Views from Agencies, Carriers and Kemper Specialty California
The outlook for a higher level of underwriting losses in the personal auto insurance market is expected to continue through 2018, according to the 2016 midyear insurance segment report from Conning¹, a respected leader in insurance research. As bad as this news may be for the carriers, it can also be disheartening for agencies that are already experiencing increasing agency loss ratios. So consider the question, “When an agency loss ratio is unprofitable, should the carrier terminate the relationship?”
This seemingly loaded question may invoke any number of emotional responses. Agencies may see the issue one way, carriers another. These varying points make a review of this question worthwhile. At Kemper Specialty California, our own review of this question has resulted in an approach to an agency’s high loss ratio that may surprise you.
The agency point of view
The agency that has a high loss ratio with a carrier may see the problem as a result of market forces that are completely out of their control. Agencies may also have the opinion that the carrier has not adequately priced its product and as a result, the high loss ratio is the carrier’s penalty for poor pricing practices. Let’s not forget about the pressures to meet ever-demanding production goals. Generally speaking, some of these opinions may have some validity. Let’s first examine market forces over which the agency has no control.
Adverse loss costs, particularly an increase in claim frequencies, are contributing to higher loss ratios seen in personal auto lines. Here are some reasons why:
- More Cars: Strong new car sales translate to more cars on the road, and that means more claims.
- More Miles: Total vehicle miles traveled in 2015 were up 3.5 percent over the prior year, as stated in the Conning report. That’s the largest annual increase in driving in more than 25 years. With drivers logging more miles and spending more time on the road, accident frequency has increased.
- More Expensive Repairs: Newer vehicles, with their complex safety technologies and diagnostic systems, are adding to the severity problem in the vehicle damage sublines. More complex vehicles mean more expensive vehicle damage claims.
As for the agency opinion that the carrier has not adequately priced its product, and therefore the high loss ratio is their penalty for irresponsible pricing practices, we understand that perspective. The way the agency may see the issue, the high loss ratio has little to do with the agency book of business. For the agency, it’s the carrier that ultimately controls where the business is placed. In the competitive world of personal auto insurance, whoever has the lowest price, lowest down payment, lowest fee, etc., has the advantage to win the business. So based on a carrier’s pricing model, the agency may conclude that they are submitting exactly the kind of business the carrier wants.
It is important to note that pricing in this market is not an exact science. Few predicted the market’s significant increases in frequency and severity over the past 24 months. In addition, regulation can present challenges to achieving rate adequacy, leaving many to play catch-up. Nevertheless, solid pricing practices have been a hallmark of carriers that enjoyed prolonged profitability and integrity in the marketplace.
The carrier point of view
Carriers understand that there is no simple solution for correcting loss ratio problems. Generally the decision to terminate an agency for a high loss ratio involves many factors. Carriers approach this termination topic differently.
Profitability pressures may cause some carriers to take swift and drastic action. Some carriers may implement agency terminations with little regard for agency issues and little exploration of the underlying reasons for an agency’s high loss ratio. When an agency has a high loss ratio, a carrier may jump to the conclusion that termination is in order. This could be because they believe the agency lacks a grasp of good business sense, demonstrates limited knowledge around insurance industry standards or does not emphasize front-line underwriting practices. Whatever the reason for termination, it can be a painful process.
Although carriers can generally terminate an agency contract for various reasons, including a high loss ratio, Kemper Specialty California believes in a more measured and engineered approach to resolving concerns around an agency’s high loss ratio.
Kemper Specialty California point of view
While an agency’s high loss ratio is concerning, it does not always signify the agency is responsible. This is why we manage the issue with more than a “one size fits all” approach, recognizing that there is usually more than just one reason behind an agency’s high loss ratio. Some of the contributing factors that influence our approach in reviewing an agency loss ratio include the following:
- Agency Mix: If an agency has a high loss ratio, it could be driven by a large amount of underperforming segments within their book. In this scenario, we may suggest actions to re-balance the underperforming segments of business being submitted by the agency.
- Scale: Most agencies are not big enough to absorb large losses. This means that a single large loss can dramatically skew a loss ratio upward. The loss ratio may not reflect the overall performance of the agency book of business. Because of these challenges, Kemper Specialty California considers a view of agency loss ratio performance over time, rather than the most recent year.
- Agency – Carrier Alignment: Sometimes business directions change for a carrier or an agency. When this happens, the agency and carrier business appetite may no longer be in alignment. . This can create a disconnect that might contribute to a loss ratio problem. At Kemper Specialty California, incompatibility is often a factor we consider prior to termination for a high loss ratio.
High loss ratios are not good for business, and we recognize that a high loss ratio does not indicate by itself that the agency is doing anything wrong. As noted above, agency mix, scale, and change in business alignment are just some of the factors that can contribute. That being said, we believe that an agency does have some control over its loss ratio, even though there are times when that control may be limited. We want to preserve the relationship and we are willing to help when a loss ratio question arises. We have seen certain agency behaviors contribute to loss ratio concerns. When this occurs, we’ve found most agencies want to remedy the issue. We have seen successful corrective measures include the following:
- Analyze the agency book of business
- Identify problem segments and consider limiting that exposure
- Review current agency underwriting practices
- Begin underwriting certain risks more cautiously
At Kemper Specialty California, we prefer to manage agency loss ratio metrics with consistent product management and collaboration. Our desire to maintain strong relationships continues to guide our efforts. We are happy to offer resources that help agencies better manage their book and serve their customers.
What we can conclude from all these perspectives is that high loss ratio can be a topic with many factors at play, each deserving reasoned consideration.
If you are an agency with a developing pattern of high loss ratios, we suggest you reach out to your carriers and discuss a plan that best fits your agency’s needs. Seek proactive, workable solutions that lead to a win for your agency. We also encourage carriers to consider a collaborative approach when loss ratios are elevated; a successful formula that has proven results and strengthens agency relationships for Kemper Specialty California.
About Kemper Specialty California
Kemper Specialty California is a member of the Kemper family of companies, one of the nation’s leading insurers.
The Kemper family of companies is one of the nation’s leading insurers. With $8 billion in assets, Kemper is improving the world of insurance by offering personalized solutions for individuals, families and businesses. Kemper’s businesses collectively:
- Offer insurance for home, auto, life, health and valuables
- Service six million policies
- Are represented by more than 20,000 independent agents and brokers
- Employ 6,000 associates dedicated to providing exceptional service
- Are licensed to sell insurance in 50 states and the District of Columbia
Learn more about Kemper.