National Association of Mutual Insurance Companies

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The Dating Game

Attracting and Keeping a Great Reinsurance Company

By Janet E.H. Wright, ABC, APR

For smaller mutual companies, it’s no longer your predecessor’s reinsurance market. Gone are the days when reinsurers lined up to come courting. Now the tables are turned and smaller mutuals must be ready to compete for attention.

Reinsurers and the additional services they can offer to farm mutuals in particular, play a crucial role in determining a successful survival strategy. But it’s a two-way street. In today’s market, insurance companies have the responsibility to prove they are worthwhile reinsurance customers to attract and retain the reinsurance company with which they want to ally.

What are reinsurers looking for?

According to Malcolm Rowland, vice president of Reinsurance, Rockford Mutual Insurance Co., Rockford, Illinois, past history provides an important portrait of the company operation. “We ask if risks are insured to value; what their premium, loss, surplus and expense history is; do they have an appropriate rating system; what the background of the management team is; what the company’s goals are; what kind of business plan do they have. In other words, we are looking to see if they pay attention to the basics of underwriting. Do they understand that reinsurance does not change a bad risk into a good risk?

“History is the existing data of how you got to where you are,” he explains. “The company’s future is reflected in this data unless the company takes positive steps to change that future.”

Positive measures of change include rate changes; increased risk inspections to understand the nature of your risks; changes in type of risks accepted; insuring property to value; and changes in territory, management, and goals.

“We look at the figures,” explains Frank Bigley, senior vice president/manager of reinsurance, Farmers Mutual Hail Insurance Company of Iowa, West Des Moines. “Premium to surplus should be 1/1, or at worst, 2/1. We look for good gross underwriting experience, nature of surplus – what it’s comprised of and how it has grown, claims experience and processes, how the computer system is used, composition of the board of directors, and the board’s general attitude toward the business. It’s like a marriage. If there is no open discussion before there are problems, it’s going to go very badly after problems arise,” he declares.

Terry Wendorff, president/CEO, Wisconsin Reinsurance Corp., Madison, emphasizes the importance of profitability and positive changes. Has the company been profitable over the long term? If not, a reinsurer must question whether the company will be around for the long haul. If there is no positive change shown, it’s a potential red flag. There must be a willingness to work with the reinsurer to maintain a partnership based on a shared purpose.

If either profitability or positive change is lacking, or if a company can’t or won’t furnish complete information, there may be a problem.

“We also look at the way the company markets itself,” Wendorff explains. “Is the company adjusting to the marketplace as it changes from farm to urban, and is the company supporting agents as they adjust, too?

“A hard fact is, the smaller the company, the more difficult it will be to get reinsurance in the future,” he continues. “Smaller companies need to start even sooner to find a reinsurer. In premium and surplus, size does matter. The reinsurance market has changed so much that companies must compete for reinsurers as they have never had to in the past. Naturally, profitable, forward-looking companies are the most attractive because there’s a good chance they’ll be around for the future.”

Choosing not to be your own worst enemy

Rowland sees one major challenge to small companies as a failure to sell themselves to the reinsurer. “They must learn to promote their companies in the same way agents promote themselves to customers. In the same way that agents study their market, small companies need to do their homework to understand what the reinsurer is looking for.

“Taking reinsurance for granted is another challenge,” Rowland explains. “The market is really tough. Reinsurance companies are merging and getting out of the business. The range of available reinsurers has diminished. A third challenge is a company’s not providing full disclosure. The reinsurer must have a full view of what your company is in order to know what it needs. In this relationship, both parties must trust and work with each other.”

Bigley feels that companies should take a hard look at the question of whether they are approaching the operation of the mutual as a business.

“If companies can’t provide the basics of their operation, e.g., annual report, description of large losses, premium by line, policy limit and deductible information, etc., it’s a red flag,” he says. “Another common mistake is looking for a new reinsurer as a quick way to lower reinsurance costs. Frankly, when a company lists that as a goal, we suspect they’re looking to cover other sins in expense or loss ratios. And if we get the slightest hint that management is being less than truthful in providing information, it’s definitely an indication of other problems.”

Wendorff cites a problem in companies waiting too long to begin the search for a reinsurer. “Reinsurance contracts are traditionally renewed or renegotiated at the end of the year,” he explains. “Now, companies waiting to review their reinsurance program until October or November may be too late. I agree that another mistake is providing too little information. The more company data available to the reinsurer will make underwriting the company a much easier and effective process.”

He also counsels against taking your reinsurer for granted. “The reinsurance market for smaller companies is dwindling, and there may not be another reinsurer out there waiting for your business,” Wendorff cautions.

A marriage of much more than convenience

Creating a partnership with your reinsurer is much more than a business transaction. Reinsurers offer resources that cannot only solve some problems and head off others, but can help position the company to move confidently into the future. Rockford Mutual’s reinsurance division offers claims advice, rating assistance, reinsurance audits, policy profiles, catastrophe studies, general administrative advice, and counsel on any portion of the business having problems.

According to Bigley, “At Farmers Mutual Hail, we make an analysis of the financial situation before we become involved, and then repeat the process as many as three times a year after we become affiliated. We also make an exposure analysis showing such items as catastrophe exposure by zip code to determine the most likely type of event the company might experience.

“We offer a wide array of claims and underwriting services and guidance according to need,” he continues. “We also hold annual meetings with managers and boards to exchange ideas and learn from each other. Custom-tailored programs are created according to the needs of individual companies. There is no standard program, just as there are no two identical mutual companies. We pride ourselves on finding creative solutions.”

WRC works with its customers analyzing underwriting, claims, forms, rating, and management.

“WRC sees itself as a resource center for our customers, working with them to find answers,” says Wendorff. “We believe in the industry – it’s the only reason that WRC is here. Our goal is to assist companies in being successful.”

And so, the news for smaller insurance companies is both bad and good. The bad news is, the reinsurance market is dwindling and companies must proactively do their homework to attract the right reinsurer. The good news is that companies that are well organized, well managed, and positioned for growth, gain far more than reinsurance products in the bargain. The reinsurance company is a valuable resource for every facet of its business, offering tools to maintain a healthy, successful insurance company giving service to policyholders for many years to come.

Posted: Tuesday, July 31, 2007 12:00:00 AM. Modified: Friday, August 31, 2007 2:55:03 PM.

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