Insurance agents exist to sell insurance carriers’ products. To do that, agents need carriers to represent. It is therefore in their interests to build strong relationships with their carriers. One of the most important things an agency can do to strengthen relationships with carriers is up-front underwriting.
Carriers inherently favor agencies that make money for them. Consequently, agents that consistently deliver low loss ratios to their carriers will earn that favor. The key to maintaining a good loss ratio is up-front underwriting. Agencies that are selective about the clients they take on will get better results than will those who take all comers.
Agents may not be able to get a complete picture of a business or household from a few quick interviews, but they can observe key indicators such as:
- The physical condition of buildings, autos and machinery
- How neat premises and job sites are
- How competent employees appear to be
- Visible loss prevention measures such as fences, alarm systems, worker safety equipment, and control over household pets
- Whether the presence of combustible materials in or near buildings and other property is limited
Individuals and businesses who exhibit good practices in these areas are likely to be profitable risks for agencies and carriers. Their losses will be less frequent and may be less severe.
Part of agency underwriting is submitting risks from classes of business a carrier wants. Risk selection is the essence of underwriting, and good risk selection starts with satisfying a carrier’s underwriting appetite. If a carrier has told its agents it does not want to write restaurants, it makes no sense for the agent to submit diners. Conversely, if the carrier says it wants artisan contractors, the agency helps it by sending a steady flow of interior woodworkers. If the agency’s book has a low loss ratio, underwriters will be more inclined to trust the agency and give it the benefit of the doubt for the occasional risk outside the underwriting guidelines.
Of course, even an account in the carrier’s underwriting wheelhouse will have its flaws. An important aspect of agency underwriting is telling their carriers everything they know about their insureds, the good and the bad. A carrier will like the agency that sends it the artisan contractors it wants. It will trust the agency that calls the underwriter when it finds out that one of those contractors is now installing residential roofs. An agency that repeatedly shows that it is protecting the loss ratio of its book of business with a carrier will earn trust.
Another important piece of underwriting is identifying an insured’s loss exposures and suggesting, both to the insured and the carrier, smart ways to treat them. An agent improves the profitability of its book by suggesting a higher theft deductible for an account with a history of repeated burglary losses. This also encourages the insured to take steps to prevent these losses from happening, which makes their life easier.
Similarly, the agent can increase an account’s premium and better protect the insured by suggesting additional coverages that the insured needs and that have low loss frequency. For example, virtually every commercial property owner needs Ordinance or Law Coverage. Local building codes may require demolition of undamaged portions of a building when more than half of it has been destroyed by fire. That undamaged portion and the cost of demolishing it are not covered without this special coverage. Suggesting this coverage is good underwriting. As a bonus, it also helps protect the agency against errors and omissions liability claims.
In addition to suggesting additional coverages, agents can propose higher insurance limits. An insured who carries a $1 million Umbrella policy can be quoted limits of $2, $5 or even $10 million. Since replacement cost calculators are not exact, higher building and personal property limits can be offered as alternatives. The agent should first confirm with underwriters that these limits are acceptable to the carriers. In some cases, the carrier may need to purchase reinsurance for higher limits.
Underwriters prefer agents who make their jobs easier. Up-front underwriting is one important way agents can do that. By doing so, they improve their loss ratios and make themselves more valuable to their carriers.
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