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Data & Analytics

10:46 AM
Tom King
Tom King

Program and Small Commercial: Flight to Profitable Safety and Growth?

To succeed in the small to mid-market and in program business, insurers must narrowly segment these businesses to underwrite correctly and set appropriate rates.

The insurance industry has always been an interesting market to watch. Past trends have included the rise and catastrophic fall of cash flow underwriting, booms and busts in specialty products, such as professional liability insurance, and the flocking in and out of sectors within the market, like workers' comp.

Tom King, Pegasystems
Tom King, Pegasystems

Back in the late 1980s and early 1990s, many commercial lines property/casualty companies were enthralled with the major markets, everyone wanted to "be a world class insurer with marquis clients such as Coca-Cola" -- a brand that was invariably listed in every one of these statements.

[Recently from King: Data-Driven Insurance Pricing: Not Gouging]

There were multiple reasons for the shift to the major markets back in the day. First off, it was sexy. Working big deals, negotiating with brokers and clients, making a significant impact on the bottom line, all of which were very adrenaline pumping. Secondly, a lot of insurers were trying to become financial services companies, with multiple subsidiaries to support the entire financial chain of their clients.

Finally, in some ways it was more cost effective. Commercial lines underwriting has always been very manual intensive. While obviously the amount of work to underwrite a major market deal was much greater than that of a middle market policy (with premiums scaling accordingly), the amount of work to do small market business was about the same as to underwrite a middle market policy. When Business Owner Policies (BOP) take as much effort as a middle market policy, an insurer's expense ratio is really in jeopardy. So, instead of fixing small market underwriting, many insurers abandoned it.

A great case study for this is The Home Insurance Company, founded in 1853 and effectively closing its doors under the name AmBase in 1994. The Home was a solid middle market, small-market and personal lines company throughout most of its 141 years. First The Home jettisoned personal lines and then, following the wave, decided that it needed to be a major market carrier. Going through book-of-business reviews, The Home systematically shed all small and most mid-market business to focus on major market risks. Through a series of senior management mistakes, The Home came under review by AM Best. The death knell for The Home came when Best's lowered it's rating from an A- to a B+. Major market insurers are NOT going to do business with a B+ company. With one stroke, the 141-year history of a solid American insurer was destroyed and what was left of The Home business was sold off as renewal rights to Zurich. If The Home had retained at least its mid-market and small business lines, which are much less sensitive to Best's ratings, the company would still have been rocked, but it could have survived.

Tom King is a Senior Director of Insurance at Pegasystems, the leading provider of business process management (BPM) and customer relationship management (CRM) software solutions. View Full Bio

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