Increased losses have made the U.S. property-casualty insurance industry unprofitable, and that could have negative effects on insurance agencies. A.M. Best reported that P-C carriers suffered a $6.3 billion underwriting loss in the first half of 2022, an $11.4 billion swing from the year before. A 15.8% jump in incurred losses and related expenses drove that result.
When losses climb, carriers take close looks at agencies’ loss ratios – incurred losses divided by premium.
What constitutes a good loss ratio will vary by carrier, says Lauren Anderson, MPA, senior manager for corporate communications for the National Association of Mutual Insurance Companies.” Insurers have complex processes to ascertain underwriting benchmarks,” she said, “and there is no set arbitrary number but a complex analysis of the risk profile to arrive at conclusions.”
Others say that acceptable loss ratios are below the mid-forties to mid-fifties, depending on the line of coverage. The target is 55% for personal lines and 50% for commercial, according to Carol Drake, vice-president of corporate strategy at agency network Smart Choice. However, those calculations typically exclude losses from catastrophic weather events and they limit the impact of large shock losses.
“Agencies can lose carrier appointments because of loss ratio challenges,” says Rex Hickling, CPCU, AIM, president of Premier Group Insurance. However, before resorting to termination, carriers will attempt to identify the drivers of poor loss ratios, how long the problem has persisted, and whether the problem can be fixed. Drake sees the more advanced carriers reviewing agents’ quoting and submission profiles to improve loss ratios. Profile reviews can uncover training needs.
Anderson says that carrier appointment decisions are not based on loss ratio alone. “The relationship between insurers and their agents remains a strong and complex link that is not susceptible to any specific causation or delineation determination in a vacuum but rather a case-by-case analysis basis based upon a number of factors.”
A bad loss ratio can interfere with agency network relationships as well. It is possible for loss ratio problems to cause a network to reject an agency, says Hickling. “The most successful agency-carrier relationships are those that generate mutual long term profitable growth,” he says. Tracy Henry of Pacific Interstate Insurance Broker agrees that a network might reject an agency because of loss ratio.
In extreme cases where poor loss ratios cause an agency to lose many of its appointments, the agency could become uncompetitive or even go out of business. Hickling says, “If an agency systemically is challenged with higher loss ratios, then that may find themselves without markets over time and having less product to sell, which could be a downward spiral.” Drake sees persistently high loss ratios with multiple carriers as a sign that the agency is serving neither its carriers or its customers well. “That will determine an agency’s ultimate success or failure.”
What should an agency do if it’s having loss ratio problems? Get help from their carriers, networks or both. The earlier, the better, says Anderson. “Discussions should be had when problems first develop so that delay doesn’t cause further harm or issues compound at a later date. Dialogue may help the carrier ascertain if other actions need to be taken to alleviate the issue for the producer/agent/agency.” Drake and Henry agree that agencies should take advantage of the support an agency network provides to help identify the underlying causes of high loss ratios.
Carriers value agencies who are consistently profitable and begin to question those that are not. Well-run agencies analyze all their lines of business to identify loss ratio problems and try to fix them. In the credit world, if you have great credit, you will get banks knocking on your door wanting to give you credit while declining a credit application for those with bad credit. Think of your loss ratio as your credit score by having a great loss ratio to open up doors and not a bad loss ratio which will close doors.