Maximizing an Agency’s Profit Sharing through Sound Underwriting Practices
- October 17, 2012
An AgencyEquity Exclusive
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, most especially during challenging economic times. 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.
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 and is probably not an unusual trait for this type of insurance buyer.
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. The only exception to this is when a client agrees to co-insurance and the premium is surcharged as a result of this.
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 great number 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 accounts that only have a single line.
5. Apply scheduled debits or credits accordingly. There is a reason why these debits and credits exist and that is 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.
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