Producers Ponder Price-Quoting Ethics

A few years ago, the question “How much premium can we get?”would have meant an underwriter was hoping premiums would not fallfarther. Today, in the hard market, the same question is probablyasking for a premium ceiling.

This column examines the producers ethical response to such aquestion from an underwriter, and whether the answer differs if theproducer is a broker representing the insured, rather than an agentrepresenting the insurer.

Every producer who responded to the “Question of Ethics” posedin NU's April 14 edition stated that, in one way oranother, (1) it was the job of the underwriter to price theaccount, but that (2) the producer had a role, in some cases, inselecting the final, fair premium to present. (As always,respondents are quoted anonymously to encourage a frank discussionof ethical challenges.)

They also agreed that when different underwriters presenteddifferent quotes, the lowest quote was not always the one selectedto present to the applicant.

For example, the producer who raised this question stated thatit was the underwriter who had the rate book that, presumably, wasbased on credible actuarial data. That data and corresponding ratesnormally should form the basis for a firm quote. However, he alsorecognized that occasionally the price quoted bore no relationshipto risk presented. In these circumstances, the producer does havesome ethical obligations.

A Florida producer reported that some of his agency companies donot give a single price on some commercial accounts, but rather aprice range. For that company, the producer will select a premiumto present within the range. In the long run, this system allowsthe producer some flexibility in the immediate term if there iscompetition, and in the long term delivers fair pricing to both theinsurer and insured.

An Ohio producer usually gets premium ranges only on specialsituations, such as liability coverage for a school fair, or moversand riggers coverage for a one-time move of an expensive type ofequipment. Knowing the underwriter is using judgment rating, andthat if an insured event does take place, no premium within therange will be adequate, this producer chooses the highest premiumin the range as fair to both the company and the insured.

A Kentucky producer prefers a single price from the underwriterand tries not to indicate desired or necessary pricing in anymanner. “My job is to provide the underwriter with all the relevantrisk information he or she needs to evaluate the risk. I want tochallenge the underwriter to thoughtfully examine the risk and giveme his or her opinion in the form of a single price.” When given arange of prices, this producer will always select the lowest pricein the range to present because he believes any price within therange is an acceptable price for the underwriter.

The majority of the producers also reported that when a price isgiven that the producer believes is either “too high” or “too low,”they would go back to the underwriter for an explanation. Aproducer from Chicago wrote: “There have been times we have toldthe underwriter that the price was too low. I do not think this isunethical because we usually know the risk and its exposures betterthan the underwriter, and it is our job to make sure there is aproper premium for the risk.”

Similarly, the Kentucky producer noted that an excessive orinadequate quote usually means the underwriter does not understandthe account. “I will call the underwriter and go over theunderwriting information to be sure he or she understands theexposures and ask that the price be confirmed. Underwriters whoknow me recognize that I am questioning their pricing. Ifchallenged, I will, reluctantly, give them my opinion as to a fairprice. After all, in the end, I am more aware of the circumstancesof the insured than the underwriter.”

As to the ethics of not presenting the lowest available quote,all producers recognized that multiple factors affect price, suchas coverage differences between insurers, and note that prices areonly one driving force in their decision-making.

The Chicago producer highlighted one major difference: “Thequality of the insurance company is becoming more and more a factorin our recommendation. Look at the recent significant declines inratings and effective demise of some major commercial insurers. Ifyou end up with an insolvent company because it had the best price,the ultimate cost to the insured will be much higher thanexpected.”

One risk manager–a former president of the Risk and InsuranceManagement Society–agrees with the producers. “There is a fairprice based on (1) the exposures, (2) quality of the risk, (3) losshistory, and (4) competition among others. It is incumbent on boththe underwriter and producer to seek that fair price and notoperate on the basis of what the account can afford to pay.”

An agent association executive also agreed: “I have observedover the years that the producers role is one of providing balancein the market. They fight for lower premiums when they believequotes are too high, and they will suggest that some quotes may betoo low during soft markets.”

A Minnesota producer indicated that it becomes his ethical dutyto assist in both pricing and coverage when a problem arises. Henotes that occasionally an otherwise “good” insured will have astring of bad luck. Looking at loss history, underwriters respondwith quotes that are too high. “I will work with underwriters tomodify coverage to bring premiums back to a reasonable level. Then,if the losses were just bad luck, I can expand the coverage in thefuture at about the same price.”

There was less consistency in the responses to the secondquestion as to whether the producers response would be differentwith an agency company or an insurer with whom the producer wasbrokering the account.

For example, the Ohio producer will use an excess and surpluslines company only on rare occasions. “Currently E&Sunderwriters do not give my accounts the time the accounts deserveto price them. Quotes are given at the last minute and on atake-it-or-leave-it basis. If I am desperate and the quote seemstoo low, I will take it and let the underwriter live with his orher decision. However, if an agency underwriter comes in too low orhigh, I will ask how they came to their pricing because thoseunderwriters appear to give the account thoughtfulconsideration.”

The Florida producer was blunt: “If brokerage companyunderwriters do something stupid with the account, I will let them.I will also tell my client that the premium this year will probablygo up next year.” However, he said he would let an agency companyknow that he felt the premium was too low: “Its not ethical tofocus on price alone for one premium for one account. It is ethicalto seek a fair price for one account that, in the long run, willalso be fair to other insureds and the insurance company.”

The Kentucky producer treats both types of underwriters thesame. “If I believe the premium is wrong, I will ask how they cameto their decision. Again, I want to challenge them to underwrite anaccount they understand and give me the price they believe is fair.However, I probably am more challenging to my agency companyunderwriters, as my clients will be having a long-term relationshipwith those insurers and I want to continue to represent the agencyinsurers to my clients.”

The Illinois producer agrees: “In the end, both agency andbrokerage insurers will judge the producer on the profitability ofthe business written. It makes no sense to treat the underwritersfor those companies differently. Also, over the long run,constantly underpricing will end up costing the producer and thecompany money, and may make insurance more difficult to place forthe client.”

The risk manager summarized the situation: “The legaldistinction between an agent and a broker is significant here. Theagent is duty bound to represent the interests of the insurer. Butas far as I (the buyer) am concerned, there is no distinction. Anagent will look out for the interest of the insured as well, or hewill not be my agent for long.”

In summary, the producer–whether an agent in the legal sense ora broker–has an ethical role in determining the premium that willbe presented to an applicant or insured.

The producer should be in a position to understand the accountbetter than the underwriter and the implications of the exposuresbetter than the insured (in the absence of a risk manager). Allparties should be seeking a fair price for the coverage afforded–afair price now and in the long run.

While there are differences as to whom the producer might owehis or her primary loyalty in an individual account, in the end,the financial and ethical integrity of the business requires thatthe producer seek equity in premiums.

Peter R. Kensicki is a professor of insurance at EasternKentucky University in Richmond, Ky., as well as a member of theEthics Committee of the CPCU Society in Malvern, Pa.

Sidebar #1

NU's Next

Question Of Ethics:

The quality of an insurer is returning as a potential majorissue. Are there ethical responsibilities to insureds for aproducer or the producers firm as to the “quality” of the insurerwith which the insured is placed? If so, do these ethicalresponsibilities continue during the term of the insurance?

Please forward your responses to Dr. Peter R. Kensicki at[email protected], ormail them to him at Eastern Kentucky University, 107 Miller Hall,Richmond, Ky. 40475-3101. All responses will be keptconfidential.

The next column on “A Question Of Ethics” will appear in theOct. 20 edition.

Sidebar #2

Ethical Words

To Live By:

After an ethics column has been published in NU, weoften receive additional responses. In most cases the responses are“ethical words of wisdom.” It would be a shame not to share theseethics nuggets with our readers.

One producer reported that his father had “street smarts” thatshaped his standards. In my last ethics column on April 14, I citedsituations where “producers feel uncomfortable with a risk, but donot have any concrete reason to walk away from the account.” Thisproducers “Ethical Words to Live By” are as follows:

“An uncomfortable feeling should be a CONCRETE REASON to walkaway.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, July 21, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.