Mind the shop

A Swiss friend once explained to me that people who live up in the mountains always make a point of being regular patrons of their local food shops, so that they are on first-name terms with their owners. Although people who live at altitude tend to work down in the cities below and therefore have the same opportunity to buy food much cheaper in large supermarkets as everyone else, they make an extraordinary effort to support their local merchants. I asked him why this was. Were the otherwise no-nonsense Swiss really sentimental romantics at heart? The reality was far more pragmatic. He explained that the apparent altruism was because in winter it is all too easy for heavy snow and ice to cut mountainside residents off from all civilisation, sometimes for days. When that happens, the stock at the village shop becomes essential and established regulars are favoured as supplies dwindle. The difference between living well while riding out the blizzard and having to survive on dry rations until the snowploughs cut through depends entirely on the strength of your relationship with the local shop. Paying a small regular premium can pay rich dividends when it really matters. Sound familiar? In post-pandemic times, even city dwellers can appreciate such a story. In strict lockdowns many have come to rely on local suppliers for deliveries of essential supplies. Cost is what you pay, but value is what you get in return. Under the right circumstances, the added value a quality supplier can bring dwarfs the premium disbursed, often by many multiples. Or in other words, if you spend all your money on loss leaders from the superbly cheap hypermarket out of town, don’t complain when you discover your friendly local shop has gone out of business just when you have run out of milk and your dinner guests are at the door. As with alpine winters, so with hard insurance markets. Even the most aggressive insurance buyer understands the need for its counterparties to be financially secure in a sustainable fashion. Carriers that consistently make underwriting losses are rightly to be viewed as potentially unreliable partners when substantial future financial liabilities are to be assumed. It’s a little like the moment described in Michael Lewis’s chronicle of the global financial crisis The Big Short. In one chapter, a trader’s euphoria when a bold bet on the imminent collapse of the financial system is about to pay off is suddenly replaced by a sickening realisation and fear that too much mercantile Armageddon may mean that there is no-one or nothing to collect from. There’s no point betting so big that you bust the whole casino. If that happens, on paper you may have made a chump out of the casino, but in fact the casino has made a chump out of you. After all, countering accumulation risk is why we have co-insurance and reinsurance. Insurers are not shopkeepers, but the best of them are equally essential in a crisis. And if we value that sometimes essential service, we must be ready to support it so that it is there for us when we really need it. As sophisticated buyers of insurance, we often have as good an understanding of what the cost of the product should be as an insurer does. We also understand that a large part of the value of insurance at this level is the removal of volatility and the sharing of the insurer’s diversification benefits with its customers. We should add to this the added value of the transfer of risk management knowledge that comes from dealing with multiple customers and handling a greater variety of loss scenarios than we would expect to encounter alone. If we appreciate and value the above, we must be willing to accept that it should be rewarded with a reasonable long-term return for its troubles. Yes, often we could do it ourselves, but if well run, economies of scale mean a good insurer should always be able to do it slightly better and at a better price than we can. What’s more, the global and fluid nature of insurance means that we can often get the convenience and service levels of the local shop halfway up a mountain but with the attractive prices of the hypermarket below. This is why as sophisticated buyers we must also bear some responsibility for our actions. If we act in a pro-cyclical way and aggressively chase discounts at the bottom of soft markets, we can hardly lament the subsequent withdrawal of capacity and harsh repricing that may ensue when the market turns against us. We have as much of a part to play in this cyclical dance as do the more short-term and opportunistic insurance entrepreneurs. It takes two to tango. Yes, some insurance shops provide terrible service and never seem to stock the products we want. Indeed, through exclusions over the years they have banned some of the things we prize the most. But through experience we learn to recognise and avoid these poor partners. As sophisticated buyers, we and our appointed brokers have the ability to construct a more mature relationship with our preferred insurance partners if we so wish. So identify, cherish and support your favoured insurers and stick with them when market momentum begins to turn against them in the next couple of years. Allow them to consistently earn a small excess of their cost of capital over the pricing cycle and they will be eternally grateful to you for it. They will also maintain stable financial strength ratings that will help you sleep at night. They will also be able to keep investing in strong service offerings and research and development to solve the risk management problems of the future. And in doing this together, you will both have done your bit to remove the worst cyclical fluctuations in pricing and coverage. Be like the Swiss: love your local shop and it will serve you right in your hour of need.

Mind the shop

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Want to read this article?

Read Next

IQUW launches active assailant cover

Talanx results boosted by HDI Global’s 43% jump in net income

Canopius Group appoints group risk director

Howden closing in on Risk Strategies acquisition, reports

New global head of energy & power at Marsh

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