Habit Four: Proper Risk Selection; Can You Afford to Write That Account?

Price is a very important variable in the equation of sales.  It’s not the only thing, but we would be foolish to discount its significance.  Customers want the most bang for their buck.  Unfortunately there are companies capitalizing on the idea that insurance is a commodity and thus attempt to reduce it to the bottom dollar.  With large marketing budgets they flood the market with propaganda that all insurance policies are equal and as such you should just go with the lowest price.  If you don’t already know, let me assure you, not all insurance policies are equal.

The same can be said for your clients.  Not all customers are equal.  It’s your job to discern the good from the bad.  Those that will have payment issues, those that will occupy the majority of your time, and the loss ratio “time bombs,” aka claims waiting to happen.

You have a choice.  You can wallow in the quagmire of non-standard insurance churning customers across your stable of companies, nullifying any commission you earn, or you can elevate your focus and concentrate your efforts on those clients who will increase your retention, productivity and ultimately, your contingency.

Why is risk selection so important?

In your agency, ideally, you have A, B, and C companies.  Likewise, you have A, B, and C customers.  Matching the most preferred clients to the most preferred company is your goal.  The ability to do so is part art and part science.  I highly recommend you familiarize yourself with the National Alliance for Insurance Education and Research’s study on Growth and Performance Standards.  

 “The Growth & Performance Standards study provides benchmarks for comparing independent agency performance. The GPS study provides comparison benchmarks for income and expense averages, balance sheet ratios, and agency productivity measures.  Agencies can use the GPS study to set a course for improved growth, profitability, and productivity.”

Be forewarned, you will read some frightening information.  For example, according to the GPS study, a typical $1,000 premium account, with 12% commission only has a window of about two hours a year of service time built in.  Anything over that and you start to cut into your profit.  Anything over three hours completely exhausts any profit.  Imagine a client with the state minimum limits who changes automobiles weekly.  You might actually be paying to insure that person.

What kind of tools do you use to help with risk selection?

Most companies use CLUE, MVR, and credit as a rating tool, but these only give you a cursory look into the true potential of a risk.  Your agency needs to develop a checklist, tailored to your needs, and one that follows your agency’s growth and profit goals. 

Go back and read your agency’s mission statement.  Don’t have one?  Write one.  Having no mission statement is like trying to find an address with no map.  Every employee in the agency should have read and own a copy of the mission statement. 

Also, don’t discount agent intuition.  You should put your eyes on every risk you write and keep photos with your documentation.  By doing this you’re providing a service but you’re also performing loss control.  Does the home display pride in ownership characteristics?   What about automobiles?  Take a walk with your client out to the parking lot and walk around their car.  Just like going to look at the home, viewing the car should be presented as a service and a chance to instill that you go the extra mile.  But it also helps you know if there was prior damage to any claims reported.

Finally, after you have instituted risk selection guidelines, follow up is the next step.  Can an A customer become a C customer?  Most definitely, and vice versa, a C can become an A.  Most states have laws protecting consumers that prohibit insurance companies from non-renewing or canceling without material changes in risk or non-payment of premium.  Be diligent to inform underwriters as soon as you notice any issues so you can possibly get off a risk sooner rather than later.

Success requires growth.  However, growth without guidelines is a recipe for disaster.  Proper risk selection and company placement is a short cut on the map to becoming a Next Generation Agent.