Increase your Agency’s Revenues with Sound Frontline Underwriting

Carriers put together profit sharing agreements for agencies to encourage favorable underwriting results. Having said that, does an agency have control over their underwriting results? Of course they do and should; the role of being a marketing arm of an insurance company is not enough, most especially in an environment where business can be done online. Carriers find great value in agencies that produce these favorable results and then carriers reward them for it.

How can your agency maximize your profit sharing revenues? They key is to put in place sound underwriting practices. Consider these underwriting practices that can help you gain a more profitable edge: 

1. Turning away business is one of the hardest things for an agency to do. However, turning away business that brings adverse risk is practicing sound underwriting. There is much greater chance for those with risk hazards to have a claim, and having many of these types of accounts on your books will catch up to you at some point and can hit the agency hard when it comes to your loss ratio. The key is to have an agency policy and culture that accepts quality risks, yet turns down risks for applicants who choose to not be a partner in mitigating their risk. When you turn down a bad risks, you are not only turning down a problem policyholder, but you are helping your agency’s bottom line.
2. Those looking for the absolute lowest cost insurance without regard to coverage will more than likely raise an agency’s loss ratio. This type of client typically pushes hard to do what it take to reduce their rates and this can mean misrepresenting the risk in exchange for getting a lower rates. These same types of policyholders often fight hard to maximize their claim payout. Those who are constantly working the system are a drain on your agency in every way.
3. Insure buildings to value, whether it be a commercial building or a homeowners policy. Winning accounts by insuring for anything less than the building replacement cost will end up taxing an agencies’ loss ratio and can be a potential E&O claim.
4. Account round as much as possible, even with the discounts. Clients who account round more effectively realize the value of having all their policies with one agency.  Agencies that have a high percentage of policies that are rounded will not only achieve longevity with that client, but they will also see more favorable loss results than agencies that focus on single line accounts or.
5. Apply scheduled debits or credits accordingly. There is a reason why these debits and credits exist, it’s because commercial accounts are not all alike –  some have greater risk and some have more favorable risk. Those who use this rating system responsibly will see dividends in the long run. Those who choose to give credits across the board will probably see higher loss ratios and as a result, less profit sharing.

Please be aware of any state laws that you have before turning away business. An agency must follow any applicable laws and this must take preference to loss ratios. When turning away business, a good way to do so is by referring the prospect to an agency that will better meet their needs. Most will appreciate the referral and in most cases, this will create goodwill for all parties involved. 

Production Factors

Since profit sharing also requires minimums, production factors may come into play and because of this, business can be written to meet the required minimums rather than written for underwriting results.  This is a catch-22: if any agency is ever in a position to compromise their underwriting results in exchange for meeting these minimums, the best option is to consider membership in an agency aggregator (network, cluster, alliance or franchise) that pools profit sharing and where minimums are based on the group, rather than any one agency. 

Master Agency Factor

While aggregator groups that pool results should drill down profit sharing bonuses to an agency’s performance, this is not always done because pooled results are based on the group and not on any one agency in the group. For this reason, groups often give the agency a split of their pro-rata share of their written volume rather than on their loss ratio results. In these cases, the groups need to manage the loss ratio of their members by putting in place policies that apply to the entire group. Since many groups now sub-code agencies with their own direct appointment with a given carrier, they can measure the loss ratio of each sub-appointment.

Groups need to take action against agencies that have a track record of higher loss ratios as to protect the other group members, and member agencies also need to keep a good reputation in these groups by applying sound underwriting practices. The carriers also expect loss ratio management of these groups and their reputation counts on it. 

Conclusion

Carriers have profit sharing agreements for a purpose, simply because they know that the agency can be a partner in the underwriting process and these agreements are a successful way to get the agencies to pay attention to this. Taking advantage of these agreements is not only a good business decision, but you are also protecting the more responsible policyholders who are partners in mitigating their risk vs. policyholders who choose not to. This helps reduce premiums for these responsible policyholders and encourages the less responsible policyholders to play a role in reducing their risk. The bottom line is, this helps manage loss and premiums, and agencies should be rewarded for favorable results.