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| | Hardening Insurance Market The Dawn Of A New Cycle. California Workers' Comp Dances To Its Different Drummer.
By Lonce LaMon - December 12, 2011
Last week at the Goldman-Sachs Conference Center in New York, Bill Berkley, the Chairman and CEO of W.R. Berkley Corporation, an International Property & Casualty carrier, said in response to questions about California workers’ compensation:
“One of the problems with workers’ comp is that new entrants won’t see losses very quickly. So, when you see new entrants growing very rapidly, they can show great results for a period of time, and you won’t necessarily see the real results. Even for ordinary workers’ comp, it can take several years before you see it, and if you’re growing at a rapid pace, it can take years before you see that adverse development.”
And how! This forty-year veteran insurance executive sure hit the nail on the head in describing that delay-effect of claims avalanching in workers’ compensation only some years down the pike after the on-set of underwriting. It’s like that expression where the stuff suddenly hits the fan.
I remember vividly how Fairmont Insurance Company started in the mid-to-late 1970s in Burbank, California, and how Joe Havlick, who was the President, was a career underwriter. I recall he was a yeller who used to get angry and holler at people.
He was worse than Stanley Zax, who’s more of a grumpy old man like Walter Matthau when he played that role, and who likes to rant and rave rather than truly rage; however Havlick would lay into people with sudden outbursts of anger. And people couldn’t take it. So, he went through claims managers faster than he went through a regular roll of toilet paper.
Until the early 1980s, things sailed nicely right along with the company writing California workers’ compensation fast and furiously. And claims adjusters loved the claims department. I remember the joke about Fairmont even writing Armenian gas stations. What was so funny about Armenian gas stations? Nothing really, but Larry Black, who was the first claims manager and eventually the vice-president of claims, got a kick out of some of the wild business they were writing at Fairmont and he mentioned with a chuckle the Armenian gas stations.
Then, the day eventually came when the fun, light-hearted conversations were over. It was as if the Fairmont claims department had been suddenly hit by a blizzard or else hurricane Katrina. There came a deluge of claims like a tsunami. Claims examiners were burning out faster than a lighted cigarette. Eventually, Fairmont couldn’t even get temps to work there.
Bill Berkley stated he believes the insurance industry is now entering a hardening market. It’s time to start writing business at increased rates. However, the California workers’ comp market specifially is not so ready to jump out the gate quite yet. It was discussed in the question and answer session after Berkley’s speech that California workers’ comp runs very differently from the rest of the country. It was mentioned how rates in California had been slashed lately, causing less attractive opportunity. But companies are looking for rate increases. The aggressive companies are at least keeping rates flat; but others are trying to push for 10% rate increases. However, undoubtedly, the California work comp market is in the early stages of the market change.
“We’ve been through three complete cycles—going on to the fourth,” Bill Berkley further stated. “It’s a business that changes not because of a lack of capital, but because of a lack of profitability. Capital levels ultimately follow profitability. Companies get into problems in this business because of problems with loss reserves. Inadequate loss reserves are why companies are unable to take advantage of the changing cycles.”
I remember someone expressing to me a year or two ago how she was very afraid to go to work for Pacific Compensation Insurance Company (then Employers’ Direct) in Agoura Hills, California, because they at that time weren’t writing any business. I told her she should be impressed and confident they weren’t currently writing business because that meant they were smart. It wasn’t profitable to be currently writing in the present market condition, so they were hanging out. I even explained that Employers’ Direct was owned by Allegany, an extremely wealthy company. They were making the right moves. They even changed their business model in response to the lingering soft market, which is what prompted the name change to Pacific Compensation.
Lots of people don’t get it. I won’t be surprised if, within the next year or so as the market further hardens, Pacific Compensation takes on the California workers’ compensation market by storm.
The cornerstone to succeeding and surviving in the insurance business, Berkley lectured, is understanding how to take advantage of the cycles. A company needs to get in a position to take advantage of the opportunities of a hardening market. They need to optimize growth when prices are at their best. And they must give great service and build relationships so the business sticks with them; that way, they won’t have to compete totally on price when the cycle changes.
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