Good fundamentals

Prime Holdings Insurance Services chairman and CEO Rick Lindsey says proper claims handling, not hard market price increases, is the route to underwriting profitability for insurers.

We at Prime are inevitably struck by surprise whenever we hear the head of another insurance company, whether in the US or in the London market, exclaim with excitement what a great time it is to be in the insurance business due to the latest hardening market.  

What we find surprising, if not shocking, is how the presence of a hard market seems to be the only factor for consideration. None of these insurance savvy executives, or the capital investors they wish to attract, seem to realise that there is much more to being successful in the insurance industry than simply hunting down a hardening market. Whatever happened to having good fundamentals? 

Hard market or not, if you have not run a profitable operation in the past, you are not going to now! 

Obviously, no matter how hard the market is, no one can price their way to profitability through premium increases alone. We routinely see insurers running at a loss ratio of over 100 percent combined and even excess of 200 percent in some instances. It takes common sense fundamentals in how you handle your underwriting and even more importantly managing claims. Each piece of business requires individualised underwriting, an approach which has served Prime Insurance Company well over the years.   

In handling their claims, most carriers become very nervous especially at the prospect of handling US liability claims. The insurance talk of the day seems to revolve around nuclear verdicts and social inflation. Insurance carriers try to ameliorate their concerns by hiring a network of law firms to do the job for them, even whilst acknowledging these legal firms have no skin in the game, and over a short period of time will not want to risk making the “wrong decision” – pushing carriers to mediate and settle even when this is not the “right thing to do” for the insured. The obvious result invariably seems to be the law firms making money and their insurance company clients losing money regardless of the outcome. 

“Until insurance companies are willing to get true claims and underwriting professionals working in their camp, there seems to be little chance of their turning an underwriting profit, regardless of market conditions”

How many insurance carriers, advised by defence attorneys, are prepared to take a case to trial?            

Until insurance companies are willing to get true claims and underwriting professionals working in their camp, there seems to be little chance of their turning an underwriting profit, regardless of market conditions. 

It is often reported that the biggest fears for insurers are “nuclear verdicts”, more commonly known in the past as “runaway jury verdicts”. But the devil is in the detail and how well the company, or its claims manager, planned ahead in handling the claim. As in so many aspects of life these days, the facts of a case often do not resemble what is reported in the news. Prime Insurance itself recently had such a case reported in some insurance publications, citing a $412,000,000 jury verdict against a trucking company insured in Florida. However, the article failed to accurately describe the underlying facts, the substantial coverage defences that existed, or the fact that the case was ultimately resolved within the available policy limit of $1mn. The point here is that when claims are appropriately handled, insurers should not be frightened of the US legal system nor of going to trial.

No hard market solution

The hardening market is not the solution, but good claims fundamentals are. Prime’s affiliated Claims Direct Access (CDA) has successfully managed and resolved tens of thousands of claims in all US jurisdictions for over 25 years both on Prime’s behalf and on behalf of its clients, including various Lloyd’s syndicates and US insurance carriers alike. These claims, for example, involved insureds exposed to multiple/single death(s), severe bodily injury losses and every catastrophic event one could imagine.

All this really comes down to whether an insurance company can operate profitably or not. It never ceases to amaze us how insurance agents representing their clients do not bother to ask about the loss ratio or expense ratio of the company that they plan to insure their clients with. Many insurance professionals have no idea of the importance of these ratios. At Prime Insurance, we always ask independent brokers whether they are interested in seeking that information on their clients’ behalf. It seems that very few of them give any thought to the stability or profitability of an insurance market. We are already seeing the new capacity that has formed in 2020 hungry for business that other insurance carriers were not able to successfully underwrite and handle the claims work on. We believe it makes a lot of sense to select a company based on its longevity and its ability to be here in the future in order to provide a stable market to its clients, whether in times of hard markets or soft ones. A true partnership.

Similarly, for investors in the insurance industry, it makes sense that investors should look for a history of operational profitability from a company’s underwriting rather than simply from its investment returns. After all, an insurance company’s tested fundamental operations are at the heart of its success or failure! It should not be enough that the industry in general is entering a hard market.      

Rick Lindsey is chairman and CEO of Prime Holdings Insurance Services, dba Claims Direct Access; Prime Insurance Company; and Primary P&C Insurance Company