Outrunning Marketplace Change

Until last week, the soft market seemed to be a demon with no end in sight. We have been speaking to you about the importance of using Total Cost of Risk as a measure of your value, other than simply a cheaper price. Those of you who embraced our teachings are reporting a tremendous growth of new revenue. But...what about the flip side?

Until last week, the soft market seemed to be a demon with no end in sight.  We have been speaking to you about the importance of using Total Cost of Risk as a measure of your value, other than simply a cheaper price.  Those of you who embraced our teachings are reporting a tremendous growth of new revenue.  In fact, just this week, we heard from 2 of our clients that had just been appointed as brokers based upon their value proposition and our Total Cost of Risk Value Report™ (Stewardship Report) (each with about $25k of income).

But...what about the flip side?  What if the recent Japanese earthquake, tsunami, and nuclear accident take the capacity out of the marketplace?  Right now it is predicted to reach about $35 billion of insured loss.  My guess is that it will go much, much higher (this figure does not include the tsunami or the nuclear event).  At the beginning of the year, one industry expert stated that for the market to turn there needed to be a $50 billion disaster.  In the first 2 months we have exceeded that between Japan, the Middle East, and New Zealand.

Of course this is a tragedy of epic proportions and we share the global concern over the tremendous loss of human life in Japan. As you know, we are brokers, not insurance company actuaries, so I will save my predictions for private discussion.  However, the impact of these global events cannot be overlooked. What if the marketplace should suddenly harden?

Consultative Brokers™ who understand and practice Total Cost of Risk will be able to demonstrate all the ways they have helped their clients reduce costs, even when the price of insurance goes up.  The uninitiated brokers will be sitting ducks as buyers consider alternatives to simply paying the freight for global disasters.

So, if you think the soft marketplace is here forever, then you need to use Total Cost of Risk as a way to create new revenue based upon your value proposition.  Also, if you think the soft market will never end, then you need to show your clients all the ways you have been reducing their costs.

Now, let’s presume the worst (after all, we are in the insurance business).  Let’s just say that the Japanese disaster is the tipping point or close to it.  Here is what you should be doing right now:

  1. You must get very proficient with TCOR.  As each cycle nears the end, buyers become more sophisticated.  There is a whole new generation of buyers who were not in charge during the end of the last cycle in 2001.  They are smarter now, and less-patient based upon the difficult economic times.
  2. Log and value your projects.  At some point you will be required to demonstrate how your projects and resources helped clients reduce their costs.  You must be very clear on the value of the project, the impact on costs and how it improved the client’s business operation.  A list of features and timelines don’t feed that bulldog.
  3. Begin playing defense.  Your clients and buyers are not in vacuums.  In the event the marketplace changes radically, you need to be the bearer of the bad news…IN ADVANCE.  This entails keeping them informed using articles and web site information.  They can hear it from you, or others, take your pick.
  4. Begin playing offense.  Those of you who are Consultative Brokers and really understand TCOR should aggressively call on prospects that have simply been buying insurance from the “price sellers.”  These price sellers would be at a big disadvantage because they have been a one trick pony.
  5. Never use your income as a negotiation.  Some brokers decrease their incomes in the hard marketplace in order to soften the blow to the buyer.  These amateurs do it because they can’t prove what their value is.  So, they use their income to negotiate credits from underwriters in order to reduce premiums.  If they understood TCOR or could create a Value Report they would be able to stand their ground.

OK, now I admit to presuming some things as regards to the marketplace.  I can’t say that this is the tipping point.  Only the actuaries, reinsurance, and insurance carriers can determine that.  But, one thing is for sure: the excess capacity of this marketplace is being sucked out in one quick hurry.

So, as Consultative Brokers, your job is to anticipate marketplace conditions rather than react to commodity pricing fluctuations.  It is only through the adoption of Total Cost of Risk and the delivery of Value Reports that you can outrun marketplace change.  

- Rob Ekern

For more information on how to quantify TCOR, manage projects, build a value proposition, and consistently deliver stewardship reports and new business presentations to your customers, check out the Major Account Development System (MADS), an on-line consultative broker's toolkit. Available now!

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To learn more about C.R. Ekern & Company, please visit our website

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