Insurance Brokers (MMC, AON, AJG, WTW, BRO)

[rogermunibond]

FT on the very soft insurance market

 

 

https://giftarticle.ft.com/giftarticle/actions/redeem/ec8c2ca1-1026-43cc-b91b-bbffcba72dd8

Edited yesterday at 06:03 PM by rogermunibond

[longterminvestor]

Maybe this will help folks understand of hard/soft market cycles.  Insurance market "hard vs soft" is identical to stock market "bull vs bear". Bull Market = Soft Market attitudes, Bear Market = Hard Market attitudes. 

 

In a Soft market, underwriters lose their minds, make irrational decisions with regards to fundamentals, no fear - everything is rosy, care free, underwriters say "YES" alot and "everyone is making money" attitude persists. In a soft market, the old school underwriters say "this can not go on forever" and the new guys say "you guys are dinosaurs, we are killing it".....until the roof falls in...or doesn't...thats the bet.  Soft market means terms conditions get sweeter and price goes down = bad equation for insurance companies.  and brokers have a field day because they are getting BETTER market execution for their clients albeit commission revenue does compress HOWEVER good brokers can sell more product into a soft market cycle.  In a soft market, as a broker you just send an underwriter a competitor quote and say "youre gonna let this other idiot make all the money?" BOOM, they match or beat the price and in many cases they will increase the commission to sell their deal.  Brokers really don't do a good job in soft markets for their clients because price alone is what the clients care about but a good broker can enhance the terms and conditions to the paper contract in a soft market with ease.  

 

A Hard market on the other hand, underwriters set the price, terms, conditions cause they know they are winning.  Imagine being an underwriter for financial D&O for banks in 2007.  You could put out quotes with a bankruptcy exclusion for a bank in a D&O policy and win!  That defines what underwriters CAN DO in a hard market.  Hard market you can put a roof exclusion on a property policy and client will still buy it.  NUTZ right?  Buyers/Brokers loose their minds in a hard market because things get tough, every underwriter says no.  Gotta stick with your partners through the cycles.  Its an amazing game.

 

Mr. Buffett wins in a hard market.  because he knows the risk is the same, its just he can charge more in a hard market.  Think of it this way, does the hurricane know its a hard market when its coming to Florida or Texas?  The hurricane doesn't care!  It's coming (or not coming) just the same.  The odds are the same either way, its the capacity being put into the market that drives drive up or down, hard or soft.  

 

Its just like stocks, the market doesn't know what you paid for the stock as much as you stare at it and fondle it, the price of the equity will go where it goes based on fear and greed or fundamentals of a good/great business.  Just like the insurance cycles hard vs. soft.  A good risk is a good risk whether its a hard or soft market, good risks just get better execution.  

 

ALL stock brokers look like kings in a bull market, just like insurance brokers look like kings in a soft market.  The inverse its true as well for bear market/hard market.  Dumb money shows up in a soft market.  Smart money waits for the hard market.  They very much rhyme.   

Edited 1 hour ago by longterminvestor