The Competitive Advantage: Opportunity Knocks

When I first started as an underwriter a few decades ago, I was truly amazed at the coverage knowledge so many of the older underwriters had. The most remarkable underwriters knew their stuff. They were great resources for the newbies and they were wonderfully reliable for their agencies.

Today, I grow ever more concerned that underwriting has been dummied down to a point that its future existence is questionable, like an endangered species. Part of this is a result of many carriers now believing they have permanently extinguished poor loss ratios. They have made this conclusion based on five straight years of phenomenal profits. Most humans take credit for good luck, no matter how obvious their luck is. And the carriers’ great profits over the past few years is irrefutably due, at least partially, to luck rather than skill (no matter what the carriers may wish to believe) for a number of reasons.

First, a loss ratio is a ratio. It equals losses divided by premiums. It really doesn’t matter what losses or premiums are except what they are relative to one another. Therefore, great loss ratios are never permanent because eventually, losses will rise relative to premiums or premiums will decrease substantially relative to losses.

Losses and premiums are always in flux because of competition in the marketplace. The recent and rare combination of falling premiums and falling losses is due to many reasons, including changing demographics that are extremely conducive to good loss ratios and the fact that premiums increased far more than losses in the early 2000s.

Second, not all the profits being reported are real. Some carriers are undoubtedly cheating on their reserving or if not cheating, will be proven to have been irrationally optimistic. More troubling, I get the impression some insurance company executives actually believe the results being reported are real.

So when companies make gobs of money by luck and questionable reserving, why spend money on underwriting and knowledge?

At the same time, agencies are so squeezed today they cannot afford to spend extra money on underwriting and coverage knowledge. In the past, agencies could rely on company underwriters. Then some companies began relying on agents and wizened CSRs. What is left? Do we have a dumb and dumber underwriting situation on our hands? If so, then a huge opportunity is opening up for those with underwriting and coverage knowledge.

Take the unfortunately commoditized homeowners policy. I say unfortunately because no two homeowners have the same coverage needs. Using non-state specific ISO forms and no company specific forms, there are approximately 130 forms pertinent to homeowners. Assuming 30 of these forms can’t be used simultaneously, that still leaves a trillion different homeowners coverage combinations. That means there is one combination for every homeowner, and not only every homeowner in the United States, but every person in the world! How often though do agents and companies even ask enough questions to customize coverage precisely? We can give you a custom suit for basically the same price as a Walmart suit and we never even mention it.

Coverage Review

Next consider all those renew-as-is policies. I know how labor intensive it is to ask insureds if anything changed so that the agency can adjust their coverages appropriately. But what good is an agent at renewal if this does not happen? Seriously, why does anyone need an agent if this question is not asked? Do you really think your carriers have not identified this weakness and are not making plans to take advantage of agents? What do you think the customer service centers are all about?

Business owner policies (BOP) are another great example. No two BOPs are the same, but a lot of people in this industry treat them the same. From an errors and omissions (E&O) perspective, when an agent moves a client from one company’s BOP to another company’s BOP and coverage is lost, but the client is not advised coverage is lost, an E&O error has occurred. All the plaintiff’s attorney is waiting on is for the insured to incur a loss that would have been covered under the prior policy.

As another example, customers in many states cannot purchase uninsured motorists (UM) under their umbrella and the amount of UM coverage available under the regular auto policy is effectively limited. So while a person may purchase an umbrella with, say, $300,000 underlying thinking they are safe, they have a huge gap because they only have $300,000 of UM coverage. UM claims are often huge and $300,000 is arguably inadequate. There is not much one can do in those states. But this is not true in all states. If you are in a state where UM can be covered under the umbrella, are you offering it?

Business income (BI) is another great example. Many producers avoid discussing BI coverage in any detail because they do not know the coverage well enough or cannot articulate this coverage adequately to insureds. So they just avoid it. Some of the biggest claims I have seen involved BI in one form or another. If your clients are paying you to advise them on what coverages they need, how can one avoid discussing BI in detail? If your customers are not paying you to advise them on what coverages they need, exactly what are they paying for?

Most think much more coverage exists under the BOP or general liability than actually exists. As Chris Boggs, director of education, Insurance Journal Academy of Insurance, so aptly stated, the key is to approach a risk from their exposures rather than from the policy. In other words, what is a client’s biggest risk from a frequency and severity perspective? Then build the coverages from there.

When You Do Not Know

Admitting that you do not know is a huge competitive advantage. This gives you time to research the necessary coverages rather than trying to fake knowledge resulting in the client not getting the coverage they need. Knowledge is power. Knowledge is a competitive advantage. Coverage and underwriting knowledge are far more powerful competitive advantages today than 20 years ago because both are so much rarer. To stand out 20-plus years ago, one had to know minutia. That is not true today. Granted, in today’s market, right now price is by far the most important factor. But that is even more reason to gain knowledge. If you are looking for a true competitive advantage, knowing your coverages and underwriting will provide dividends for decades to come.