Disaster Recovery Plans

Well, we’re finally heading into a hard market. The market will affect commercial lines first, but, as reinsurance treaties are renewed, you can expect an effect on your personal lines, as well.

Throughout the soft market rates have dropped and companies have endured increasing losses as the price to pay for cash flow and market share. Now carriers are reacting to loss ratios much more intensely. Reserves will be adjusted and agencies will be targeted for action as carriers try to reserve their shrinking capacity for agencies that have low loss ratios.

Much of the loss ratio problem is not addressable at the agency level. If cost of claims and repairs increases year-by-year and rates decrease, the inevitable reaction is the souring of loss ratios in general. The book of business is not necessarily bad – it is simply under priced. We trust that companies will take appropriate action in those circumstances.

However, most companies “rate” their agencies by comparing the agency’s loss ratio against that of the company’s local or regional loss ratio (in total and/or by line of business) when determining actions to be taken to solve problems. Most agencies understand their loss ratios but refuse to acknowledge ANY responsibility for them. The agency mantra is “Loss ratio is defined by company rating structure. All we do is sell insurance by the company’s guidelines.” Of course this is “hogwash”. Companies would not need agents if they just qualified clients on paper. Carriers count on their agents to be front line underwriters and expect them to distinguish the potentially profitable from potentially unprofitable customers through the agency’s application and interview process.

Once a book of business is already on the books, its loss ratio becomes an indicator of the quality of the agency’s underwriting habits. Of course losses will occur. And, of course, some of these losses will be severe. That’s why people buy insurance. However, if an agency’s loss ratio exceeds the loss ratio of the company for that region on a consistent basis, then risk selection has been a problem (or has been non-existent) and a solution must be found.

In an aggressive market, the company will try to rehabilitate and educate an agency in risk selection and will re-underwrite a book of business to keep the higher quality business and to make a good sales agency profitable, as well. However, in a sharp downturn (as will occur after 9/11/01), companies may simply give up on agents and either restrict or terminate for extended poor loss ratios.


An agency may analyze and re-underwrite its own book of business before being approached by its carrier. Doing so will reflect the degree of partnership desired by the agency, and may influence a carrier to extend its charter with an agency in expectation of better results after the re-underwrite.

Re-underwriting a book of business involves analyzing all clients with losses over a one -or two- year period. The goal is to determine if the loss ratio results from unique losses, from frequency or from severity. Obviously, a company will not terminate an agency for having unique losses (i.e. a million dollar homeowner’s loss on a million dollar book of business). However, even unique losses will cause a company to reconsider appointment if they seem to occur every year.

Frequency and severity issues are more likely problems and can be addressed in a variety of ways to ‘clean’ the book of business. For instance, clients with multiple losses in a short period (i.e. two years) are segregated into “Watch List” clients (those with two losses within two years) and Problem Clients (those with more than two losses within two years). “Watch List” clients are flagged for action if another claim occurs. Problem Clients are addressed with either higher deductibles, limiting endorsements, or are flagged for non-renewal (as permissible) or not to reinstate in case of non-pay situations.

Clients with multiple severe losses are evaluated to determine if additional losses are possible (i.e. heavy wind losses – the wind will continue to blow) and termination actions are taken, as permissible.

The action of “cleaning one’s own house”, without carrier intervention, is impressive to any company partner. Of course, you must tell them what you are doing and keep them in the loop with constant communications of actions taken. The company simply wants to make money on the insurance that they sell to your customers. If you show them that issues within your control are being addressed, they will find ways to keep the agency.