FEATURE: A Shift Toward Better Target Ratios, Adequate Pricing, & Underwriting Profitability in Program Business

IWA is a fourth-generation insurance brokerage based in Ronkonkoma, New York, and provides several programs to independent agents: Fabricare Advantage (dry cleaning, commercial laundry, linen supply, uniform rental business); Coin-Op Advantage (coin-operated and self-service Laundromats); C-Store Advantage (convenience stores with or without gas stations); Grocers Advantage (independent grocers); Restaurant Advantage (restaurants of all types and sizes); and Business Products (Workers Compensation for business and office products suppliers throughout New York State). IWA has had a long successful history with Adam's grandfather, Irving, having founded the company in 1946, and designing an insurance program to address the insurance needs of a dry-cleaning association. Over the years, IWA has grown its Fabricare program to be the largest in the country in addition to developing its other programs.

Annie George (AG): What are you seeing in the insurance industry and the program business space over the last year in terms of pricing, market accessibility, etc.?

Adam Weber (AW): "Depending on the industry, we are now seeing the direct markets drawing a line in the sand, with carriers needing to take serious action if they are going to be successful in a particular niche. For several years, insurers were reluctant to take the necessary steps in rates, coverage amendments or limitations. Now they are making changes and as a result, accounts are being looked at through a different lens. If an account isn't perfect and doesn't fit a carrier's model it won't be written. Consequently, brokers are coming to program markets with more adverse risks these days. They're looking at us as a market of last resort instead of a market of first resort, which is not where we're intended to be.

"Additionally, as a result of a shift in pricing, underwriting, and appetite by carriers, insureds are faced with rate increases or modifications in coverage. For example, previously their property policy may have included wind coverage, but now it includes a substantial wind deductible or it will be written without it. They are faced with a double shock: price increases and coverage contraction.

"Moreover, we are seeing this not only on the conventional retail side but also on the program business side. It's back to underwriting basics, which we've tried to maintain, but because of the nature of the soft market, depressed rates, and multiple national catastrophes (Irene, Joplin, Sandy), carriers are either needing to make substantial adjustments or getting out of areas where they feel they can't make money moving forward - whether it be from an inadequate rate perspective or due to exposures from catastrophic losses that are no longer the rarity."

AG: Are rate increases and coverage limitations occurring in specific lines?

AW: "We're seeing the increase across the board now. Initially, the increase was strictly in Property along with reduced carrier exposure or complete withdrawal in certain areas. But now the rate increases seem to be affecting all lines of business, as the carriers are struggling to make money. Unless they are running below 40 or 45 loss ratios, their expenses keep creeping up. Reinsurance costs also keep increasing, and the day-to-day expense of running their systems and their operational overhead is up. There is no offset.

"We're seeing increases in Auto and Workers Comp, for example. We see situations not only in our own programs but also with brokers coming to us for markets that carriers just don't want to be in, such as with Workers Comp in certain areas. This is not a new trend; we've come full circle with carriers staying out for a while and then coming back, depending on the regulatory climate, whether insurers can get an adequate rate, and whether the internal state fund is a competitive option or one of last resort.

"Even within small businesses, we're seeing that some of the coverages that were once handled within a BOP policy, whether Equipment Breakdown or other types of coverage - are no longer available for certain industries and must be purchased separately. Coverage is not necessarily more expensive but it may be more limiting. For example, you may be providing Business Interruption coverage but it's not on an actual loss-sustained basis as it was on a BOP policy."

AG: How does this cycle compare with others in terms of access to markets and pricing?

AW: "In program business, it depends on the industry. At industry events, you hear carriers saying they're interested in programs, but they're interested in the diamond in the rough. They're interested in the rarity where there is a 20% loss ratio. They are dissecting programs to make sure there will be no surprises. And from an overall insurance perspective, they are right to do so, but it's making it difficult for brokers to place business in some industries and for some coverage lines.

"Right now, we may only be seeing a couple percentage points increase across the board, but in certain areas it's much more. In New York and Florida, for example, we're seeing property rates still climbing. What's more, there are internal factors in certain programs where we're seeing 10% increases depending on the coverages in place. And that's surprising to insureds who have been dealing with years of rate decreases."

AG: Do insureds understand that over the last several years we've had a soft market with broad coverage and rates that were inadequate? 

AW: "This, of course, depends on the rate increase. If insureds are getting a rate increase under 10%, they understand. If they are getting increases of 18, 20, 30%, they are having a hard time understanding it. In most cases, their businesses have yet to come back from the economic problems we've been trying to dig out from since 2008. They're looking at the fact that X% of their revenues are going to increased insurance costs and wondering how they will able to offset this cost at a time when they're still trying struggling to turn things around."

AG: How will Sandy affect rates and accessibility?

AW: "Some rate increases will be offset by coverage modifications. The customer who is accustomed to getting very broad coverage that allows for minimal out-of-pocket costs in the event of a claim is going to be exposed to cost-sharing in the next such incident as Sandy. And this makes sense. Insurance is intended for catastrophic situations. As an industry, we'll put together coverages that are the most comprehensive and affordable for the end user in a specific industry class. But we'll have to make modifications to programs for catastrophic-type areas. In order to effectively serve the masses and be there for the long term, we'll have certain belt-and-suspender type protection for both the customers and the carrier so that the carrier can have a better understanding of their total exposure and is able to buy reinsurance. It's about knowing what the tolerance level is from the carrier and reinsurance perspectives and tapping into what you can sell in the market from a competitive point of view.

"This is a tougher balance, but it's a reality. Customers will come to understand, for example, the need for a wind deductible after what has occurred over the last couple of years in coastal areas such as New York and New Jersey. Even in Florida where they have escaped a major storm in recent years, it's still a big concern for carriers, and customers will see modifications to the scope of coverages provided."

AG: How are you helping brokers to gain more business in this changing environment?

AW: "We've been fortunate in our main program, Fabricare, which we've been running for nearly 70 years. During this time, we've only had five carriers underwriting the program. We've made sure to run the program properly and make the modifications that are necessary so that we're in the space for the long run. Our commitment has always been to protect the program for the future - to properly align adequate rate and coverage so that we can serve the industry on an ongoing basis.

"If a broker doesn't have a squeaky clean risk, they can turn to us to see what we can do. We are here for the industry group and the better-than-average risks in our programs. We also provide brokers with avenues to differentiate themselves through affinity marketing so that if a broker has several accounts that are similar within the programs we write, we'll assist them with local marketing, including providing them with leads.

"Also included on our website is marketing material with the ability for brokers to brand these material so that they can present themselves as more knowledgeable within a specific industry - such as dry cleaners, grocers, restaurants, etc.

"Our goal is help brokers differentiate themselves, especially as the market gets more difficult. We want to do businesses with the local brokers, as they have the relationships with the industry groups with which we deal, and we can help by educating them on what to look for, how to properly cover a risk, and how to go after more than one account. If you can be successful with us with one account, we can show you how to be successful with five."

For more information about IWA and its programs, please visit www.iwains.com.