October 2009
Volume 14, Number 7

Why follow good procedures?

I recently had a discussion with an agency owner regarding whether following good procedures made any sense. He wanted to stop following certain E&O preventive procedures in order to increase sales and make life easier on his producers. From an E&O perspective, the procedures we discussed were clearly black and white issues. The procedures clearly decreased E&O exposures.

So academically, the answer was easy. But in the real world, the answer was not so clear. As an example, I once visited an agency with some of the worst procedures I have ever seen and even after a large natural disaster, no one sued them. Their customers absolutely did not have the right coverages and the agency clearly messed up in my opinion. Yet they did not get sued.

This brings to light the real world decisions agency owners and managers must make regarding procedures. They see the same results. The lazy agency that does not follow procedures doesn't get sued, while the agency that does everything correct does. As the saying goes, "I'd rather be lucky than good."

So it really comes down to managing risk. Is there a way to measure the risk versus the reward of good procedures? The answer depends on the complexity of the procedure. For many procedural changes the risk and reward are easily measured. For example, a simple disclaimer on proposals or emails has a price of $0 so why not do it?

A more complex change such as mandated coverage checklists has a price. Time is definitely involved. No doubt it increases cost some. The benefits are very significant though. Sales increase and E&O exposures decrease significantly. The last odds I saw showed that one in twelve agencies were sued each year. I have seen reports that the use of a coverage checklist reduces suits by 50%. So the use of a coverage checklist improves the odds to one in twenty-four. Moreover, the odds are that sales increase more than enough to cover the cost of using coverage checklists (at least that is what I have experienced with my clients that have implemented them completely). So the value gained is more than enough to cover the cost.

More complicated issues, such as record retention, are more difficult. Truly addressing record retention properly will likely cost an agency several thousand dollars and considerable time. The odds of improper record retention resulting in a suit may be small. If one in twelve agencies are sued, and assuming the same ones are not sued over and over, then out of one hundred agencies, eight will be sued in any one year. So at the next convention, look around the room at the grand opening and you will see eight agencies with ongoing suits for every one hundred agencies.

I do not have access to the statistics showing E&O suit by type, but I imagine maybe 25% or less of suits involve record retention. So for every one hundred agencies, maybe 2 agencies out of 100 will have suits involving record retention at any time. If only two percent of agencies per year are sued for E&O issues involving record retention, is it worthwhile to take proper steps to minimize such claims? Extend this over ten years and this mean 20% of agencies will incur such a claim. Is it worth the money?

Some agencies are willing to take chances of being sued, provided they believe they will win. This is more difficult because in my experience, many of the claims won by agencies are ridiculous suits. The plaintiff attorneys should lose their license for even bringing the suit, so good procedures may or may not positively impact these situations. But let's assume all are legitimate suits. Agents win 80% of E&O suits based on reports I have seen. So all else being equal, only 4 agencies out of every 20 sued will lose suits related to record retention over the next ten years (of course, they will still have to spend a considerable amount to win the suits). Is the investment of several thousand dollars to mitigate this risk worth it?

This depends on your risk appetite of course. Some issues seem to carry such little risk, it might be worth the risk relative to the cost. But most E&O preventative measures cost very little. In fact, most E&O preventative measures increase productivity, often result in increased sales, and improve the professional appearance of the agency, all for a price far less than the return. Yet so often, agency owners and producers balk at the price of the change.

The real issues they are resisting are accountability and responsibility. It has nothing to do with the financial expense. Good E&O procedures result in agency owners and producers being held accountable for doing their jobs well. They hold the producers and agency owners responsible and accountable for treating staff and often carriers well and with respect. Good procedures hold producers accountable for making sales. This is the price they are paying and it is a dear price to them. Often it is a price they will only pay when no other alternative exists.

So when your producers desire to not be accountable, why not let them? Make them 100% responsible for all deductibles. Plus, they should pay for all the time the agency spends to defend themselves. For instance, if fifteen hours of attorney meetings and depositions are required, then multiply fifteen by the average cost per hour per person. This may run between $30 and $450 per hour. Then, if your E&O premium increases as a result, they can pay that cost too. You may want to add in another 10% just for the aggravation. Sometimes the frustration of getting people to follow procedures is more than can be bared. If they want to take the chance, let them--for a price.

Everything has a price and sometimes the insurance industry forgets this. E&O answers are all black and white and underwriters' answers are all yes or no. Insurance is about pricing risk and moving risk to other entities. Maybe it's time to put a price on risk in our own agencies and transfer some of that risk to the people creating the exposures.

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Reality, Fantasy & Self-Discipline

Two years ago I gave a speech to a select group of agents that were facing a particularly challenging common situation involving one very unstable carrier. I advised them they had little future with that carrier because of its dire financial situation. One of the audience members told me my recommendations were pointless because to act on my suggestions required intense self-discipline. The person suggested that his fellow agents should just accept their miserable fate and not try to change it.

I have been thinking about that person's comments for two years because he made a powerful conclusion. At first I was frustrated that anyone would just accept a miserable fate because it required no self-discipline. After some time though I began understanding how valuable the agent's message really was.

Virtually all consumer sales are made on the basis that a person should not need any self-discipline. How many weight loss commercials have you seen that even hinted at the need for self-discipline? How many get rich commercials have you seen that required any self-discipline? How many mortgage commercials use to air that suggested borrowers needed self-discipline, an adequate income, or a down payment? Advertisers know that self-discipline does not sell.

Even our financial regulators over the last twenty years tried to erase any need for self-discipline by flooding the economy with money. When a person or society has an excess of anything, self-discipline is unnecessary. By flooding the economy with excess money, economic self-discipline was diminished to zero.

Humans are generally not designed for self-discipline. If we were, self-discipline would not take so much effort! Scientists have shown through a variety of studies and brain scan analyses that most humans' brains are geared for immediate satisfaction, not the distant rewards generated by self-discipline. Interestingly, they have also discovered that most long-term wealth is created by individuals who do have the self-discipline to work for rewards that only come with time.

Self-discipline is not a natural behavior for many people, so I prefer to look at it from a different, more practical angle. Instead of looking at self-discipline as limiting what I can do, I look at it as simply refusing to believe in fantasies. For example, I refuse to believe in the fantasy that I can lose weight without eating correctly and exercising. I refuse to believe in the fantasy I can build long-term wealth without working hard and making smart decisions. I refuse to believe the fantasy that I can get a beautiful girlfriend just by drinking a certain beer. I refuse to believe the fantasy that sales cure all ills and therefore, good management is unnecessary.

Once a commitment is made to not believe in fantasies, self-discipline really is not necessary because the only alternative is to work hard toward one's goals. By not believing in fantasies, indecision is eliminated and life gets much easier. Fantasies are for romance novels and movies, entertainment to take us temporarily away from our daily struggles. Confusing reality and entertainment is a major mistake. This is not to say a person should not shoot for dreams as long as those dreams are not fantasies.

Unfortunately, this view of self-discipline does not help those who lack the desire to change. Little can be done to help a person who simply accepts a poor fate without desiring to change it. They are the epitome of the saying, "You can lead a horse to water, but you can't make him drink."

So the next time you find yourself lacking self-discipline, ask yourself, "What fantasy am I believing in?" Spell it out. Then make a decision as to whether reality or fantasy is the best solution.

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A Producer's Role

"These days, a producer's role is as much about caring, counseling and advising as it is about selling."

This was the headline of a recent article by a sales consultant. It was unfortunately taken out of context because the rest of the article made sense. The author has my sympathy that the editors chose that sentence for the headline because regardless of the rest of the article's contents, the headline will stick with readers, especially producers and agency owners.

That headline is exactly the message many sales people want to hear because it's the perfect cover for lousy sales. They don't need to sell if they are "caring and counseling" and it fits right into many agencies' cultures. In fact, when I ask agents what their agency does best, the almost universal answer is, "We take great care of our clients." So when an expert says this is what producers should be doing, everyone latches onto it like a tick to dog.

Agency owners and sales managers like this message because they can rationalize their producers' failure to grow their books. It is simply the price paid for "caring and counseling" clients. They see caring and counseling as the white hat role and selling as the black hat role. If a producer in an insurance agency sees selling as a black hat job, they should find another position if they want to be successful. If the agency owner wants to grow their agency, they should not enable their producers to hide behind the caring and counseling facade. If they simply want a reputation for caring and counseling while their business stagnates, then they should indeed emphasize caring and counseling above all else.

Again, this was not the author's total point, so I am not pointing a finger at her. The issue is the headline provides the fodder necessary for many managers and producers to not take responsibility for making sales. To care and counsel is part and parcel with the job of selling. A salesperson can't care and counsel without clients, so selling must be primary and "caring and counseling" must be secondary. A good professional producer always cares and counsels.

I am not suggesting hard nose sales like a fly-by-night used car salesman. Some of the best producers I have ever met use sales approaches that are based on caring and counseling. When the sale closes, everyone looks kind of surprised because no one ever heard the producer even ask for the sale. But let's make no bones about it, they never lose sight of the sale. These producers are among the fortunate few who have found a method that works extremely well for their personality and their customers. Their method though only works because they close the deal. The sale is the focus. If the goal is to increase sales, simply caring and counseling is inadequate.

Another way to look at this is that if most producers who focus on caring and counseling really cared and counseled their clients, they would focus even more on selling! The very best way to show that you care about your clients and to counsel them is to use a coverage checklist. Yet, 90%+ of agencies do not using coverage checklists regularly. If "caring and counseling" were their true emphasis, they would use coverage checklists to educate clients on their exposures and to determine if their clients had adequate coverage. As an insured recently told his agent, "When you used a coverage checklist, it was the first time I ever thought an insurance agent actually cared about me and my business!"

If the producer actually wanted to care and counsel, they would use coverage checklists religiously to identify coverage needs and counsel their clients to find solutions. The idea that most producers discuss all the coverages clients need without using a coverage checklist is malarkey. In auditing thousands of policies as an E&O auditor and company underwriter and in doing due diligence for agency valuations and acquisitions on hundreds of agencies, clearly few producers have offered clients all the coverages they need. This is evident by the plethora of commercial accounts that generate less than $500 commission. It is evident in Utica Mutual's findings that 50% of all E&O claims from Hurricane Katrina would have been avoided had coverage checklists been used. It is evident in the low number of EPLI policies sold. It is evident when agencies finally mandate coverage checklists be used and the result is their producers sell more coverages to their clients!

The producers who claim to focus on caring and counseling the most are the least likely to use coverage checklists. Why is this? Because they only want to use "caring and counseling" as a cover for not selling. They do not use coverage checklists and therefore, do not really provide real caring and counseling because their own insecurities get in the way.

You can care and counsel and go broke, but feel good doing so knowing you're a "good guy." Or you can focus on selling, caring, counseling and using coverage checklists. The result? Everyone wins.

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NOTE:  The information provided in this newsletter is intended for educational and informational purposes only and it represents only the views of the authors.  It is not a recommendation that a particular course of action be followed.  Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

Burand & Associates, LLC is an advocate of agencies which constructively manage and improve their contingency contracts by learning how to negotiate and use their contingency contracts more effectively.  We maintain that agents can achieve considerably better results without ever taking actions that are detrimental or disadvantageous to the insureds.  We have never and would not ever recommend an agent or agency implement a policy or otherwise advocate increasing its contingency income ahead of the insureds' interests.

A complete understanding of the subjects covered in this newsletter may require broader and additional knowledge beyond the information presented.  None of the materials in this newsletter should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this newsletter.  Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations. 

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