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Underwriting plays a crucial support role in both agency plan management and progress toward the overall company strategies and objectives. The following chapter generally describes the areas of responsibility included within the underwriting function. Also included, from a company perspective, are what they deem "desirable" risks and the characteristics that agencies should look for when attempting to place business. Finally, this chapter addresses the issue of maintaining positive agency-company communications.
A special thanks goes to Gail Clark-Bittman, Account Analyst with The Travelers Group Personal Lines Marketing Division in Orlando, Florida. Gail provided the underwriting information used in this chapter from the Travelers’ "Agent Underwriting Handbook" as well as her underwriting and agency field management experience.
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What Do Companies Look For In An Agency?
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Companies seek to do business with those independent agents who they feel will most enable them to meet their profitability objectives, i.e., those who 1) use "best business practices," 2) want to work as a team with the company and 3) operate in favorable geographic and regulatory environments.
There are several factors insurers consider in evaluating agency representation. They include:
- Location and appearance — accessible to the public, professional operation.
- Financial information — consistent profitability, good collection practices.
- Type and mix of business — average types of clients, specializations, retention rate, volume of nonstandard business.
- Other insurers represented — too many companies, duplication of markets, outlets for nonstandard accounts.
- Loss experience — shock losses or poor underwriting by producers.
- Personnel — professionalism, experience, turnover.
- Business plan — projected growth areas, goals, ability to meet company production quotas.
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Underwriting the Agent
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Agency underwriting is an integral part of the selection process. Underwriting decisions are products of many different levels of thought and knowledge. Without sacrificing objectivity, the companies must simultaneously examine:
- The application.
- The agent’s account.
- The agent’s credibility.
In risk selection, they start with the application. Supplemental data is added based on the companies knowledge of the territory, motor vehicle, CLUE reports, loss runs, and possible investigative reports.
Next, they consider the account. Each submission is related to the agency’s book of business and the agent’s method of doing business. In assisting in Agency Management, companies often encourage an agent to solicit certain types of business in order to improve the account and to curb any trends which may imply adverse selection.
Lastly, they consider the agent’s credibility since he/she is the initial underwriter of business. The company must know the agent to judge whether or not they have all the information necessary to evaluate the risk. Often, the agent has seen and talked with the applicant and, in many situations, the agent has seen the risk. How effectively the information is obtained and how the information is relayed to the company will vary with the agent’s abilities and organization set-up.
Always, the underwriting system includes checks and balances — such as a random check to determine if the person signing the application is actually licensed and appointed through that company.
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Eligibility vs. Desirability
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It is also critical that business be properly selected, classified and priced, and that coverage types and limits be written in accordance with underwriting/pricing programs in effect.
The risk selection process helps to:
maintain a balance between both loss exposure and premium to adequately cover expected losses.
achieve underwriting and production goals. This is crucial to the financial strength of both the agency force and company, and ultimately affects claimants, policyholders and stockholders alike.
Obviously, if all risks were either all good or all bad, and there were no subjective variables, then all risk selection could be performed by an automation program. However, the fact is that the majority of risks fall somewhere in the middle and that while automation of many functions has significantly changed the way business is processed, it has not replaced the need for a personal assessment of the business that is written. It remains the responsibility of the individual handling the risk to make an effective judgmental decision and maintain a profitable spread of business.
The underwriter’s concern must be with the combination more than with the individual characteristics. Certain elements of exposure which individually may be acceptable may, when combined, represent an exposure which cannot be adequately priced under a particular program. To price a risk properly, each characteristic must be considered in relation to the other elements on the risk.
For example, consider a personal auto exposure involving a nine-year-old car with three operators. The applicant has a clean driving record, but his wife has a two-year-old speeding conviction and their 19-year-old son was involved in an accident just over three years ago. The annual mileage on the car is well above average and the family’s previous policy was cancelled for non-payment of premium. Although the risk may be technically eligible in any pricing program, there are enough marginal characteristics to place the risk outside the better-than-average category.
On the other hand, several better-than-average characteristics can offset an isolated marginal characteristic. For example, a risk with a minor conviction may be better-than average if it involves such preferred characteristics as three late-model and well-maintained cars, two middle-aged or elderly operators, low to moderate annual mileage on all vehicles, a stable family and a claim-free record for the past ten years.
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Client/Agent Interview
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To obtain accurate and objective information with which to underwrite the total exposure to loss and to classify each risk properly, companies regard direct personal contact between agent and applicant as essential in the selection process.
The personal interview is not for the company’s benefit only. Rather, it helps the agent in several ways:
By enabling you to gauge the applicant’s insurance needs;
By giving you a picture of the overall exposure including homelife, surroundings, operators, potential operators, and such intangible data as the applicant’s lifestyle and driving attitudes; and
By developing more accurate information, since your conversation allows you to place the specific questions on the application in the proper context. This minimizes the chance of costly classification or underwriting errors and resulting changes to the policy which can "irritate" your insureds.
Additional information and pertinent details may emerge when the application is filled out. Each new piece of information is evaluated. Underwriting decisions can be changed at any time, subject to this information.
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Printed Underwriting Guidelines
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Companies recognize the need to provide agents with some printed guidelines for different pricing programs. Printed lists serve some very valid purposes.
- They outline the agency’s binding authority.
- They identify some of the operator, vehicle, and risk characteristics that call for careful evaluation.
But risk selection isn’t just a matter of consulting lists. Your role as the first-line underwriter of business requires good judgment, knowledge of insurance fundamentals, experience, and common sense. No list can possibly include all of the considerations that affect underwriting pricing decisions.
The printed requirements are intended to be used to supplement underwriting judgment. They should not be used in the context that all risks that don’t "hit" the lists are acceptable. Many risks do not have any of the characteristics appearing on the lists, but are nonetheless unacceptable exposures for a given pricing program.
Four things will help you in the role of the first-line underwriter of business:
- Adequate judgment skills.
- Awareness of the intent of each pricing program.
- First-hand knowledge of each risk.
- Ability and willingness to communicate all pertinent information to the company.
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Moral Hazard
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A "moral hazard" is defined as any abnormal exposure arising from the conduct, ethics and personal habits of an individual and his/her friends/associates. While this hazard is probably the most difficult to detect, it is the most important single underwriting consideration in the selection of business.
There are two degrees of moral hazard:
- An indifferent attitude, which may result in neglecting ordinary precautions to protect against a loss, or
- Deliberate activities that increase the potential for loss.
In many cases, as an agent, you will be unaware of the existence of a moral hazard until it comes to light on a subsequent investigative or claim report. However, you must be alert to the possibility of a moral hazard.
The mere existence of a characteristic that varies somewhat from "normal" or "socially acceptable" behavior does not necessarily mean that a moral hazard exists. The concern is not whether an individual’s lifestyle is different, but whether or not it constitutes an above average loss exposure. It may be difficult to clearly identify a moral hazard in some cases, but certain key areas can alert you to possible problems:
The character and attitude of a prospective insured is considered favorable if his/her activities are not open to criticism on the grounds of unethical, immoral, illegal or anti-social behavior such as excessive drinking and/or drug involvement.
Well-kept residences in communities that do not have an excessive crime rate generally indicate pride in one’s property and regard for the property of others. A stable family situation, free from marital or family problems that could result in dangerous psychological pressures, is also desirable.
A background of crime, unethical business dealings or other infractions of the law are definite indications of increased susceptibility to future loss.
An individual whose occupation provides stable employment, financial security and no abnormal exposure due to unusual working hours or undesirable associates is considered the average risk.
People who live in excess of their means are potential moral hazards because they have a greater motivation to profit from a loss. They may also be unable to afford necessary repairs and maintenance that could avoid or reduce loss.
Some people believe that insurance should pay for virtually every loss, no matter how small. They see their insurance contract as a means to provide maintenance, minor repairs, or replacement expenses. Obviously, this exceeds the scope of the normal insurance market, whose intent is to protect against the large, unexpected, and perhaps catastrophic loss. Other people may see insurance as a potential financial "windfall," and try to collect payment in excess of the appropriate amount.
Not only is incident frequency an indicator of subsequent accident severity, but it may also be an indicator of moral hazard. Persons who sustain several convictions or accidents over a relatively short period of time may be exercising poor judgment and driving skills. They may be lacking the maturity necessary to operate an automobile safely.
Do not submit risks with an indication of a significant moral hazard. Such risks are normally uninsurable in any pricing program.
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Loss Ratio
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A traditional means for evaluating an agent’s account and his/her management efforts as well as those of the Company has been loss ratio. To this point is probably the best available tool.
However, loss ratio is only a measure of past history and is not necessarily reflective of the current book of business, developing trends, or future results. In addition, for all but the largest agencies, one year premium/loss relationships often lack statistical credibility. The longer period over which you evaluate loss ratio (e.g., 5 years) the better an indicator of the value of that account — to the agent and the Company. Again, we’re dealing with past history. Today, there are better management tools available than current or historic loss ratio.
Why should an agent be expected to produce a good loss ratio?
- All agents have an obligation to generate a profitable book of business independently as well as collectively. Favorable loss ratios help maintain a competitive posture. It ranges from hard to impossible to maintain competitive rates in an environment where several or many agents are not carrying their fair share in terms of maintaining profitability through controlled loss ratio.
- The overall objective of the Company and the agent is to serve the policyholders well, to operate economically, and to make a profit on the business.
How can an agent maintain loss ratio or improve a poor or deteriorating loss ratio?
- Concentrate on source underwriting. Meet with the insureds in their home. Meet and talk with all the operators of the vehicles. Inspect the vehicles to be insured. Communicate fully your observations to the Company.
- Develop accurate classifications and underwriting information through solicitation of the facts — objectively and honestly. You cannot expect to achieve profitability by writing business at the wrong prices.
- Always insure premium adequacy on each risk in the account.
- Evaluate your selection/management efforts through a periodic review of the management information available to you and through evaluating the changes taking place in distribution of business in your account. Manage your own situation.
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A Positive Approach to Underwriting
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A positive approach toward underwriting requires effective, ongoing communication between agents and field staff. Often, the "no" associated with some underwriting attitudes can be directly attributed to an absence of communication.
Agents are encouraged to obtain complete applications with full supporting documentation. Agents should be aware of the mutual benefits for both the agency and the company of having all the facts needed to make a sound decision.
Carefully communicate underwriting information which involve sensitive areas such as personal data about insureds and their families, loss histories and lifestyles.
Both agent and company should keep their relationship positive rather than negative. Take the time to compliment each other on the things they do well.
Use empathy in all communications. Put yourself in the recipient’s place. How will your message be received? Are you using a form letter when a personal approach is more suitable?
Companies always include a look at favorable areas and trends in the agent’s account, as part of the agency management process. They consider ideas to help the agent market better business and improve or maintain aspects of the account that are already good. The agent’s success is their success!
The agent should be involved in the identification of problems, potential reasons and causes, ways to improve weaknesses and capitalize on strengths and goal setting. Agents need to be aware of their role in the improvement of unsatisfactory production and underwriting results and the benefits received from active management of their account.
If the agent and the Company convey an image of being ready and willing to work with people to give them the insurance and service they need, perhaps price would play a less significant role.
Agents and companies have a common interest and should bear this in mind in their business dealings.
View the magnitude or uniqueness of the exposure as a challenge — not a deterrent. A risk does not have to qualify for a preferred price to be good business. A proper price makes the difference.
Methods to Maintain Productive Producer-Insurance Communications
Formal channels — agent advisory councils give input to insurer on agent reactions to company policy and decisions.
Informal channels — personal contacts between agency and company personnel (lunch, visits, seminars, conventions, etc.).
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PRODUCER-COMPANY RELATIONS
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A producer has two parties to sell on every proposal — the customer and the insurance company. Failure to handle either sale properly results in neither being made. In this section we are going to give you information on the company side of the transaction.
Agencies vary on the exact manner in which a company is chosen for a certain piece of business. Some prefer an agent to go directly to the company underwriter and handle the applications personally. Others may have a "placer" or marketing department that determines choice of carrier, with the producer simply turning in all account information and awaiting the finished proposal. All may have reasons to favor a certain carrier or carriers over others in the agency — production quotas, "favored agent" programs, long-term relationships, or simply the principal’s decision that "this is the way you’re going to do it."
Now is the time to learn your agency’s procedures:
- Who will place your business for you, or who will help you learn how to do it yourself?
- Which carrier(s) will be asked to write the account and why?
Let’s look at the factors involved in (2) above, because as a producer you must understand the process of choosing the proper carrier and the importance of maintaining ("protecting") good relationships with the agency’s markets.
Company Factors to Consider in Placing Insurance
Marketing philosophy and practice.
Underwriting procedures and practices.
Agent-Policyholder services.
Claim service.
Financial stability.
All should be compatible with agency and producer’s methods of doing business.
All will be examined in greater detail on the following pages.
Matching an Insurer’s Marketing Philosophy and Practice with the Agency’s
Type of business desired
Is it a type agency plans to produce?
What other companies in the agency want to write the same piece of business?
Are they willing to write all lines of coverage or only certain specialties?
How competitive will they be on their preferred products?
Requirements
Overall volume
Volume in certain lines (ex: life submissions)
Permissible loss ratios
Functions required of agency — claims handling, rating, computer tie-ins, etc.
Production and appointment practices
Underwriting stability
Type (and number) of other agents appointed or to be appointed in area
Compensation
Commission schedules by line of business
Direct versus agency bill
New business versus renewal
Profit-sharing agreements
Other incentives (sales contests, trips, special bonuses, etc.).
Insurer Underwriting Procedures to Evaluate
Where underwriting decisions are made — agent, branch, regional or home office.
Underwriting guidelines — applications, limits, eligibility.
Rate levels — competitiveness, deviations, negotiability .
Competence and stability of staff — training, experience, turnover rates.
Types of Agent-Policyholder Services Provided by Insurers
Procedural — billing plans; mail procedures; applications utilized; time required to obtain a quote, issue a policy, or process changes; cancellation procedures.
Support — loss control, audits, educational programs, specialty programs.
Automation — efficiency of home or branch office processing; availability of agent tie-ins.
Considerations in Determining Insurer’s Level of Claims Service
Staff or independent adjusters.
Availability of drive-in claim facilities and/or estimators.
Location of claim offices.
Reputation for claim settlements.
Producer’s rights to assign adjuster.
Producer’s claim authority and/or responsibility.
Compensation to agent for settling claims.
Ease of verifying claim status.
Producer’s ability to track status of claim.
Insurer’s divulging of reserve amount.
Importance of Company Financial Stability to a Producer
If company represented becomes insolvent, there are three primary effects on producer:
- Erosion of client confidence in producer — client relied on producer to select company; delay in claim processing, and possible loss of unearned premiums adds to customer dissatisfaction.
- Loss of valuable time — much nonproductive extra work must go into cancellation and rewriting of policies, filing for unearned premiums, trying to retain unhappy accounts, etc.
- Possibility of errors and omissions suit — based upon any advance knowledge the producer may have had of the company’s impending collapse, and the failure to properly protect their insured through warning, moving business to another carrier, etc.
Major Sources of Company Financial Stability Information
Insurance Carriers:
Best’s Insurance Reports rates an insurer’s financial position relative to its peers, based upon the following factors:
Competence of underwriting.
Cost control and efficient management.
Adequacy of reserves.
Adequacy of net resources to absorb unusual shock.
Soundness of investments.
Insurer’s Annual Report — shows earnings, policyholder surplus, etc.
Self-insurance Funds, Risk Retention Groups (Property-Casualty):
State Department of Insurance
What Insurers Look For in You and Your Agency
Now that we’ve spent time looking over the company, it seems only fair to point out that they are looking back. Assuming you’ve decided you want to do business with them, how does a company decide if it wants to accept business from YOU?
Business plan — projected growth areas, goals, ability to meet company production quotas.
Perpetuation plan — who will be running the agency five years from now? Ten years? How are they going to be trained for the job? What financial arrangements are involved and how are they guaranteed to be available?
Financial information — consistent profitability, good collection practices.
Type and mix of business — average types of clients, specializations, retention rate, volume of nonstandard business.
Other insurers represented — how many (too many?) companies, duplication of markets, outlets for nonstandard accounts.
Loss experience — shock losses or poor underwriting by producers.
Personnel — professionalism, experience, turnover.
Automation — functions now being utilized, plans for future, company interface capabilities.
Location and appearance — accessible to desired clientele, professional operation.
Completeness of submitted business — properly filled in applications, necessary data included (loss runs, pictures, etc.).
Steps to Selling an Underwriter
Okay. You have determined that this is the right company for your account. They have agreed to let you place business with them. There is one more step in the process: How do you convince the company underwriter that this particular account you’re working with is one their company would be crazy not to accept?
NOTE:
There is one overriding factor in all of the following discussion. It’s one of those "this goes without saying" comments, but experience and company feedback tell us it must be said.
Always be totally honest with your underwriter.
No excuses. No buts. ESPECIALLY no "but they won’t write it otherwise." Quite possibly there will be an excellent reason not to write it. A reason you should learn about now, and which may serve you well in future underwriting decisions. If you end up feeling the underwriter is being unfair, ask for your account to be reviewed by their supervisor. Keep in mind that it would be much worse to cover up the problem now, only to have it blow up in your face later. You are risking not only permanent damage to your ability to do business with a given underwriter, but your access to that entire insurance carrier.
- Submit business within the insurance company’s guidelines — those rules and procedures developed by the company to aid in underwriting. Don’t constantly ask for exceptions "just this one time."
- Consider the underwriter’s preferences — their experience and expertise in certain lines assists in proper decisions on accepting or rejecting a given submission. Remember: any time an underwriter turns down your account, FIND OUT THE REASONS WHY. This is valuable future information whether you like the answer or not. It will either help you to underwrite your accounts better in the field, or teach you where you dropped the ball in preparing your submission for this particular underwriter.
- Provide full information to the underwriter — all relevant information they believe is necessary, in legible and easily digestible form.
Complete applications — fill in every item of the appropriate forms required by the company. If you don’t know the information, find out or fill in the application with "don’t know." Leaving a blank leaves the underwriter to their imagination as to which of two reasons apply for your omission: you are too ignorant to know how to properly complete an application (this is the GOOD reason); or there is something about the account you don’t want to tell them for fear they will then reject it. You notice you lose either way.
Pictures and/or diagrams — of the premises, major equipment, location of insured in relationship to neighboring buildings, etc.
Loss history — for at least three, preferably five years. Not only is this important to underwriting, but this is also crucial for experience rating the account.
Cover letter narrative — give the underwriter a "word picture" of the business. When did they go into business? What is the management like? What are their plans for the future? Where do they fit into their marketplace? Remember that the underwriter has not had the same opportunity you’ve had - to personally visit your client. Include anything that will provide to them that "feel" for the account, whether it takes three paragraphs or three pages. (see sample form in Appendix.)
- Gain the underwriters trust — Remember that we are people doing business with people, and developing a solid personal relationship with your underwriter will often prove crucial. Following the first three steps with honesty, consistency and consideration will lead to future cooperation in key insurance placement relationships.
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