Loss Ratio

[rrahman99]

I was wondering if I could get some feedback from agency owners who write a lot of auto insurance in metropolitan areas. I've been a Principal for about 2 years now and my loss ratio is over 100%. No matter what I do the earned premiums will not cover the losses the agency incurs. I've heard that new agencies typically take 2-5 years before they become profitable. I have the insurance company's district sales manager down my throat every time I speak to him. Can anyone give me some feedback regarding this matter? I'm stressed out of my mind wondering if I'm going to have an agency in the near future after dumping my life savings into starting this agency.

 

[CaptiveGuy]

What kind of field underwriting are you doing? If your clients all have prior insurance, clean records, and are over 25 etc. it may just be that you are only 2 years in so the earned premium is not there.

Take a look at clients who had claims and see if you missed anything when underwriting the account. If you are in an urban area you may be getting a bunch of uninsured motorist claims which you really can't do anything about.

 

[nyc2phi]

Where are you located ?

 

[djs]

I remember going through this myself early on. Let me say it probably has nothing to do with waiting 2-5 years, but with the method you are using to write business. Why?

Most agents will have loss ratios over the years looking something like:
Year 1: 60%
Year 2: 62%
Year 3: 108%
Year 4: 63%

Okay, I made those up, but most agents I know have a year here and there where losses exceed premium. Just happens. Usually only takes one or 2 bigger than normal losses and you hit that problem.

With a small startup agency, you don't have the premium to cover a few extra claims, but you also don't have the risk exposure of thousands of policies out there to file claims. The ratio of risk to premium actually remains the same as you grow. The impact of one or 2 extra claims will obviously impact a smaller book more.

Now, what can you do?
Look at how you are attracting business. Its pretty well known that certain types of marketing attract higher loss ratios. Depending on how you market you will cause your own problems.

For me, this was working with used car dealers. I wrote a lot of business, I had a lot of claims. I also had a lot of lapses, late pays, reinstatements, more lapses, more claims. But, I wrote a lot of business. Take your pick of what you want. Eventually, you find the right carriers to put these in.

In general, look for preferred clients to help reduce your loss ratio. Much easier said than done, but its not that hard either. Here in CA, credit isn't an issue in underwriting, but, I can guarantee you that if you look at the big picture, you will definitely see inverse trends of credit and claims.

Unfortunately, location tends to have an impact on claims. I'm not advocating redlining, but, ask your carrier for what areas generate the most claims per policy holder. Don't market into those areas. You can still write policies there, but don't market into them.

Market after things that tend to help reduce claims. The list is pretty easy:
- Homeowners (hence the auto/home discount)
- Professionals - yes, engineers tend to file fewer claims than the guy making slightly above minimum wage.
- Continuous prior insurance. If they have had insurance for a while, they tend to keep it and it also will give you better insight into claims history.
- Avoid lots of previous claims. You'll see people come in with a lot of small comp claims (4-5 in last 3 years). Avoid these. More than one and I would question it pretty heavily.
- Young drivers. Under 25, drivers tend to think they are the best driver on the road. Yet, they cause a lot of accidents.
- Married, with children and a dog. The idea here is to look for people that are settled in their life, not having huge changes.

Field underwriting basics are easy. Look at their driving record, look at their claims history, 5 minute conversation, you can pretty much assess the likelihood of a claim being filed. Rate the policy appropriately. Let the rate take care of the risk.

Most newer agents strive to get the lowest premium possible, forgetting that the premium has to cover losses (in aggregate). When you do this with someone who is unlikely to file a claim, no problem. When you do this with someone who is going to walk out of your office and file a claim, you hurt yourself, the insurer and the system as a whole.

Also, the simplest way to fix loss ratios is to inspect the risk before insuring it. Go look at that car, take pictures. Its amazing how many agents will write something without any inspection and then get claims for damage that probably pre-existed the policy.

Don't let that happen to you. Besides, its a good chance to cross-sell.

Dan