In the current hard market, insurance carriers are taking a variety of actions to improve their results. They are dropping policies, hiking premiums, raising deductibles, adding new exclusions, and getting more strict on paying premiums on time.
They are also being tougher on their agents. There have been reports of carriers cutting commissions, giving written warnings about unfavorable results, and even terminating agents’ contracts. Outraged agents may question whether carriers can legally do these things.
The answer: Probably, if the contract between the carrier and the agent permits them. Therefore, the first place an agent should look is the contract she signed with the carrier.
It is important to realize that no two agency-carrier contracts are the same. The structures may be similar, but the specific provisions will vary from one carrier to another. An agent cannot assume that, because the rest of the carriers in the agency do or do not do something, another carrier will act the same way.
It is also probably incorrect to believe that a specific carrier action is against the law. Unless there is a state law that prohibits a certain contract provision, it is probably legal for the carrier to include it. For example, the vast majority of states do not have laws on the books about broker of record changes. In those states, every carrier can handle them differently according to their own procedures. This can sometimes produce results that strike an agent as unfair. However, not every poor business practice is illegal.
An agency-carrier contract should address items such as binding authority, premium collection responsibility, commission levels, ownership of expirations, and termination. It may require the carrier to give the agent advance notice of certain actions. When a carrier is taking an adverse action against an agency, the agency should review the contract to see what it says about advance notice of things like:
- Changes to underwriting guidelines. During a hard market, new restrictions in a carrier’s underwriting guidelines may happen frequently. Check the contract and communications from the carrier to see if they require advance notice of changes. Does it permit the carrier to make changes effective immediately or does it require some warning period?
- Changes in commission levels. Some carriers have reduced commissions in response to the hard market. Check the contract to see if: 1) it requires advance notice to the agency and, if so, how much? The Independent Insurance Agents & Brokers of America (IIABA) contract guidelines call for 180 days’ notice. 2) Does it permit the company to change commission rates more than once in a 12-month period?
- Changes in profit-sharing requirements and formulas. There may be a separate contract governing profit-sharing. If a carrier decides to make its program less generous to the agent, check that agreement to make sure they have provided the required notice.
- Rehabilitation. Agencies with loss ratios the carrier views as unfavorable will come under scrutiny. If the carrier wants to place the agency in a profit-improvement (or rehabilitation) program, the IIABA guidelines call for a rehabilitation period of at least a year before termination is considered. The carrier should identify specific problem areas, what they expect the agent to do, and how they will help. If the problem is loss experience, the carrier should provide documented loss information to demonstrate the problem.
- Termination. The IIABA guidelines suggest a minimum of 180 days’ advance written notice to the agency that the carrier is terminating the contract. The notice should provide the reasons for termination.
An agency should not be afraid to question a carrier’s marketing representatives about confusing contract provisions. Like insurance policies, carriers write these contracts, and the carriers should be prepared to explain what they mean.
These are difficult times for both agencies and carriers, but the relationship remains a business partnership of equals. Carriers may have to take unpleasant measures, but if they do, agencies should ensure that they have kept the promises they made in their contracts. While Carriers can make these changes, in most cases an independent agency can also roll a book of business into another carrier. Given this, the agency may have options to take action on books of business with carriers that have very unfavorable terms.
