Frank serves as Practice Leader, Growth Solutions at ReSource Pro.
Helping buyers become an employer of choice with insurance companies
One of the most significant challenges insurance agents confront daily is the way business decision-makers buy insurance. Most insurance buyers believe that simply handing their policies over to several insurance agents and directing them to get the lowest price is the most effective way to manage their program and buy insurance.
Few buyers know how they can influence their insurance pricing and how their current process is likely working against them. This presents an opportunity for insurance agents to educate their buyers on what they can do to become an employer of choice with insurance companies and positively influence their prices.
What factors can influence insurance premiums?
Most agents either are not comfortable leading a discussion on price or just have not taken the time to explain to their current and prospective clients what underwriting looks for when determining insurance policy pricing.
There are three “buckets” that factor into how insurance premiums are developed: frequency losses, severity, and insurance company expenses.
1. Loss frequency
Loss frequency is somewhat predictable year in and year out. While it can be driven down with the right practices and processes, most companies have a steady amount from year to year.
Loss frequency creates a dynamic where there is an exchange of dollars between the employer and the insurance company. The business pays the insurance company a sum of money in their premiums, and the insurance company pays the losses with part of the premium. If a business wants to reduce costs, it must reduce the frequency of claims.
2. Severity
Helping a client understand pricing severity is a bit more challenging than frequency. Certain types of risks like truckers, heavy manufacturing, heavy construction, and others are exposed to severe losses, irrespective of whether your particular prospect or client has experienced any severe losses.
You may find it frustrating that you have a trucking account that has not had a significant loss in over a decade, yet their premiums are going up because all truckers’ premiums are going up in the current insurance market. The same goes for other high-hazard industries. With some accounts, severity comes with the territory.
3. Insurance company expenses
There is not much variance with expense ratios from one insurance company to another. Even though commissions are included in the insurance company’s expenses, cutting commissions is not a preferred practice. So, there’s not much that can be done to reduce expense ratios and correlating premiums.
Communicating with underwriters
In summary, pricing is comprised of frequency risk, severity risks, and expenses. Typically, the premiums in each of the three buckets are equally divided. However, other aspects of the risk can be communicated to the underwriter to secure a better premium.
The first is to take the time to effectively communicate the description of operations. The box in the ACORD form is not sufficient for this purpose, and the only words in that box should be “see attached.” A comprehensive description of operations should be attached to the application.
This description should include two key elements. You want the underwriter to know how this company is similar, different, or equal to other companies with respect to their work. For example, a heating and air contractor that only performs service work on residential homes is a very different risk than one who does commercial work. Both contractors have the same class code, yet one never goes higher than an attic, while the other may work on the top of a skyscraper.
Secondly, agents should inform the underwriter about what this company is doing differently from other companies to mitigate risk and reduce losses. Is the quality of their safety practices better, which would make them a better risk?
Agents are consistently asked to go get a better price, yet those directing that charge are often unwilling to take the time to help agents do what they are requesting. It falls to the agent to communicate to buyers why they must assist in understanding and communicating their risk to the insurance marketplace.
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