Are you getting everything you should out of your agency automation system? This document by Ken Buehler examines some of the automation pitfalls you should avoid to ensure that you’re not hit with an E&O loss.
Although few (if any) independent agencies operate without automation, I suspect that too many agents fail to use their computer systems to minimize their Errors & Omissions exposures. This neglect might easily come back to haunt them. As the hardening market forces more and more agencies to look for a new E&O carrier at renewal, they might end up with less coverage with a higher premium and higher deductible at a time when they can least afford a claim.
Consider these scenarios:
- An agency principal doesn’t know how to use the computer system.
- A well-managed agency acquires an agency that’s poorly run or controlled.
- An agency’s financial performance is marginal or poor in comparison with its peers.
- Agency management doesn’t require producers to be computer literate.
- An agency fails to account for and document activities in its system.
- An agency doesn’t make proper use of the system’s report and verification facilities.
Although a number of other situations could arise, let’s explore each of these:
AN AGENCY PRINCIPAL DOESN’T KNOW HOW TO USE THE COMPUTER SYSTEM
An agency automation system is a major investment that should help boost productivity, reduce staff dependence on other sources for information, and increase revenue per employee significantly without substantial staff growth. The system should also reduce work-processing time.
More important, it should provide reliable internal checks and controls, as well as parameters to improve productivity and eliminate or substantially reduce the agency’s potential exposure to E&O losses.
It’s been said that every agency reflects the personality of its owner(s) or principal(s). Because you bear the ultimate responsibility for agency performance, you need to understand the system and constantly evaluate and question its functions.
Proper, consistent, and uniform client files are critical. Monitor activities in a client file by using reports the system generates. If you don’t know how to request and evaluate these reports, there’s no way to make the changes needed for E&O loss control.
By understanding the system and its capabilities, you can make staff and managers accountable and responsible for its operation. People who know that a knowledgeable person is overseeing their activities will take the initiative to improve the system if performance isn’t up to par. This can be a highly effective E&O risk management technique.
A WELL-MANAGED AGENCY ACQUIRES AN AGENCY THAT’S POORLY RUN OR CONTROLLED
Why would an agency that’s well run want to acquire one that isn’t? For one thing, the buyer might hope to snap up a bargain. If the acquired agency’s markets were essentially the same as those of the acquiring agency and solid planning went into the book transfer, an acquisition at the right price would make sense.
If both agencies use the same automation system (not an unusual situation) this commonality would greatly simplify the book transfer. Even if the agency being acquired has failed to use its system properly, updating files to the standards of the acquiring agency should be fairly easy.
One key issue involves staffing. The buyer might be able to take over the book of the agency being acquired and retain its staff without a major investment in retraining them. However, because the chances are that the buyer’s staff generated more income per employee than did the acquired agency, absorbing its entire staff might well have a negative financial impact on the combined business.
What’s more, the agency being acquired might have a hidden E&O exposure waiting to explode in the buyer’s face. This possibility makes it wise to assess every acquisition from a risk management, as well as a financial, perspective — making reasonable allowances for unexpected events.
AN AGENCY’S FINANCIAL PERFORMANCE IS MARGINAL OR POOR IN COMPARISON WITH ITS PEERS
Poor financial performance in an agency might be due to inadequate planning, receivables problems, market losses, excessive business attrition levels, over (or under) staffing, lack of producer motivation, weak management, poor employee morale — the list goes on and on. Problems such as these can easily lead to E&O allegations of shortcuts in processing or documentation, a lack of concern for client relationships, and/or inadequate staff accountability.
In many such cases, although nothing terribly wrong happened, the plaintiff’s attorney was able to turn some minor breakdown into an E&O horror story that the agency found difficult to defend. Although such mishaps can occur in the best agencies, they’re far more likely to crop up in poorly run operations.
E&O risk management is an ongoing process that requires constant analysis of workflow, adjustment to change, education, and accountability.
AGENCY MANAGEMENT DOESN’T REQUIRE PRODUCERS TO BE COMPUTER LITERATE
Most agencies strive to have producers out of the office selling as often as possible. A producer who doesn’t get involved with the computer system is probably doing things that a CSR will have to re-do later — for example, completing paper ACORD applications for the CSR to enter in the system. This dual-entry process, aside from wasting time, increases the chances of error in reproducing the information that can lead to an E&O claim.
If your producers are writing out apps, train them to put this information in the computer on a "once and done" basis, so that no transaction should be handled twice unless absolutely necessary. Apply this principle to all data entry functions. Although it’s effective to have producers out in the field selling, there will be low sales activity periods when they can be put to good use in the office.
Take a team approach to data generation as a process with a clear division between sales and service. Give both producers and CSRs specific roles and require producers to use the system for appropriate documentation of their activities. Without clear processes in place, you’ll never be able to monitor and review their actions. As sales management expert Roger Sitkins notes, you can’t manage numbers, but you can manage the people who make the numbers.
Sitkins also recommends a "Service Hand-Off" in which the producer tells every client to call the CSR or equivalent for their service needs because the producer is out meeting with clients most of the time.
Some producers believe that they need to take every call from their clients and initiate service activity. In most cases, these people spend most of their time in the office, rather than growing new business.
Make sure that your producers sell, that your CSRs service the business, that your automation system produces the documentation needed to manage their sales and service activities — and you’ll be practicing effective E&O risk management.
AN AGENCY FAILS TO ACCOUNT FOR AND DOCUMENT ACTIVITIES IN ITS SYSTEM
I’ve seen agencies with hundreds of activity codes and others with as few as 25 specific activities. Having too many codes creates an unmanageable and cumbersome system. On the other hand, operating with too few requires such broad applications that management activity reports don’t show what’s actually happening in the agency.
Documenting activities when business is transacted allows the agency to accurately measure what and how much each person is doing. The agency might want to have specific activities for Personal Lines, Commercial Lines, Sales, and Marketing.
For example, a producer might have separate activity codes for application completions, carrier submissions, quote follow-ups, proposal preparation, sales, or closing a file without a sale. Each completed step in the process will create an activity with the appropriate code.
Plan and monitor the activities process for each employee on an ongoing basis so that you can review and evaluate progress. Given the number of transactions that occur in your agency every day, failure to use your system’s activities documentation capability will make defending an E&O claim extremely difficult. A word to the wise …
AN AGENCY DOESN’T MAKE PROPER USE OF THE SYSTEM’S REPORT AND VERIFICATION FACILITIES
Agency computer systems can produce a wide variety of reports — balance sheet, profit & loss statements, production reports, aged receivable reports, activity reports, general ledger, expiration reports, and so forth — any time you want them. These reports are being constantly updated as the monthly business activities cycle proceeds, and most agencies run month-end reports after closing the books. Assuming that your agency has a financial forecast and a business plan, you can use these reports to compare monthly budget projections against actual performance.
Ideally, the agency principals would meet at a specific time to review month-end results. If your agency isn’t performing at the level forecast, the reports will pinpoint the problem areas and target the reallocation of resources. Otherwise, you’re in the risky position of operating based on subjective opinion and perception. This is an exercise in futility that’s no different than preparing an annual business plan on New Year’s Day, sticking it in a drawer and not looking at it again until after Christmas.
An agency that fails to review its management reports also loses the opportunity to reinvent itself on an ongoing basis. From an E&O standpoint, it lacks the data to evaluate processing, question file integrity, improve systems, review receivables, and so forth. It’s maintaining the status quo — good, bad, or indifferent. An agency running in maintenance mode is leaving itself wide open for eventual acquisition or insolvency. Even if it’s acquired, you can bet it won’t command top dollar.
An agency in this mode is highly susceptible to E&O claims because of its laid-back, casual management style. An agency’s culture generally reflects the personality of the principal(s). This isn’t to say there’s anything wrong with a casual attitude in an agency, as long as it takes care of business. Most well run agencies give off relaxed vibrations precisely because they have controls and accountability practices that protect the business from operating in a stressful atmosphere.
Running an independent agency these days can be a demanding business — and it’s not going to get any easier as commission levels keep falling and the industry’s problems grow. On the positive side, breakneck advances in automation and communication technology provide enormous opportunities for those agents who’ve positioned themselves to reap the benefits of these advances through increased productivity, reduced expenses, and profitable growth.
There’s a strong relationship between the decline of an agency and its higher vulnerability to E&O claims. Although even the best agencies will still have E&O exposures, they should work to adopt practices that reduce and diminish the frequency and severity of these risks.