I recently presented a webinar on the topic of Evaluating for Risk Quality. Part of my presentation discussed the impact of relative risk quality on rates, premiums and terms offered to commercial clients. Part of the reason underwriters need to address the issue of risk quality is to develop a premium commensurate with the risk’s relative risk of claims. The discussion quickly evolved into the issue of my opinion on risks shopping their insurance.
I answered stating that there is value in an extended relationship between the insured, their insurance agent, and the insurance carrier. However, from my perspective as an insider and knowing what I know, I would have to recommend to any insurance buyer that they shop their insurance frequently.
One cliché I have heard underwriters and agents use over the years that has grated on my nerves the most is, “I don’t want to leave any money on the table.” This is simply a euphemism for price gouging. Our role as insurance professionals is to develop a premium rate which offers a fair opportunity for profit and not to maximize the rate you can charge.
Price gouging runs rampant in the commercial insurance industry. Sometimes it runs more rampant than others with the cycle of markets. During soft markets carriers have less control over pricing than they do in hard insurance markets. Over my 4 decades as a commercial underwriter and in underwriting management, I have seen numerous abuses.
In one case, a manufacturer of auto parts was paying 4 times the manual premium for the class. I could find no justifiable reason for such a high premium rate. They had not had any claim activity for at least 5 years. Nor did they make a part that was particularly hazardous or dangerous. Nor were there any other characteristics that would warrant such a rate surcharge. The rate had been had consistently at this level for several years.
In another case, a lessor’s risk only risk who was paying over 3 times the manual premium. A review of the properties showed the properties to be in good condition. The occupancies were not high-risk occupancies. Contractual risk transfers appeared to be in place. Nor was there any adverse claim activity.
I wish I could say these were one off occurrences, but I cannot. These situations happen far too often. In my opinion, they occur because of the mentality of not leaving any money on the table approach I mentioned earlier. For these reasons, I would have to recommend commercial clients shop their insurance regularly. It is the only way an insured can validate whether they are getting a fair price.
Then there is the other side of the coin when insurance carriers go crazy seeking to expand market share at the expense of profit and drop premium rates to unsustainable levels. Those levels are guaranteed to turn their healthy profit margins into rubble by not even trying to link risk characteristics to pricing decisions.
Sheryl Crow sang “Good is good and bad is bad.” I like to think of commercial risk premium development as “fair is fair.” By fair, I do not mean average. I mean a premium that is a fair premium to charge the client which enables the insurance carrier to have an acceptable opportunity for profit. With any risk, that should be our goal. We need to focus on doing the right thing.
I understand the whole argument surrounding the cyclical markets. As a student of economics, I also understand the concept market pricing and the role it must play toward deciding to put an insurance company’s capital on the line. Granted, employing a company’s capital means maximizing the potential profit which can be construed as maximizing the premium you can get for any single risk. Furthermore, during soft market cycles, you also need to remain competitive. However, it is not absolute that you gouge in the hard cycle and give it away during the soft market cycle. There is a better way.
Perhaps the better goal would be to minimize the effect of market cycles to eliminate periods of gouging and periods of inadequate (which usually lasts longer) pricing by seeking a fairer price during the hard portion of the cycle and a more adequate premium level during the soft portion of the market cycle while retaining your clients. Particularly in the middle and large risk markets, there is a significant value for the relationship between the insured and the insurance carrier. Predictability or stability in pricing benefits the insured as much as it does for the carrier.
Years ago, I participated in a pre-renewal meeting of a prominent general contractor. During my discussion, I focused on the issue of pricing consistency. In their business model they bid projects and needed to be able to project costs from one year to the next. I espoused on the principal that since they bid jobs on a multi policy year basis it was import to their success we smooth out the pricing swings between hard and soft markets and focus on what was fair pricing rather than pure market driven pricing. In doing so we could create a greater degree of premium stability, an important feature to assure multi-year projects would remain profitable.
Less volatile pricing benefits the insurance carrier by creating an acceptable level of profit in both hard and soft markets. Carriers practicing this approach are more likely to deliver favorable combined ratios and retain good clients during soft market cycles. When clients feel they are being treated fairly they are less likely to leave for price. Integrity has value.
In addition, it also means continuity of safety, risk control and claim adjustment services. Making sure those services are maintained at a level which assist the insured to be successful in controlling claims activity is essential and enhancing the profit potential.
In one example, my carrier was soliciting to be take over as the carrier for a national health and beauty services provider. The marketing representative had arranged for a pre-quote meeting with the prospect and the broker 60 days prior to the expiration date. We brought claims, marketing, and risk control representatives as well as me to represent underwriting.
On the wall of the conference room, there was a map of the United States with dots and stars denoting the locations of a variety of locations and offices for the prospect. The meeting started with the client describing their risk control procedures and outlining some of the services the existing carrier was providing to enable them to effectively implement the strategy. As they were describing these services, my eyes continued to be drawn to the map on the wall. The number of locations seemed to be multiplying in numbers as I thought about just how we would help them to continue to implement their strategy. After a few minutes, I came to the realization there was no way we would be prepared to step in within 60 days an avoid a major disruption in the required level of risk control services. The more I thought about it, the more I realized it was simply a lose-lose scenario.
I interrupted the risk manager and stated my concerns stating there was no way in hell we would be prepared to deliver the services they needed within 60 days and that this meeting was several months late in happening. The rest of my coworkers’ (particularly the marketing representative’s) and broker’s jaws dropped. Their Risk Manager breathed a sigh of relief and replied not to look at the meeting as being 4 months too late, rather as 6 months early to set a game plan in operation where we could prepare to step in on day one but only on the next renewal date.
The point of this story is there are other factors besides pure market driven price competition to be considered. In my experience, savvy clients are generally good clients. They understand value and can determine what things are worth.
But here is the real point to this article. There is nothing wrong for insured’s shopping their coverage from one year to the next. They like any other business are trying to improve their bottom line and insurance is a significant expense. To punish or to decline quoting on risks because they seek fair pricing is simply wrong.
It is a two-way street. You cannot have it both ways. If an underwriter wants their insureds to not go to market, they need to act in accordance with seeking a fair price and not try to maximize their price simply because they can. They need to be transparent and deliver all the factors that went into their pricing decision. It is the only way they can build trust by having highly valued conversations which may not be entirely comfortable. The client’s trust that you are also looking out for their interests as well as your own.
Good underwriters will find that ground, be transparent and communicate the logic behind their pricing decision to the insured. Those underwriters will typically outperform in both production and profit over time. Insureds should expect to have good underwriters.