The Impact Of Insurance Market Cycles

Lisa Harrah of Harrah & Associates, Inc. joins Bob Mazey of New Jersey Agents Alliance on his program “Insurance Insider” to talk about “What are Insurance Market Cycles?”.

Topics Include:

– How Are Insurance Companies Affected By Interest Rates?

– Personal Factors That Affect Insurance Rates

– How Does Reinsurance Work?

Listen to the full episode and comment with questions you have about insurance market cycles!


Hi, my name is Bob Mazey, I’m the president of the New Jersey Agents Alliance, and welcome to another edition in our ongoing series of key interviews with decision makers and leaders in the insurance industry. Today, I’m going to introduce you to Lisa Harrah, the vice president of Harrah & Associates, located in Hamilton, New Jersey, to talk with us a little bit more about insurance cycles, hard market cycles and soft market cycles and what those impacts may have on business insurance clients.


But before we start with Lisa, I just want to make a special shout out. And thanks to our friends at Merchants Insurance Group. Merchants Insurance Group has been very supportive with Alliance and the independent agency system in general in New Jersey, and we’re very thankful for their support of this series. So without further ado, I’d like to introduce you to Lisa Harrah from Harrah & Associates, who will talk to us a little bit more about hard and soft market cycles.

Hard Market Cycles vs Soft Market Cycles


Lisa, my first question is this. We hear a lot about hard and soft market cycles, but that seems to be an insurance term. Can you really talk about what a hard market cycle is versus a soft market cycle? What causes those changes in cycles and what that means to a consumer’s premium when they buy insurance? Not to oversimplify it, but a hard market simply means that prices are going up. A soft market, conversely, means that your premiums will go down.

How Do Interest Rates Affect the Cost of Insurance


So why does that happen? Does it happen because the insurance company feels they have an opportunity to perhaps exploit increased rates? Or are there other factors that go into that that consumers might have a better understanding of if you understand why things change? I understand that interest rates have an impact on this. How do interest rates assimilate to the cost of insurance? That’s a great question and it confuses a lot of people. Interest rates affect the cost of insurance dramatically because insurance companies invest, they’re limited in how they can invest their cash.


We’re a regulated industry, which is a great thing for the consumers. So the insurance companies have very limited access, as I said, to what they can do with their excess funds bonds. We all know bonds are so conservative. We all also know what the interest rates have been on fixed income securities. So that year after year after year is having a major impact on the insurance companies and their profit and their revenue that they bring into their bottom line.


Right. So in addition to making money on collecting more premiums than claims paid out, I guess what you’re saying is insurance companies are also taking those premiums as they collect them and investing those funds. And, you know, I have to agree that we are literally living in the lowest interest rate environment in history. So when the Fed is that close to zero and the best you’re going to do with a fixed income investment is three to four percent, that makes a lot of sense.


I remember the days when interest rates were 15, 16 percent. And I guess if the insurance companies earning a lot of money on the investment portfolio, they don’t need to charge so much on the retail cost to the consumer. Well, they can make some profit on that line. So there’s an underwriting profit than an overall profit. So if they can get more basis points on their investments, that can that can help with the underwriting profit. Gotcha.


And, you know, we’re coming out of a pandemic. We’ve had wildfires in the western part of the country, lots of sort of major natural disaster events, as well as social events that have caused a lot of claims. I imagine that when claims activity is up and interest rates are low, there’s an inflection point of the perfect who’s going to pay. Right? So so is that sort of one of the major reasons behind Routley? Absolutely. That’s a major issue.


And I guess when it’s coupled with the interest rate environment that we’re in, it’s a double whammy, if you will, for the insurance companies, because they can’t they can’t help offset the underwriting losses that they’re having because of the natural fire, the all the natural disasters and claims that we’re having. So it kind of puts them in a precarious situation where they don’t have a choice. Right. And the general public really probably doesn’t think about it because it’s not their industry.


And they hear even though interest rates are so low, overall investment environment has been very good, especially if you’re investing in tech and the little things that are a little more risky. The problem is the insurance companies can’t invest in those things, those assets, because, again, to protect the consumer so that when the claims come right, they’re going to have this surplus in the money to pay the claims. Right.


So in addition to some of the natural disasters we’ve had that are, you know, largely funded by the insurance industry, we also hear this term nowadays, at least in the insurance industry, called social inflation and. And the definition that we hear a lot is that the general average settlement or the average lawsuit now is much, much greater than it was this time 10 years ago or 20 years. Do you see that as well in practice or when someone has an auto accident or there’s an injury at a job site, people are just happy getting their medical bills paid and they don’t resort to litigation.


Feels to me like people are really resorting to litigation more often than next, particularly when you turn on the TV or, you know, go on the Internet. There’s, you know, plenty of law firms, I guess that will be glad to take your case to kind of make the claim a little bit bigger as we see it every day, every day. In fact, this morning I was reviewing a large account, getting ready for renewal and looking at the losses.

How Does Reinsurance Work?


It’s unbelievable. And they’re minor. They seem to be minor claims. But once somebody hires an attorney, everything just escalates. And the amount that the insurance companies are paying right now compared to, like you said ten years ago, is so it’s crazy. Absolutely crazy right now. Now, we also hear a lot about reinsurance. Can you talk a little bit about how reinsurance works in the insurance world? Because I think most consumers think that if they buy a policy from an insurance company, if there’s a claim, all of those dollars are going to come from that insurance company.


But that’s not actually how it works, is it? No, no, no, no. So insurance is founded on the spread of risk. That’s the whole idea about our industry. No different than consumers. We spread our risk out. We try to transfer risk. We buy insurance to try to save our assets. And insurance companies are the same. So what they’ll do is when they take when they underwrite or risk, depending upon how large the risk is, what the type of business it is, they will go to another reinsurance carrier to give them some of the risk so that if two million dollars, if they have a two million dollar building loss nationwide is not going to be stopped with the two dollars million building loss they’re going to, the reinsurance company may absorb 50 percent of that or 25 percent of that.


And sometimes there are multiple layers of reinsurance companies also. So that is another thing that affects overall pricing in that the reinsurance rates when they go up are the companies that I deal directly. I don’t deal with reinsurance carriers. I deal with retail, the retail insurance companies. So a company like Merchants, for example, they when they negotiate their reinsurance rates, that rate is a factor of what they’re negotiating with me. And neither them nor I have any control about that.


So that’s a fixed increase cost. Right. And we’re seeing insurance rates, reinsurance rates excuse me, heading north also. So that’s another factor in the overall hardening. So it seems like with any other manufacturer or distributor, insurance is no different because there’s other components to it. There is reinsurance costs, there’s litigation costs, there’s, you know, social inflation, things that they have to deal with. And I guess like any price of an ultimate product, it’s based on the sum of all the ingredients.


So that actually makes good sense. I think the public would probably appreciate knowing that they’re not the only people that have to buy insurance and learning that insurance companies have to buy insurance on their policies sort of makes sense of of spreading that risk among the globe, really, when you look at all the reinsurance companies. So that’s very, very interesting. So obviously, this is out of the client’s control. Absolutely. So these things happen and in a hard market where we have such things as lower interest rates and higher claims and such.


How do you prepare that customer for that? Because, you know, I know not everyone wants to pay more for insurance, but I think it it’s sort of indisputable that with the cost of lumber going up, home prices are going up with the cost of raw materials going up for automobiles, the cost of an automobile goes up. So I’m sure your business clients price their services based on their raw materials as well and cost of labor. So how do you prepare a client for that?


Do you talk to the client about that or is it simply, hey, your rates have gone up this year? Sorry, it feels like to me I would want to know more as a business owner. Yeah, absolutely. We that’s something that I take to heart very much because I try to always put myself in the position of my clients. And being a business owner myself, I would much rather know sooner than later. I’d also rather try to understand I don’t always understand everything, but when I can understand stuff, sometimes I can, you know, Rasht.


It just reason with it myself, communication is absolutely the key, and having a relationship with your clients and consumers should have the relationship with whoever their insurance broker or professional is that you can talk about things and not be so fearful of bringing up the elephant in the room. Nobody wants everybody wants to see their prices go down. And that’s just human nature. And unfortunately, we don’t have rabbits to pull out of hats, you know? So I find it’s better to educate and tell my clients sooner rather than later that the market is hardening so they can plan and incorporate those into their product.


Absolutely. And initially, I have to say, I was a little hesitant about doing it because I was concerned. If I tell them now that rates are going to go through the roof there, you know, maybe they really don’t trust me or maybe they’ll go out and look for another broker. But it’s really been beneficial. And I find I find that it works much better getting them the information sooner than later and just having open lines of communication and trying to explain to them why the rates are going up.

Personal Factors That Affect Insurance Rates


Right. So it seems like when these hard markets occur globally, if not nationally as well, insurance rates go up. And I suppose the better clients that have better claim experience or stronger safety programs might not feel so good about being plunged into a wholesale price increase across the board. So does the insurance. Do the insurance companies rather take individual risk characteristics into account when deciding whether or not to apply a small increase, a moderate increase or a high increase?


So I guess the question restated is, does the client have any control in their ultimate price or are they just simply a victim of whatever the insurance company comes out with? I would say that there is some control that the client can have for it and it’s being prepared and being ready. The agent that they choose to do business with, the broker that they choose to do business with, will also play a key part because that agent will be preparing them.


We see in the industry trends that come so before the market really, really hardened, we saw the trend of a hardening market approaching any you can see when you look at loss ratios, when you see when they’re just getting to the point where they’re not profitable, that, you know, something has to be done with the rates for the industry to be able to sustain itself. So having that information and educating your, again, communication is key. Educating your client helps them.


And it also helps. I found what we’ve done in the last couple of years is we’ve concentrated a lot more on risk management tools for our clients. We sent we have a portal where they can do driver safety, winter driving, warehouse safety and anything like that to help them be a better risk for the insurance company. And then ultimately, when we go to market, when the agent goes to market it, there should be an executive summary. There should be like you and I are having a conversation.


That’s what I try to do with my clients and and write down why they’re best in class. And that truly, truly does help. It also helps when there’s a good relationship I can get. Relationships are the key to everything. It also helps when the agent or the broker has a great relationship with the insurance carrier, when the insurance carrier and the underwriters respect them. And they know that if they say it’s green, it’s green, it’s not yellow with a little green, it’s green.


So that that’s one of the benefits about being a New Jersey Agents Alliance member because of our reputation and the quality of the people associated with us. It kind of it makes my job so much easier to be able to to be able to do the very best that I can for my clients, even if I’m bringing them an increase. I know at the end of the day that it’s the smallest increase that we could have possibly gotten for them.


Right. So so I guess in summary, what I’m hearing from you is, although let’s say the insurance industry needs to increase rates 10 percent or 20 percent or whatever the percentage is, if you were a better than average risk, you should expect a lower increase because your safety protocols, your loss experience, your claims have been better than then, let’s say, one of your competitors, as long as that’s communicated. So you could have the best you could do all these wonderful safety protocols yourself as a business owner.


And some businesses take it on their own. They don’t rely on their agent for it. Some of them are so that they’re passionate about that. But if that’s not communicated, if the if the agent doesn’t know about it or if it’s not communicated ultimately to the carriers, that’s not going to matter. So, yes.


So it’s nice to hear that better insureds are rewarded for better practices. So it sounds to me like in addition to just completing an application with, you know, name. Rank and serial number, what your values are, it sounds like the story is important and telling that story as the broker agent to the insurance community is really important to, I guess, validating or supporting why this particular business owner isn’t deserving of this increase and they deserve this increase. So that’s interesting.


And when you have these conversations, do your clients appreciate them, these conversations or do they dismiss? It feels to me like most business owners are reasonably sophisticated in how they come up with their rates and prices and such. So it seems to me that if they have a better understanding, then they would probably feel better about, you know, maybe making some changes in their practices and things. I think I think because it feels like it gives them a little bit of control in an area where sometimes we all feel like we have no control.

Being Educated About Insurance in a Changing Landscape


And that’s that’s the worst feeling to feel like you’re just in a situation, especially as a business owner. Right. That you I equate it to myself when I’m purchasing technology for the agency because I just I hate that feeling of not really knowing I need something. So I believe that when somebody is educated a little more or just or just informed, not that they’re not educated, they are, but they’re just they’re informed about how the industry works, the mechanics of it, and what they can do to to to make their to position themselves the best they can.


Right. I think that that works wonderful. And people love to tell their story. Everybody loves their story and what they do differently and why they’re better than, you know, the plumber down the street. Sure. Sure. It seems that with the changing consumer behaviors and more do it yourself policyholder’s. They don’t necessarily want to talk to people or talk to an agent and they will go online to get a quote and you turn on the TV or whatever the case might be.


And there’s all sorts of ads to, you know, get insurance on your cell phone in 15 minutes or 15 seconds or whatever the case might be. I wonder if those platforms even have an option or a medium to tell your qualitative story, or is it just here’s your address, here’s your values, here’s your payroll, here’s your sales, here’s your premium.


It seems to me like for those risks that are either exceptional risks that are better than average need, that agency representation, that mouthpiece to the to the companies, whereas the clients that, let’s say, have poor experience, probably also need some counseling on how they can make changes in their business to get to that that’s best in class place. So I imagine you must see clients on all sides of the spectrum. Right. So are they different conversations? Absolutely.


They are in conversations. And sometimes people sometimes people are more interested. So they want they want to know more. They want to know how they can affect or, you know, increase make make themselves more marketable when other times people unfortunately, sometimes they don’t. They don’t they don’t feel the need for it or they don’t think that it matters as much until it becomes too late. And then they have to start from square one. Right. Right.


Well, I’ll tell you. So this has been very, very insightful. I really appreciate your feedback. I think this reinforces why there’s certain things you can automate and certain things that you really need personal intervention, whether it be medical care, legal advice and certainly advice on your insurance purchases. So thank you for sharing this with us today. If people want to reach you, how is it best to to reach you?


You can reach me at the office number, which is 609-587-8030. Our website is, and I’d love to speak to anybody about any questions that they may have or any way I can help. That’s great. Well, thank you once again. Thank you again to our friends at Merchants Insurance Group for sponsoring this series. My name is Bob Mazey and I look forward to seeing you again.


Thank you for watching.