APPLYING RISK MANAGEMENT PRINCIPLES TO SMALLER ACCOUNTS
Three little words that can lead to big trouble: “Renew as is”
In my capacity as a commercial property/casualty insurance consultant, continuing education instructor and expert witness, I see some seriously neglected commercial insurance programs. It comes as no surprise that the less income an account generates, the more neglected it tends to be. So, smaller accounts can generate some of the biggest errors and omissions claims against insurance agents.
Smaller accounts covered by businessowners policies (BOPs) are written for multiple-year periods, direct-billed by the insurer, renewed and sent to the insured often with no contact up to 90 days in advance of the expiration date, not audited (or self-audited), and often serviced and processed out of insurance company service centers. It stands to reason that for a small business owner and even some larger ones, an uncovered claim could mean the end of the business. The business owner’s only hope for recovery may be an E&O suit against the agent and agency that wrote the policy.
Following are the characteristics that, either individually or in any combination, neglected accounts seem to share:
* They usually generate less than $1,000 in commission income.
* They are serviced out of insurance company service/processing centers, which don’t have a consistent way of communicating with insureds at renewal or anniversary time.
* They are serviced by agency personnel who don’t have a consistent way of communicating with insureds at renewal or anniversary time.
* They started as small entrepreneurial ventures, grew rapidly in a short period of time (often within three years), and the agent (including his or her staff) who originally wrote the policy failed to check in periodically to see if the venture was growing and what changes in coverage and/or limits needed to be made.
* They are owned by successful entrepreneurs who haven’t gotten used to the idea that they are no longer “mom and pop” operations and are totally clueless as to the needs and exposures of growing businesses, especially the cost of insuring these exposures. I can’t tell you the number of times I have seen insureds suffer from “sticker shock” when presented with an insurance proposal that accurately reflected the current needs of their businesses.
* They are written on BOPs that have been renewed and direct-billed over successive policy periods with no contact from the agent or the insurer.
* They have far outgrown the types of policies and programs they were once eligible for, and the agent never made the appropriate updates and/or offered them new or increased coverages relative to their growth and present size.
* They have far outgrown the resources and capabilities of the agency that originally wrote their insurance. Some accounts that have experienced rapid growth may be in need of insurance and risk management expertise in their particular industry or class of business or may require international capabilities and/or specialized loss control services that are not available from their current agent. As difficult as it may be to refer a client to an agency better equipped to handle the client’s current needs, failing to do so may result in an E&O claim because of your inability to provide the resources and expertise the client needs. It is also a disservice to your staff, which may not have the knowledge or experience to respond to a client’s specific needs.
* They are inconsistent in terms of minimum coverages and limits with other accounts of similar size and exposures.
* They are assigned to the least experienced personnel in the agency.
* They are serviced by the same customer service representatives who also handle larger and more complex accounts. When work piles up, the larger accounts take precedence over the ones that generate less income.
* They have become “house accounts” that have no one producer or service person with overall accountability assigned to them.
In over 30 years of working with commercial property/casualty accounts of all types and sizes, I have yet to encounter an agency or broker that hasn’t grappled with how to write and service smaller and/or mass-produced accounts efficiently, profitably and with a minimum of E&O claims. Following are some recommendations I have compiled from working with a number of independent agencies that have found solutions for addressing the issues enumerated above:
1. Establish a separate department or unit in the agency to handle accounts under a certain size (e.g., those that generate under $1,000 in commission) and/or that are written on BOPs and other slot-ratedtype policies. Larger accounts written on “mass-produced” policies (e.g., franchises and other businesses eligible for such policies) can also be included in this unit because these policies are handled in the same way.
2. When establishing a separate department to handle the types of accounts described above, staff it with experienced people who see being in this department as an opportunity to become specialized or develop expertise in a particular area. This department and its staff should be viewed and treated no differently than any other department or team in the agency. Members of this department should be given the same opportunities for advancement, increases in compensation and self-improvement as anyone else in the agency. It is critical that people belonging to, hired for or expressing an interest in joining this department are not viewed or treated as “second-class citizens.” Giving the department a name like “Emerging Accounts Division” or “Emerging Enterprises Group” can certainly help along these lines.
3. If establishing a separate department to handle the types of accounts described above is not possible, designate specific customer service representatives to handle this type of business. CSRs should not be expected to handle and prioritize all types and sizes of accounts. Do not assign these accounts to your least experienced people. These accounts often require as much knowledge and expertise as your larger ones.
In addition, it is unprofitable to have customer service representatives or account executives handling your largest accounts and also handling your smallest ones. When work piles up, they will inevitably give priority to the accounts that generate more income.
4. Pay producers some commission to service renewals regardless of account size, or pay support staff a percentage of commission or a bonus on all new coverages sold or on “significant” increases in limits at renewal.
5. For “house accounts” (accounts with no assigned producers), determine the circumstances under which a face-to-face visit with an insured is warranted (e.g., the last time the insured was visited, rapidity of growth, etc.), who should make the visit (e.g., a producer, customer service representative, etc.), and how that individual should be compensated for any new/additional business written. These accounts are often wonderful opportunities to mentor new producers and start them off with a small book of business.
6. Develop a standard renewal form letter to be sent to all insureds who will not be visited in person at renewal time. The letter should identify the coverages and limits currently carried and some important coverages that are not. Invite your insureds to call, e-mail, visit or return the letter to discuss new coverages or increases in existing coverages.
These letters should be sent far enough in advance of an automatic renewal so that the changes can be reflected in the renewal billing and should contain a statement such as: “If we do not hear from you to the contrary by [date], we will assume that you do not wish to make any changes to your insurance program at this time.” In my experience, properly written standard renewal letters can generate hundreds of phone calls and thousands of dollars in additional revenue. Non-responses after the designated period of time should be documented in your automation system.
7. Develop an “agency standard” of minimum coverages and limits below which you will not offer protection (e.g., minimum general liability and automobile liability limits of $1 million, non-owned and hired automobile liability, hired automobile physical damage, employee benefits liability, and $10,000 of employee dishonesty and depositors forgery). Once an agency standard of minimum coverages and limits is established, it should be communicated throughout the agency to anyone who services existing business or writes new business.
In insurance litigation, plaintiffs and defense attorneys alike are always looking for the standards of care by which similar accounts are handled. A lack of consistency in the way an agency handles accounts can be very incriminating. And remember, every new person you hire brings into your agency a new way (i.e., his or her old way) of doing things.
A policy renewed “as is” can be an E&O claim waiting to happen. In addition to the recommendations above, carriers that write insurance agents’ errors and omissions coverage have many recommendations of their own for handling “mass-produced” or slot-rated business. They often offer premium discounts to agencies that send a predetermined number of staff members to approved courses on mitigating E&O exposures. Educational offerings such as the James K. Ruble Small Commercial Accounts Seminar may also be extremely helpful in developing strategies for handling these types of accounts.
If you really want to go the extra mile, create a task force consisting of your most experienced CSRs to write a technical procedures manual for all new and existing agency personnel to follow. It might come in very handy on the witness stand.
By Danny Eitingon, Ph.D., CIC, CPCU, | ARM, AU, AAI, ACSR, ACE, ACD
Danny Eitingon, Ph.D., has over 30 years of commercial property / casualty insurance marketing and account servicing experience with independent agencies and a global broker. He has taught CPCU and IIA courses for over 15 years and has done extensive inhouse teaching and training. He is currently pursuing the Certified Risk Manager (CRM) designation. For more information on the CRM program, contact The National Alliance for Insurance Education & Research at (800) 633-2165 or go to www.TheNationalAlliance.com.
Copyright Rough Notes Co., Inc. Sep 2005
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