PATHS TO UNDERWRITING PROFITABILITY
by Becky Lathrop and Jon Persky
Many agencies focus their efforts on new production and overall growth in order to achieve their objectives. Although this is critical, it’s just as important to manage the profitability of your book of business. Your carriers expect this, and you need to remain profitable, in order to maintain a positive relationship. However, most agencies find it difficult to be proactive with claims/profitability management and loss control. Ultimately, the opportunity to earn contingency commissions lies in your hands!
Managing Your Business
Marketing reps sometimes tell you that you just fell short of your contingency goals. This usually happens in January or February, after it’s too late to do anything about it. This is by no means done purposely. In most cases, Company reps (as well as agency principals), just not know how to manage agency underwriting profitability effectively. Approximately 75% of agency loss experience is “controllable” by agency operations.
Outside of catastrophes, weather-related claims, etc., most agency loss ratios depend on what takes place within the office. Some of the factors that you have direct control over in your agency include:
- Field underwriting techniques of your producers and/or service reps
- Proper classification and pricing of risks
- Limit and deductible assessment
- Vehicle/home inspections
- Prior insurance verification
- Customer education
Agency loss results and trends usually aren’t a priority unless the numbers start going south. Too often, by the time you discover adverse loss trends, it’s too late for a quick fix. Agencies often overlook analyzing underwriting profitability, claims management, and loss control because of the complexity and difficulty in understanding how to manage it. It’s imperative to create a plan for managing profitable growth by establishing specific objectives. You should manage growth and profit for both short-term and long-term success.
Analyzing Your Agency’s Underwriting Profitability
Because most agencies represent several companies, first determine which carriers represent a substantial portion of your portfolio and verify which ones provide contingency bonus opportunities.
Once you’ve identified the primary carriers, you should then analyze your loss results:
1. Review your loss ratio trends.
Obtain agency loss reports to review specific lines of business with carriers, or all lines if you have a diverse portfolio. See if any loss ratios, by line, look “unprofitable” or are trending in the wrong direction –up. Although each company might have its own definition of “unprofitable,” if a loss ratio is higher than 55% to 60% (incurred—including reserves, but no catastrophes), it’s a good indication that you need to review this business more closely.
2. Determine if frequency and/or severity are causing adverse loss results.
Make sure you have reports that provide loss ratios not only, but also frequency and severity trends, as compared to your market, territory, or state. This will allow you to identify any minor or major adverse trends in advance, so you can address them before they cause your agency problems. In general, if there’s a frequency issue, you might need to proceed to Steps 3 and 4 to determine the cause before you can correct it. Steps 3, 4, and 5 will help you with severity issues.
3. Review agency processes (or lack thereof) that could impact growth and loss experience.
It’s important to take a step back and see if any agency marketing, retention, or other programs could be causing adverse loss trends. For example, you might be experiencing rapid premium growth through an auto dealership program to increase your Personal Lines Auto production. If you don’t monitor the program for quality applications and field underwriting, you might see immediate deterioration in your loss ratio. This type of marketing approach needs highly specific and detailed guidelines to ensure that you write and retain quality business
4. Interview staff to determine if internal processes or the market are driving results.
Frequently, quality and/or loss control processes you believe are in place have dropped down (or off) your staff’s priority list. This normally happens over the course of time. Often, the principal and staff mistakenly believe all the correct things are being done. Due to pressures brought on by carrier changes, agency requirements, and tasks assigned to your staff, you might need to review the prioritization of agency processes. You might also find that a new marketing campaign is causing “adverse selection.” By the time you discover the problem, it might be difficult or take longer to reverse the negative results. Being proactive with proper “checks and balances” is critical for growth and profit.
5. Review carrier reserve reports for your agency.
Sometimes reserving methods or changes in reserving methods can impact loss ratios, either positively or negatively if the claim is “open” and the situation is current. These types of claims can have a substantial impact your bottom line. Review these open reserve cases and discuss them with your marketing rep or company claims representatives/ management. Offer any information you can provide to help facilitate the claims settlement process. This shows your willingness to partner with your carrier, while helping manage everyone’s bottom line. You might also find that even though some claims have been “closed,” the company report is still showing an “open” reserve – which has a negative impact on your loss ratio. Let the company know about this to ensure the reserve is “released” (or backed-out) correctly from your loss ratio. This will result in an immediate improvement in your loss results. It’s critical to review this process before year-end for bonus purposes. Although you should do this throughout the year, pay particular attention to it September through November so that there’s time to do research and make the necessary changes.
6. Communicate findings to agency principal and staff.
Communication is key. You need to create an awareness, importance, and clear priority to everyone that growth and profit must go hand-in-hand. Your staff will help you achieve profit objectives far faster and more effectively if you share your plans with them. This also empowers your staff to “do the right thing” and gets everyone on the same page.
Appropriate Action Strategies for Success
Based on these six steps, you must now develop action plans for improved underwriting profitability. Establish and implement customized processes to see positive short-term and long-term results. Attack the “low-hanging fruit” first to get the best return.
Here are some basic examples of general action strategies to consider, along with an expected timeline for change to occur (results will vary based on each individual agency operation):
- Analyze open reserve reports. As discussed previously, review for closed claims still showing reserve amounts and work with claims partners to assist in any way. Results: immediate.
- Review new business acquisition process. This includes providing more detailed field underwriting staff awareness, training, and checklists for proper screening. This usually helps with claim frequency issues that the agency can control. . Results: 12 to 18 months.
- Monitor daily claims activity for loss control. Assign one person in the agency to review daily claims reports. This assists with the claims process and helps achieve customer satisfaction. Results: immediate.
- Implement a vehicle inspection process. This might be necessary, even if not required, if your agency is experiencing higher frequencies in auto collision and comprehensive claims. Results: immediate.
- Conduct annual policy reviews with clients. This customer-focused process serves many functions: retention, customer satisfaction, and the creation of an open line of communication with your clients. If clients’ needs change, address them via accurate field underwriting of the account, leading to proper coverage placement. Results: Long-term loss ratio improvements, improved retention, and greater customer satisfaction.
- Use target marketing. Implementing the proper marketing programs with appropriate follow-up will proactively prevent adverse selection and result in profitable business. Results: Immediate premium and commission growth, along with continuous long-term underwriting profit results.
- Follow Up, Follow Up, Follow Up! Once you’ve set priorities and customized your agency’s action plans, it’s essential to follow up each program regularly with your staff. Implement no more than two to three strategies at a time; otherwise, they might not be effective. Follow-up should include weekly discussions for the first month; then bi-weekly, working toward monthly or quarterly follow-up meetings. Use these discussions to ensure processes are functioning as intended and are continuing as planned.
Contingency Commission Impact
At the end of the day, your agency underwriting profitability not only impacts your carrier relationships, but can put money in your pocket. Contingency programs vary by carrier, agency size/volume, growth, profitability factors, and other variables. Let’s assume you have a $5 million premium agency, currently experiencing 2% premium growth. The current loss ratio for the agency is 51%. If you can improve the loss ratio by just two points, to 49%, what impact can it have on your profit-sharing bonus?
The chart below provides a sample contingency commission grid based on premium growth rate and loss ratio. A 51% loss ratio and a 2% premium growth rate at $5 million in premium results in a $75,000 bonus ($5 million x 1.5%). If you can improve your loss ratio to 49%, the bonus improves by $25,000 to $100,000 ($5 million x 2.0%) – a 33.3% increase in contingency dollars!
Summary
All of the solutions discussed in this article are proven strategies. However, most agencies are unable to focus time or effort on these or any underwriting profitability plans on their own. It takes a great deal of time and energy to identify what’s driving an agency’s loss results. Developing specific action strategies to improve growth and underwriting profit results requires a great deal of analysis and investigation to determine which customized processes will work best in your agency. Even if you need to pay a consultant to direct your agency in this project, you’ll more than earn the cost back over a short period.
Jon Persky, CIC, CPA, PHR, is president of Optimum Performance Solutions, LLC, an agency consulting firm that provides valuation, merger and acquisition, agency, perpetuation, strategic planning, and marketing and retention services to insurance agencies nationwide. He is also a member of The National Alliance faculty and a speaker at Ruble Seminars. For more information, contact John at (813) 835-7337; e-mail [email protected]; or visit www.optperform.com.
Becky Lathrop, CIC, is vice president of Optimum Performance Solutions, LLC, an insurance agency consulting firm that provides sales, marketing, retention, workflow, profitability, valuation, merger and acquisition, and agency perpetuation planning services to agencies nationwide. You can reach her at (561) 373-0560; [email protected]; or visit www.optperform.com. Reproduced from Resources Magazine, with permission from The National Alliance for Insurance Education and Research.