time it's written by attorneys and it's even a little bit above my head when I'm reading the articles about it.

Speaker 2:

They use really big words, but essentially it's like a venture capitalist coming in and plaintiff attorney money and and say go ahead and file suit, and when you get that billion dollar verdict or whatever, I'm going to take 20% off the top of it or whatever. And it's kind of like having a empty pot or you know deep pockets and and so plaintiff councils are saying, hey, we've kind of leveled the playing field because insurance companies have deep pockets, yada, yada, yada, We've got all of this money. And I'm like, no, we don't, we don't, but that's okay. And the issue is is that the funding isn't really very clear, because sometimes I think there are some bar rules that say you can't do this and you can't fund this way and you know the money has to come from yada, yada, yada and it's a morally and ethically gray area where this money is coming from.

Speaker 3:

In theory, but it's it's pretty popular. I don't know what their current number is, but I think I saw something that said is the funding was in excess of $10 billion at this point, so I think that's part of it. And keep in mind too, though, the insurance companies are playing both sides of this, because insurance companies have a policy out there called judgment preservation.

Speaker 2:

now, Really yeah.

Speaker 3:

Yes, let's talk insurance coverage. Tell me about that. So let's say, Bill, that you go out and you win a verdict for $50 million and the loser is appealing. That verdict you can buy in theory. You can buy an insurance policy that says, if your $50 million is reversed upon appeal, the insurance company will write you a check.

Speaker 1:

Wow, that is interesting, it's almost like they're shorting their own defense.

Speaker 2:

I have an issue with this because you know, the thing is, is that insurance is supposed to be a fortuitous loss, supposed to be based off of a fortuitous loss? Fortuitous, as I explained to my insurance kids, that big old fancy word meaning by chance. Is it really by chance, or are you gambling, if I mean, because it's kind of like a 50 50, isn't it? If you're either going to keep that 50 million or you're not going to keep that 50 million, or you're not going to keep that 50 million, so how can you issue a policy? Well, I guess you could if you were in this excess surplus lines, not the not even excess surplus.

Speaker 3:

But for anyone that wants to go look it up, look up the IBM case, where IBM won on reversal and uh and um, it costs the other side's insurance company a minor fortune because they had insured the verdict against IBM. Ibm won on reversal. It's a pretty fascinating deal. Like you said, I think it violates the whole fortuitous aspect of it myself.

Speaker 2:

Yeah, but you know what?

Speaker 1:

It's almost like they're being too smart by half too, because they're speculating, trying to capitalize on a situation that may or may not occur, and if they lose, they lose pretty big, but that's gambling.

Speaker 2:

However, some would say parametric insurance is not fortuitous, so I mean that's a whole other podcast.

Speaker 3:

That's another podcast.

Speaker 2:

That's another podcast, yeah.

Speaker 3:

There's some material differences there, but yeah, it's, and so I think insurance companies offering that policy effectively are are third party financiers as well, and so you know it's going both ways. I'm not sure it's healthy for anyone to be going down this road, but so that's part of it. The other part, though, is and I know I'll upset people with this one, but the other one is that the insurance companies have decided to not think about property underwriting writing, and so, especially out in the West, where I live, you know, humongous areas have been mapped out as wildfire risk and therefore we won't write there, and it doesn't matter if it's really a wildfire risk or not. There's just not a market. If the map and most companies are using, I think, the same map, and it's an old-fashioned form of redlining.

Speaker 2:

There's nothing else when I was just getting ready to to ask you, I'm like oh, is this redlining that we're selling?

Speaker 3:

yeah, it's redlining there's. You call it what you want. Call it green green lighting, because it involves the environment instead. But it's the same thing, right? But we call it a wildfire map and we say we're not going to write anything within this wildfire area ends up being a wildfire area. Well, let's just pull out of the state and be done with it. But I'm going to give you an example of why this is really bad, why it's going to cause the property hard market to be hard for a lot longer and why it's stupid. So, in fact, we're going to run a contest through my newsletter and podcast that says where is the wildfire risk, and this is the example that we're using to start the whole thing out.

Speaker 3:

There's this one little tiny restaurant out in the desert could not get any insurance, any property insurance. So I went to Google Maps and mapped everything out the closest flammable material that's wild. And you think about it on a 360-degree angle, circling this little restaurant. Okay, so out of 360 degrees, one and a half miles away, there is a flammable. There's flammable wild material that takes up about 20 degrees of the 360 degrees. Okay, one and a half miles away, in between the restaurant and the one and a half miles is pavement and buildings and highway and the flammable, the highest flammable part is and the flammable, the highest flammable part is, let's call it, three feet tall and sparse, because we're in the desert, the other side of the restaurant once you get past, because there's concrete going north and south for about five miles, six miles and so if you go to the other side, the western side of this, there is no flammable material because it is all sand, it's dirt, and there isn't a market that will ride it because of the extreme wildfire risk.

Speaker 2:

See, I would have thought, because the fire department couldn't get out there in time.

Speaker 3:

It's in the middle of city limits. It's in the middle of city limits. It's a protection class five. It's not a problem whatsoever.

Speaker 2:

How interesting.

Speaker 3:

And so.

Speaker 1:

So this just happens to be within the map and Ticks a box. Ticks a box, there should be other boxes.

Speaker 3:

It should be. This makes no sense. Let's apply some brains to this.

Speaker 1:

Right.

Speaker 3:

That's what should be done.

Speaker 2:

You know let's talk about, since we, since the insurance companies, have so much money and this will probably be like my last question and it'll lead us into like three hours of conversation, I'm sure, Because here's my unpopular opinion Since the insurance companies have so much money, as we've been talking about, why aren't they doing more grants to where we have these hurricane-proof roofs? We have these hurricane-proof roofs. There's this whole you know movement in Oklahoma and Louisiana and Florida and North Carolina, south Carolina, where you can petition the Department of Insurance or the state or whomever particular instance, and if it's a lottery, like it is in Louisiana and Oklahoma, you might not be able to get it, and these roofs are kind of expensive to add. And so why aren't we putting our money where our mouth is?

Speaker 2:

There is a TED talk by a gentleman, ted Hornsby. They ended up saving millions of dollars. Their little bitty regional carrier out in California loans $5,000 loans to help you build with cinder blocks rather than wood, because you know we're all going to be rebuilding with frame wood things where, because it's quicker and it's cheaper, quicker and cheaper.

Speaker 3:

for sure, there's a lot of problems with that. I think one of the. I'm a big fan of crediting people that do that and offering bigger credits. I think the credits are too small in many ways. For wherever you have hardening, especially hardening for hail, I think that the insurance companies look at it and say what's the return on investment? What prevents the client once we give them that and we have a safer account, what keeps them from going to another carrier? So I think that's a fair point.

Speaker 2:

It's a fair point. We could offer things such as much like we do and I don't know if this is legal, because rebating is illegal but you could do something to the effect of much like they do for nursing students or for doctors. You know like we'll put you through school, but you have to serve in our you know rural area for three years. Rural areas for three years.

Speaker 3:

So in times gone past, insurance companies actually offered lifetime auto and lifetime homeowner's policies. A long time ago and in the 80s even in the 80s and 90s they were still doing it. So that is feasible if they would go back to that. Let me correct one thing that you said Rebating isn't 100% illegal any longer.

Speaker 2:

Oh, okay.

Speaker 3:

And it actually is one of the avenues that we could use to fix this. So the NAIC passed the model law I think now it was three years ago and the model law says that at the agent broker level, rebating is now legal if it is used in coordination with loss control, risk management. It can't just be a cash rebate, it has to be that we're going to give you these services, these ways to minimize your risk, and we'll take it out of part of our commissions to do that.

Speaker 2:

Thank you, yeah, because I kept wondering. My students keep going well, we're just going to give them a rebate and I'm like guys, it's illegal.

Speaker 3:

Yeah until three years ago.

Speaker 2:

That I don't know.

Speaker 3:

And most states haven't passed the model law yet, but a few have. So there's, there are a few states now where you can do that and I I applaud it. That makes all the sense in the world.

Speaker 1:

It's good for the consumer so what's the difference between that and a and a like a non-smoking credit, so that's at the carrier level and the rebating law allows the agent now to do something along those lines.

Speaker 3:

So it's the difference between the carrier and the agent and what they can do. So carriers can always rebate if they want.

Speaker 1:

But if the agent Right, so if the agent is doing something that lowers this person's risk, but they take it out of their commission Instead of, and then depending on.

Speaker 3:

There's a lot of ways that you can finesse that. Let's say In my world, that's good, that's awesome, we can make the world a better place by doing that. Let's make the world a better place, I'm all for it.

Speaker 2:

Absolutely.

Speaker 3:

I thought that was good innovation at the level of the nasc. I hope more states agree to it. I hope more states go along with the hardening um, and I also think that it makes a lot of sense, because the carriers are reluctant to think to where a state look. If someone hardens their home, their state or their insurance company, you've got to credit it accordingly, because the carriers seem to be lack resolve to do it on their own, so somebody's got to force them. It's a sad commentary, but it's reality, right.

Speaker 2:

Yeah, yeah.

Speaker 3:

I mean we.

Speaker 1:

But I mean, carriers are always looking to be more competitive too and if they can you know, if they they're smart and they see that someone is is protecting their home from wildfires through some sort of you know material that they're installing on the outside or whatever um, and they can offer that, that uh discount um. I think that would make sense for them because they're lowering their risk. They make a lot of sense you can't tell me.

Speaker 2:

you can't tell me that, yeah, if I didn't get five thousand dollars or whatever to to put a new roof or to put a hail proof roof Cause I live in Kansas on my house from my insurer, that I wouldn't be more loyal to my carrier, I mean that's good customer service. But again, you know, what do I know For?

Speaker 1:

carriers Way to bring it back full circle.

Speaker 2:

Bill. Way to bring it back full circle, because I was going to say we are unfortunately out of time. Yeah, and what a fascinating conversation. Absolutely.

Speaker 1:

It is. It is and it's fairly far removed from the claims process. So it's good for claims people to hear this part of the business and how these investments, how reinsurance affects things On your daily travels and in your claims handling. You're not going to come across this stuff as much claims handling you're not going to come across this stuff as much, but it's good to know how these companies work and you might get some insight as to why a carrier lays off half their claims?

Speaker 2:

Absolutely yeah, and it's always when you want to move through the ranks to know how the carrier works. Chris, where else are you going to be talking? You mentioned a podcast. You mentioned newsletters. How can people get that information?

Speaker 3:

I'm going to be, I don't know when you're publishing this. I'll be speaking at NetView next week.

Speaker 2:

Thursday.

Speaker 1:

I will be speaking on May 8th.

Speaker 3:

Now I've got to look at the calendar out. May 8th.

Speaker 2:

Oh May 8th. Now I've got to look at the calendar.

Speaker 3:

And I'll be speaking at the Florida convention in June.

Speaker 2:

Okay, this podcast here will come out on May 8th.

Speaker 3:

Okay, I'll be at the Florida convention, speaking on June 19th. I'll be at the Board of Conventions speaking on June 19th, okay, and then I do presentations for the Insurance Academy. I'll be doing one of those on see. When will I be doing that one? I'll be doing that one on no, I don't know when I'm going to do that. I don't know what I'm talking to you.

Speaker 2:

OK, you know what, email us and then we can put it up in our show notes. All right, is there? Yeah, they can follow me on LinkedIn. They can follow me on LinkedIn. They can follow me for my newsletter.

Speaker 3:

Just send me an email. Ask for a newsletter. It's free. I'll be speaking at the Insurance Academy on June 5th, okay. And then we have a podcast that comes out about every two weeks. Awesome Give or take, a little short one and um very cool that's. That's some of the places where you can find me awesome. Well, thank you so much oh yeah, and read my monthly column in the insurance journal oh, I love that.

Speaker 2:

Yeah, because you know I actually give the students, uh, a lot of articles from the insurance journal as discussion questions and to help explain what is going on in the greater insurance world. So I love that. Well, I'll sit there and go. I know this guy.

Speaker 3:

Yeah, it's the church. I do a monthly call in there and they give me the luxury of writing about any subject I want to write about.

Speaker 2:

Oh, that's awesome. Well, Chris, thank you again I appreciate you spending some time with us. Our next episode this one's going to hit on May 8th. Our next episode is going to hit on May 22nd. Our next episode is going to hit on May 22nd and we're going to be speaking with Amy Cooper and the founder and CEO of Rise Professionals, which helps young insurance professionals connect with one another, so you won't want to miss that.

Speaker 1:

Thank you.

Speaker 3:

Yeah, Thank you. Bye Thanks.

Speaker 1:

Chris, good to meet you, take care Bye-bye. Thanks for joining us on the Art of Adjusting podcast, where we talk about life as an insurance adjuster. Hit that subscribe button real quick and tell all of your adjuster friends to check this out as well. For independent adjusting services, go to wwwautinclaims, and for anyone interested in working as an independent liability adjuster, go to the contact us tab to join our roster.

Speaker 2:

So this wraps up another Art of Adjusting podcast. If you enjoyed this podcast or this episode, please give us five stars and a review. It does help the algorithm pick us up. In the meantime, you can contact me at theartofadjustingcom for consulting and training purposes.

People on this episode

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Chantal Roberts

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Sandy Avina, MBA

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William Auten

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Nicholas Kearns

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