How to make money during an unprofitable market

As market conditions start to become more challenging in personal home, auto and commercial property lines, how can carriers and brokerages maintain a healthy, profitable book of business?

“To me, there are three possible strategies,” says Greg McCutcheon, president of Opta Information Intelligence, an SCM company. “One is, you have to have an ability to assess your book and understand which risks are causing the greatest frequency and severity of claims losses. You need to identify those losses and make sure you are pricing those correctly. That’s critical.”

Companies are starting to rate by peril, as brokers across Canada have reported to Canadian Underwriter. In other words, carriers are analyzing their risks using granular data connected to specific peril losses.

In pricing auto insurance, for example, carriers might be looking at the price of specific auto repairs. Geo-spatial data may show risks around a commercial property that could possible lead to a fire. Perhaps the elevation of houses on a block will lead to different pricing of risk related to a severe rainstorm.

Sophisticated carriers are able to use finely segmented data analysis to assess the precise nature of their risks, and price accordingly. This brings up a second strategy, applicable to those carriers that may not have the ability to segment their data so finely.

“Making sure that you are not anti-selected against in this market is critical,” says McCutcheon. “There are companies that have stated publicly that they are prepared not to grow in some areas – and maybe even shrink their overall premium a bit – to ensure they are maintaining profitability.

“A sophisticated carrier may have analyzed a piece of business and said, ‘We think this is probably going to be a problem downstream, we don’t want it.’ That business has to go somewhere. If somebody else picks it up, they could be unsuspectingly getting themselves into a worse position from a profitability perspective by anti-selecting themselves.”

Some have observed the market may be divided into the “haves” and “have nots” when it comes to whether a company has the resources to analyze its book of business thoroughly. While some companies may have extremely robust data analytics capabilities, others may still be building them out. How do the “have nots” avoid being selected against, when their data analytics capabilities may not be as sophisticated as the “have” companies?

“You have to find business partners that bring solutions that are turnkey solutions for you,” McCutcheon says. “These partners can work with you to implement [a sophisticated data analysis] using skill sets that are as advanced, or as close to being as advanced, as the top tech players in the industry.”

A third, time-honoured strategy is underwriting discipline. This demands a full review to make sure the risks on your book are insured to value.

“Make sure you are putting sophistication into your new business processing, so you can identify if this is the type of business you want to write,” McCutcheon advises.

“We often see situations where underwriters will be flooded by applications for new commercial business, for example, that not is within the organization’s appetite or wheelhouse at all, and yet they still receive a submission. You need to make it very clear to the distribution channel, and in your marketing efforts, that ‘This is the type of business we are trying to attract.’ I’m either pricing myself very competitively in this area because I want this business, or I am not pricing myself competitively because this is not the type of business we want. If we take it, it will be surcharged.”