Agents Have Options to Profit as Cycles Turn

Trust, efficiency, quality, knowledge are among the values independent agents bring to the insurance transaction

Managing insurance cycles to maintain profitability is a tricky proposition. Higher premiums produced by hard markets provide more income, but it may be difficult to find coverage for troublesome risks. Plus, customers are unhappy at having to pay more for less. In a softening market, the scramble is on to retain decent profit margins while premiums fall. What’s an agent to do? There are a lot of options to choose from and management decisions to make.

One panel of insurance executives recently cited a number of elements of successful business models that both agents and carriers can look to for handling market swings with minimum disruption. Among them: trust — between carrier and agent, agent and customer; adding value to the insurance transaction; efficient claims handling; effective use of technology; ease of doing business; client retention; differentiation in the marketplace; knowledge of carriers’ risk appetites; and embracing predictive modeling.

Develop Relationships, Add Value

The property casualty insurance business is “about making money and we’re not embarrassed to do that, and I don’t think any of you are embarrassed to make money,” Thomas F. Motamed, vice chairman and chief operating officer of the Chubb Corp., told an audience of independent agents attending a panel discussion at the 2007 Dallas All Insurance Day in November. “At the end of the day it’s about quality people and the trust between people.”

There must be a “level of trust between you and your underwriter,” agreed Dan Carmichael, former president and chief executive of Ohio Casualty and now an executive consultant with Liberty Mutual Agency Markets. “It’s all about relationships and how well you work with your underwriter, with your marketing rep, with your claims staff.”

State Auto Insurance Companies Executive Vice President and COO Mark Blackburn added that there’s pressure on both the agent and carrier to maintain relationships. “We have to have a relationship that’s built on trust and being honest with each other,” he said.

Blackburn said many companies claim to be working on relationships with their agents. But, he noted, it’s one thing to say and “it’s another thing to manifest that in the actions that they do. That comes from getting out and visiting with you, getting out from behind their desks … and finding out just what are the issues of the day.”

In addition, carriers and agents have “a responsibility to bring something to the policyholder,” said Sean S. Sweeney, director, executive vice president and chief marketing officer for Philadelphia Insurance Companies. “You have to have some sort of value added — loss control, value added coverage that really has meaning — with the idea of providing that something long term that will make their business better.”

Increasingly, insurance consumers “are going to be more demanding of you and us,” Motamed said. “They’re going to align with value. If you can’t provide that customer or that buyer what they’re looking for they’re going to go somewhere else and try to find that value somewhere else. And they’re going to do the same thing with us as a market. It’s their money they’re spending and they’re going to want to get something they think is important.”

One added value agents can bring to the transaction is their ability to educate their customers about the financial structure of the insurance company, Sweeney said.

“Educate the consumer on why it’s not right to pick the lowest price every time,” he said. Explain why it’s necessary to look at the company they’re placing business with, rather than just telling the customer the carrier has an “A” rating.

“I think if we do a better job … teaching people to be risk managers, it will take the cycles and the variability out of the business,” he said.

Agent, Know Thy Underwriter …

Carriers need to know what they’re good at; they need to know their strengths and weaknesses, Chubb’s Motamed said.

In turn, agents need to know their markets, said Robert Lindemann, chief operating officer of Zurich North America Commercial Markets. Having knowledge of the market means not just assessing a carrier from a territorial perspective, but knowing whether the experience of the carrier is appropriate for a risk, knowing what the insurer’s competitors are doing, and knowing what products differentiate that carrier in the marketplace, he said.

Reputation, financial stability, coverage offered, service provided and claims history are essential elements to investigate when considering placing business with a carrier, the panelists said. Equally important is knowing the carrier’s appetite for risk.

“It’s up to the agents and the clients to delve pretty deep and figure out what the companies are good at. Some companies are better at some things than others,” Motamed said.

Investigate the financial security of the company, the particulars of the coverage offerings, the quality of its service and the pricing of its products, Sweeney said. “What’s the combined loss ratio of the company you’re placing business with? Over a 10-year period, what type of risk pool have they aggregated? You’re going put your policyholder in that risk pool. Is that policyholder going to subsidize the bad risk with a good risk? Long term is he going to have stable pricing? That’s the first thing you have to look at.”

Policy coverage terms and conditions are different from carrier to carrier, he said. “Policies have different wording. What’s the specific policy wording that relates to your policyholder? Is it giving the value added they’re looking for?”

Sweeney noted that a carrier’s service can be benchmarked. “How quickly does the company issue a policy? How accurate are their bills? How good are they at getting their endorsements to you? How quickly are they handling … claims? Are they transparent? Do they let you see what’s going on in the claims process?”

Finally, the agent should look at pricing. If a company aggregates a good risk pool that produces a low combined loss ratio they can provide competitive pricing. “It’s easy to say but it’s hard to do,” he said. “And I think if with each transaction you look at those four things, you’ll do the right thing for your policyholder.”

Predictive Modeling, Identifying Risk

To State Auto’s Blackburn, the change occurring in the insurance industry today with regard to technology is monumental. That change is not just about hardware and software and the ease of doing business. Pricing technology — predictive modeling — is “going to affect the industry in a big, big way,” he said.

The use of predictive modeling in pricing commercial accounts allows carriers to better understand a class of business, Blackburn said. “All restaurants are not equal and now there are different databases to look at, and things to choose amongst those restaurants. [It enables companies to] really know better how to slice and dice the pricing.”

He advised agents to pay attention to carriers’ use of predictive modeling because their ability to identify risk will make a difference in how quickly a company is able to negotiate changes in the marketplace.

Carmichael agreed. He said agents and their insureds should accept sooner, rather than later, industry developments with regard to predictive modeling and using technology to identify risk. “I’m not saying they are perfect, but it is a better way to measure, to be able to compete, if you can get the right statistical background,” Carmichael said.

‘Putting Lipstick on the Pig’

Blackburn said every Monday morning he has to remind himself that “we’re a technology company that sells insurance, rather than an insurance company selling technology. Every decision that we make and how your offices are set up today is so much about the ease of doing business and the technology that is in place.”

But he acknowledged that big changes in technology are on the horizon and carriers have a major obstacle in the way of a deft response to those changes. “A lot of our systems are big, expensive and very, very dangerous to change out from the standpoint of they touch so many different systems. Legacy systems are expensive and hard to change.”

Carmichael said while the industry has made progress on the technology side, “we’re still putting lipstick on the pig. We’re making the Web sites look better but we haven’t changed the squirrel cages back in the innards of the company.”

He said the industry is still a long way from fixing the back end so that companies can collect and analyze data differently, whether it’s information about the agency or the customer.

Agents, he said, should be demanding more from their companies on the technology front. What you need to “be asking for as agents is for carriers to allow you to stay in [your agency management] system and allow you to toggle out to a proprietary Web site.

“Most of the companies’ chief technology officers would suggest to you: ‘Just trust me, we’re going to give you the best way to do business with us.’ Well, you’re independent agents because you need more than one market. …

“Your carriers need to make it possible for you to stay in your system to get to their system. The data about your customers should be available to you online through your system.”

The Measure of an Agency

Carmichael said client retention is one of the foremost requirements a company should demand of the agencies with which they partner, particularly in a soft market. “Because that is business we’ve already together earned,” he said.

Lindemann agreed. “Are they retaining clients? That’s a tremendous measure.”

Motamed said Chubb monitors the service agents provide to clients, seeing it as key to client retention. Like his colleagues, his company “likes to have high retention numbers and we’d like to have retention like you have retention. Our numbers are probably lower than yours — we could learn from you in that regard.”

Lindemann said his company also looks at whether the agent is bringing value added and differentiated services to their clients. In addition, he wants to know if the agency has a plan to grow.

“That doesn’t necessarily mean double-digit or single-digit,” he said. “It means how are they being successful in the marketplace? I think a carrier is also looking for an agency that understands their risk appetite. And understands how they can feed that carrier and produce that connection.”

Carmichael suggested agents find “the sweet spot” of their partner company and work on that. “If you find an underwriter that has a particular expertise — say bonds or umbrella or whatever — show them some risk. Don’t just show up at the door once a quarter or every two or three months.” Show them what your book of business is all about, he said.

Sweeney said one of the hardest things in the insurance “business is to unearth quality risk.” He said his company is interested in partnering with agencies “in the niches that we’re involved with to help you grow. And once we do that what we look for is a quality submission. …

“As the market softens, when you talk about ease of doing business, what our company looks for is, we look for all of the underwriting data so that we can look at long term and make a decision that will last for 10 years. …

“One of the issues with the softening market is that some companies may need less information. We’d like to have more information because if we can put it to bed up front with the broker or agent then we’ve got a win-win over a long period of time.”

Topics Carriers Profit Loss Agencies InsurTech Tech