ARE YOU PRESENTING YOUR RISKS CORRECTLY?

Rough Notes, Oct 2004 by Gaskamp, Mark

Highlighting claim experience in today's insurance marketplace

If you were trying to sell your house, you would want it to look presentable at all times. Plus, you'd want to note any upgrades or repairs that had recently been completed. You'd want real estate agents to be eager to show your home. If it shows well and has a good chance of selling, agents will focus on your house. Likewise, potential buyers will take notice as well if the house appears to be well maintained and clean. The homes that have the most appealing presentation command the most attention.

Similarly, underwriters are like real estate agents in that they encounter myriad potential revenueproducing opportunities every day and must decide which are best the possibilities from the appearance and information prepared by the "sellers" (the risk manager and the agent). Are the risk managers and their agents who are sending these submissions presenting them in the most favorable light? Or are carrier loss runs provided without any explanation, left for open interpretation by underwriters? Are problems concerning the size or type of risk explained to open potential insurance markets and favorable pricing for these risks?

Unfortunately, many risk managers and agencies do not devote adequate time and resources to the presentation process and, in turn, sell themselves short in the marketplace. Nowhere is this more important than in the evaluation and communication of claims data and accidents. This article offers opportunities to improve the claims data analysis component of the risk submission process to make sure your risk gets the attention it deserves, much like a wellmaintained home with complete information will get the attention of real estate agents and buyers.

Profit is king

The first opportunity is to convey whether the risk has been "profitable" and why or why not. Given the limited time and resources available in today's insurance marketplace, many underwriters and insurance carriers fall victim to simply reviewing the premium and losses for the past several years as the initial cut to determine whether a risk is allowed to continue the underwriting process. Risks deemed "unprofitable" are tossed aside without a second look. Despite the potential shortfalls and inaccuracy of this process, it is reality, and those who do not adequately analyze and explain claim information will inherently miss out on opportunities in the marketplace.

Overcoming this hurdle is not as difficult as it sounds. A simple and concise analysis of premium and loss information should be the initial step. Since this is of vital importance to many carriers, the information should be right up front, for all to see, not embedded somewhere in the confines of the submission. Even if the results are not as favorable as expected, presenting the information openly will remove doubt that there is something to hide.

That said, any outliers or unfavorable results should be thoroughly explained. Even risks with limited claim activity can benefit from a sound premium and loss analysis, which includes an explanation of claim causes and steps taken to prevent future occurrences. Unfortunately, for many risks it has become increasingly difficult to find a single market to offer the most competitive terms for all lines of coverage. Specialization of carriers and adverse results for specific lines of business have restricted the marketplace; therefore, it is vital that any premium and loss analysis must evaluate the profitability of each line of business.

Taking the time to detail premium and loss information for each line of coverage vs. bundling "the package" policy will help ensure that potential monoline markets are tapped and avoid losing markets that may have an interest in only certain lines of coverage. An example is a food distributor who no longer needs transit coverage for the products being distributed. It had numerous claims in prior years showing up in the loss runs. If these losses are included with the overall property loss experience, the results will be viewed as unfavorable. By taking time to break out the transit premium and losses for the past several years, a potential property market may show interest that otherwise would have taken a pass.

Accident trends

We should not look at only the individual year's loss ratio and explain any problems, but a second opportunity to improve the presentation is to look at the overall trend of claims to highlight reductions in losses and explain adverse trends. This should include an evaluation of both frequency trends and severity trends for the risk.

Increases in claim activity may be expected under certain circumstances, but without a simple explanation an underwriter may well come to a false conclusion. For instance, an expanding operation would inherently have an increase in claims, which may not be reflected purely by the premium basis. Organizations revamping their claim reporting and accident investigation processes may have a short-term increase in claim activity due to improved reporting procedures. This may actually prove to be a more favorable risk, yet without adequate information it would appear to be an unfavorable trend. Without appropriate enlightenment as to the actual basis for the experience, the determination of why events have occurred and what can be expected in the future will be left entirely to the underwriter's predisposed bias or imagination.