The Hard Market and the US Economy—Where ALPS Fits

Robert W. Minto, ALPS CEOBy Robert W. Minto, ALPS CEO, robertminto@alpsnet.com
 

It usually follows that when the wind blows the insurance market acts accordingly. Bracing itself the market hardens and prices go up. It's logical; repairing wind damage costs money and insurance prices increase to cover those costs. The wind blew in 2011 and early 2012 so we should see firming in property and casualty pricing in the next renewal cycle. What does the wind have to do with Lawyers Professional Liability Insurance (LPLI)? Technically nothing, but practically everything. LPLI is a subset of Casualty Insurance and is dependent on the same reinsurance sources as the general casualty markets. In other words, the industry as a whole floats on the same tides.

In Theory

The economy and the insurance industry are intertwined in so many ways that it is hard to look at the latter without analyzing the former.

The insurance industry depends on investment returns for that portion of its income that allows it to keep premiums down. When investment income drops, premiums must go up to cover the cost of losses previously subsidized by the investment side of the business.

When the economy goes into recession, claims frequency tends to rise for a period of three to four years, as troubled business ventures attempt to find deep pockets to avoid failure.

When the wind blows and the insurance industry pays claims, it creates jobs in all sectors of business as communities rebuild.

When the economy declines, insurance premiums generally decline as people and businesses try to cut expenses, which puts a heavier burden on insurance company investment income to support claims cost.

In an economic downturn, interest rates generally fall, putting pressure on the insurance industry's investment income which in turn drives premiums up (theoretically) to cover the cost of claims.

In any case, I think you get the picture that the relationship between the economy and the fortunes of the insurance industry can't be separated, nor can they be easily predicted. In a way I like this tangled relationship, because as ALPS CEO and an insurance industry leader, it requires me to think, speculate and project just to keep ALPS in the game. The good news is that most years I'm right and ALPS continues to be a strong player.

Right now the broad professional liability industry faces real challenges as we see the claims prognostications coming true, investment returns declining and the softest market many of us can remember. The soft market needs to end in order to keep the industry as a whole viable. Competition is good and I believe that a single insurer can't meet the needs of all risks. Accordingly, those insurers who recently entered the market hoping to grab significant market share need to get realistic about pricing or they will not survive. Let's face facts, loss costs for professional liability and LPLI in particular have risen in the past two years and there doesn't seem to be any end to that trend in sight. The Wall Street Journal ran a good article a week or so ago that really thoughtfully addressed the whole issue. Here is the link so you can dig deeper if you like. It portents a need for greater sanity in the market place and a greater understanding by professional liability insurance consumers of what they really want and need  from their insurer. For so many, for so long it has been about price. In these economic times price can't be King. Particularly in this market, consumers need to understand the coverage they need (certainly) and that all policy forms don't provide the same protection or the same service. It's not simply about premium. It's about how you want to be treated not only at renewal and when a claim occurs, but throughout the entire relationship. The other day one of our staff, Kiffin Hope, came across a blog on what to look for when purchasing malpractice insurance and shared it with me. As a blogger, I was impressed and decided to share it with my readers as well. I'll be interested in what you think about it.

In Practice

This whole thought string took me back to the inception or conception of ALPS when we set out to create a fairly priced stable market for LPLI. It still amazes me what we accomplished and how far we have come in the past 25 years:

ALPS remains the most stable market in the country for LPLI. We don't leave markets when claims issues arise; we price to the cost and work with our insured lawyers to reduce the risk and keep the cost down.

We price our risks based on the profiles of every lawyer in the firm so that just because one lawyer in the firm has a high risk practice, the whole firm doesn't pay for one lawyer's risk factors.

When you call ALPS you will be greeted by Nancy or Kristine (real people), not an auto attendant, and you won't get dumped into voicemail unless you want to go there. I still believe in the personal touch.

Surprisingly, you will hear from us throughout the year in a number of ways, not just when it's time to collect more premiums.

Our technical services (Web presence, social media, blogs, etc.) far outpace the industry as we work to bridge the age range of all our insured lawyers. Our website (www.alpsnet.com) serves as your electronic portal to all our services and information.

Our Risk Management services set the standard with our live CLE events, ALPS 411 blogonline CLE and most importantly your ability to have one of our Risk Managers actually come to your office and do a confidential risk assessment at a very nominal cost.

Our personalized claims service is individualized to each firm's needs on a claim-by-claim basis.  Our claims attorneys don't just manage the claim; they provide invaluable assistance to you and your firm in returning you to productivity.

It's all good stuff. ALPS has grown in many ways and I still have a vision of how to make it better, stronger and more responsive to our customer needs, even in this amazing time of instant gratification, text messaging, social media and digital handshakes. It all centers on what ALPS customers want us to be. We want to do it your way on your timetable and without creating additional stress or time pressure. Stay tuned as you see ALPS evolve in the next couple of years.

The Future

To a great extent the economic crisis of 2008 changed the world forever in that for the first time we got a glimpse of what Ayn Rand (Atlas Shrugged) and George Orwell (1984) predicted relative to corporate control and intrusion into government and economic controls. We finally admitted that in order to avoid a total meltdown we had to recognize that some corporate institutions were "too big to fail" and that the populace and small business would bear the burden of restoring the economy, not the corporate giants. It's a bitter pill to swallow, but the reality of what it means for the future actually gives our governments and the people an opportunity to face realities sooner and on a more micro level that will help us avoid repetition of the drastic meltdowns of the past.

Interestingly, the property, casualty and surety insurance industry faired pretty well through the last three and a half years. There were only a couple of problems ­- the flight to capital from other sectors into the insurance sector, and an increase in claims frequency and severity for the professional liability industry as a result of the downturn in the general economy. All the additional capital put a damper on the natural industry trend of increasing premiums to reflect the increased loss expense. It was sort of a double whammy; on one side losses cost rose and on the other investment income went down due to the government forced interest rate environment designed to stimulate the economy. Four years later, the loss costs have eroded some of the capital base and the industry will need to move its pricing up to make sure that it doesn't become a late casualty of the 2008 economic crisis.

Across the industry, pockets of leaders recognize the need for stronger pricing to cover losses and have raised prices to prevent negative solvency impacts. I am happy to say that I am one of them. ALPS stands for stability in coverage. We must be in a leadership position if we want to maintain our position as the industry stabilizer. ALPS has also been the leader in its use of technology allowing us to target the increases to the segment of our book (areas of practice, firm size, limits profile) where the losses occur rather than just a blanket across-the-board rate increase. Some of you won't notice the difference; some will see a slight increase and others will see increases that may seem high. Our customer service staff and underwriters work tirelessly to make sure that before a quote goes out of the office we get it right for the firm based on the information we have.

What you Can Control and how ALPS helps that process

The cleaner the application, the more complete the information, the better the quote reflects the risk of an individual firm. I have always viewed ALPS's relationship with our firms as a partnership where ALPS takes the stress and concern off the backs of our insured firms for all the potential risks that the policy form and its endorsements anticipate. Whether it the stress of a claim or the stress of making sure that the LPL policy fits the firms practice profiles and client mix, ALPS commits to stand with you and support you to get it right. We understand that policy forms don't all look the same and can be modified to add coverage or remove coverage by endorsement to make sure our insured firms get the best fit. All this happens within the annual application process. The more robust the discussion between our customer service folks and you, the more complete the application becomes and the better our underwriters can fit coverage and cost to the needs of the insured firm.

Bottom line, I believe that the insurance market is firming (moving toward a hard market) and we can all expect our insurance costs, all P&C lines, to increase over the next year. The good news for our insured lawyers is that we have prepared for it and you can be assured that you will get the best, most stable coverage at the best price from ALPS. Like anything else, you may find LPLI coverage cheaper, but you won't find ALPS's quality coverage anywhere at a lower price.

As always if you want any information about how ALPS calculates rates and ultimately individual firm pricing, or just want to comment on this blog post, please e-mail me at <rminto@alpsnet.com> or call 1-800-327-2577. ALPS policyholders can also call or e-mail their Account Manager to discuss what this means to you and your firm. The rest of the world can call or email Julie Patterson (1-800-367 2577, jpatterson@alpsnet.com), Kevin Beasley (1-800-367-2577, kbeasley@alpsnet.com), or Keith Fichtner (1-800-367-2577, kfichtner@alpsnet.com).

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