I met an agency consultant and asked how I could turn around my mostly personal lines, family-owned agency. I had bad loss ratios and knew if I did not do something about it, I would most likely lose a carrier or two and be forced to deal with the resulting fallout. He replied that there was no real way to correct the problem; rather, I should just keep putting as much on the books to try to outrun it. Wow, was he ever wrong!
It took me a few more sessions in the school of hard knocks before I discovered that there is a tried-and-true formula for success: good front-line underwriting. At that time, we almost never inspected the properties we insured–no photos, no cost estimators, no physical inspections. We felt we knew the area and did not need to perform those measures. We compiled the customer's information and believed whatever he told us. And if a company told us that the customer really wanted to work with us and re-underwrite the book, we considered that both an imposition and an insult. It did not take too many years for that process to catch up with us.
Fast forward 20 years, and let's examine how good underwriting can achieve excellent results. I was recently speaking with my partner, Craig Sargent, now an aggregator and formerly an independent agency owner in Maine, who most recently had 10-year average loss ratios in the 20 percentiles for commercial lines and in the high 30s for personal lines.
Sargent, a 29-year industry veteran who has owned or managed as many as 17 locations and $42 million in property-casualty sales, faced the same challenges. During the 1980s and early '90s, he went through some rough years with bad loss ratios, canceled company appointments and loss of business due to unavoidable book rolls and lost markets. He ended the distressed times by making several major changes to his operating philosophy.
Changing the rules of the game was simple, Sargent said. He began requiring agency staff to inspect every property before quoting unless they were able to obtain photos through Internet databases. They secured photos of the front, sides and rear of the properties, did an outside visual inspection and then completed a cost estimator based on tax evaluation data, customer interview and personal observation.
Sargent reminisced about his own experience, one that many agents can relate to. "I can't tell you how many times I have walked around the back of a home to find a deck without railings, Typar where siding should be, broken windows or a pit bull chained to the leg of a trampoline," he said.
Then he instructed the agents to quote based on the results of the cost estimator, not on the prospect's current policy limits. "We were striving for premium adequacy as well as, of course, providing the best level of service," he said.
Finally, with all of the information assembled, the agency could place risks appropriately, and sometimes that meant they were quoted in the surplus lines market. The agency was fortunate to implement an auditing process to make sure that no steps were omitted, assuring a quality book of business.
After instituting and monitoring this type of front-line underwriting, positive results became apparent within 18 months. The agency's loss ratios trended downward and continued to do so. Management delivered a consistent message to staff as to expectations and shared the positive results, so everyone could see that their efforts were making a significant difference. And, as all agency owners know, better loss ratios not only mean higher profits for both the agency and the carrier, but also help solidify the partnership between the agency and carrier, and the agency owner and the staff. It's a win-win-win.
Lisa Klebe-Peet, owner of Klebe Insurance Agency LLC in Colebrook, N.H., for nearly 30 years, concurs. "Good front-line underwriting is what keeps us profitable year after year," she said. "We are fortunate to have been in business for a long time and in the same town. We know our clients. We inspect everything before we quote. We won't insure a property unless the insurance-to-value is where we know it should be."
She acknowledged that this is something that needs to be reiterated to the agency staff, and she leads by example. "As soon as we get a request for a property quote, either I or someone else in the agency will be at the site within a short period of time. Site inspections are a valuable underwriting tool. You can't quote what you haven't seen," she said.
Ross Gorman, owner of Safe Harbor Insurance Agency in West Harwich, Mass., shared some of his observations and personal experiences. As the owner of a $15 million sales agency, and then the CEO of a large bank-owned agency, he has extensive industry experience and agrees on the importance of front-line underwriting. "We almost never asked a company for exceptions. We felt that if a company had a good product and reasonable pricing, those were the terms that should be offered," he said, discussing his involvement in a small cluster of Massachusetts agencies.
Over the long term, this allowed the cluster agencies to develop strong, stable markets. Within his own agency, Gorman empowered his employees by paying them a good base salary and allowing them to decide whether or not the business was going to be good for the agency.
The long-term benefits were higher profitability, stable company relationships, preferential treatment and the ability to really get things done with the carriers if time crunches occurred. "Our small commercial account loss ratios were almost always in the teens," Gorman said. "Our personal lines loss ratios were rarely over 30."
Most importantly, the loss ratios became predictable, as long as the agency's underwriting philosophy remained the same. This made it much easier to do agency forecasting and to look toward continued growth. "Over time, it tended to drive away the price shoppers, because our agency philosophy was product driven not price driven," Gorman said. "We tried to give a good price when we could, but we always provided great coverage."
You can achieve higher levels of profitability, carrier and employee stability and minimized errors and omissions potential by using best practices front-line underwriting in your agency by following these rules:
- Never bind a property without seeing it
- Take photographs
- Conduct due diligence with a visual inspection followed up by a cost-estimation using the many products available to agencies (Marshall-Swift square foot calculators, for example)
- Once a reasonable replacement cost is established, quote based on that value, not on the current dec page provided
- Endorse on any extras the customer may currently have or advise of their not being included
- Ensure that you place the risk according to established carrier underwriting guidelines
- Don't negotiate on coverage limits; quote based on cost estimator
- Make asking for accommodations the exception and not the rule.
Ensure that the staff understands the whys and hows of this better way to run the agency and if at all possible, monitor their compliance, take action when needed and reward good behavior. Loss ratios will go down and profitability will go up, and if you continue to reward your employees, you will have the added benefit of increased morale as well.
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