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The Word on Loss Ratios in Relation to Agency Networks & Each of Their Affiliates

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Independent insurance agencies join networks for market access and increased profit-sharing opportunities. Carriers monitor a network’s results. In turn, the network watches the loss performance of its affiliate agencies.

The carrier watches the network’s loss ratio as if it was one very large agency. They still know how individual agencies within the network are performing, however. “If the network’s loss ratio is high, carriers may conduct a deeper dive into individual agency members to see if they can uncover any problem areas,” says Adam O’Reilly, controller of Insurance Pro Agencies (IPA). Pacific Interstate Insurance Brokers (PIIB) assigns sub-producer codes to each affiliate agency, says Tiffany Bertolini, vice-president. This enables the network to identify drivers of negative results.

Even if some carriers don’t necessarily monitor individual agency performance, the networks do. It’s a matter of maintaining good relationships, says Nick Petrocelli, chief operating officer of Agent Support Network of America (ASNOA): “Consistently losing money with a carrier over time is a good way to lose a carrier relationship.” PIIB reviews its results with carriers every month or so. “If we discover an agency is unprofitable across multiple carrier partners, we will work with the agency and carrier to implement an action plan,” Bertolini says.

Consistently high loss ratios will eventually catch up with an agency. In some circumstances, says O’Reilly, IPA will restrict an agency’s access to its carriers or even separate the agency from the network. This can result in the carriers’ terminating the agency’s appointment and non-renewing its policies. Petrocelli acknowledges that, for agencies that are running high loss ratios, “limiting or restricting new business submissions is something that may be implemented.”

Of course, a network needs and wants as many agencies to be members as possible, so termination is a last resort. Bertolini says, “We take many steps before we resort to termination: Identifying carrier trends; contacting a carrier; analyzing mix reports; communicating timeline expectations; and implementing a rehab plan.” Often, this approach solves the problem, but PIIB has had to terminate some agencies. “It is our first priority to protect our profitability,” she says, in order to maintain profit-sharing and good carrier relations.

Still, loss ratios are vulnerable to some extent to factors outside an agency’s control such as soft market conditions and catastrophe losses. Networks make allowances for that. Petrocelli says, “We always work directly with carriers to make sure the loss reporting we are receiving for each individual agency is detailed enough to ascertain loss ratios with and without shock and/or cat loss data.” This information helps them determine whether there are problems that need to be addressed.

Cat losses are taking an increasing toll. Bertolini says PIIB experienced $650 million in cat losses from California’s 2017 and 2018 wildfires. “Unfortunately,” she says, “these severe cat years seem to be the new normal.” They still paid out millions in profit-sharing, but they are cautiously entering geographic areas that are vulnerable to catastrophes. They expect agencies to manage these exposures: “Whether it be a soft market, a hard market, or a brutal cat year, the key to profitability is our affiliates.”

Networks want their members to succeed and will work with them to improve loss ratios. O’Reilly says that IPA stresses establishing proper field underwriting habits. They want agencies to understand which types of business fit with each carrier. Proper risk classification and correct application of discounts are also important. ASNOA encourages its affiliate agencies to work directly with the carriers to review underperforming books of business and ensure they are writing risks that match carriers’ underwriting appetites. They also share their reports with affiliate agencies and will work closely with them to address problems.

“Profitability is a topic of conversation everyday between PIIB and our affiliates,” Bertolini says. If an agency is put on notice for profitability issues, work begins analyzing reports, meeting with the agency and carriers, and implementing a rehabilitation program. Agencies that are not on notice still receive regular reports about profitability factors.

 PIIB encourages affiliates to create internal underwriting guidelines for their staffs to follow. It also wants them to discuss with their clients the importance of coverage and professional advice, rather than focusing on price. Petrocelli says agencies can manage their loss ratios by having systems in place to track large losses, multiple at-fault accidents in a household, and the placement of large reserves. O’Reilly emphasizes fitting business to carriers’ underwriting appetites. “One of the most important concepts for an agent to understand,” he says, “is that just because a carrier comes back with a rate, it doesn’t necessarily mean that the carrier wants the business.”

Ultimately, carriers and networks want to work with agencies that consistently develop profitable loss ratios. Agencies that deliver profits will always find welcoming carrier and network partners.

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