What a Difference 35 Years Make (or Not)
As I write this article, I have been working in the insurance industry for 35 years. Throughout those many years I have reviewed and analyzed carrier production documents, either when I worked for a carrier or when I review/analyze/reconcile them for my agency clients.
Carrier production documents are the monthly and annual, scorecards of how well an agency is performing for a particular carrier. These documents are supposed to be easily understood by an agency's staff so that when the carrier's marketing representative or underwriter calls or visits, both sides can knowledgably discuss the agency's results. If the results are poor, the carrier representative can point to issues within the production document whether it be loss ratios or growth or retention or an issue with a specific line of business. If the agency is excelling, the carrier representative can point to the growth or loss ratio or volume or whatever aspects of the business at which the agency excels and objectively congratulate the agency on its success.
Yet in 35 years, and especially over the last few years, the quality of these documents has deteriorated significantly. How is it possible that the quality of key data has deteriorated over the last 35 years when 35 years ago carriers were using abacuses to calculate total premium. Now, in the data age, in the age of supposedly extensively updated carrier IT systems, how is it possible that about 20% of the carriers' production documents I have reviewed over the past twelve months (and these are carriers that represent around 80% of all independent agency premiums) do not even show earned premium?
Furthermore, these documents do not show incurred losses or the numbers do not reconcile to contingency statements. Written premium is nice, but earned premium determines profits. Some questions have arisen in my mind because when carrier representatives are asked by agencies for this information, most of the representatives have no clue how to provide the data points and they do not seem to have a clue as to why these data points are important. That was not meant as a snarky comment, just a factual one. If the carrier representatives are measured by production, growth, loss ratios, etc., they should be paying attention to these numbers also.
Several questions arose in my mind relative to why these data points, and many other data points, are not shown on such important documents.
It could be incompetence. I am positive that some carriers' IT systems combined with the people designing the reports do not have a clue as to the value of these reports and that is why the data does not exist. Incompetence does not usually result in success.
Another reason for this neglect is pure ignorance on the part of the programmers who understand absolutely nothing about insurance results but are designing software to collect and analyze this information. I have seen plenty of examples of this lack of knowledge at work because no one is reviewing the programmers' work product. This lack of oversight is a problem. I have seen material distortions of loss ratios multiple times as a direct result of a programmer's ignorance and management's failure to review their work.
In other cases, it may be that carriers are trying to eliminate this data because of the rating systems they utilize. If a carrier has invested millions and millions of dollars on predictive modeling systems, then earned premium and incurred losses are supposed to be correlated to the quality of the predictive modeling system and not necessarily correlated to the quality of an agency's efforts. I can see this as a reason not to share this data.
However, management has forgotten to tell their representatives because their representatives still talk about loss ratios as contingency contracts are still built around loss ratios. This disconnect is a serious problem. I know one particular carrier where this is the case and the agency-carrier relationships, which historically were phenomenal, have deteriorated to the point that the carrier is just another mouth to feed now.
With regard to a few carriers though, I wonder if the elimination of these key data points is more nefarious. Without this data, verifying the accuracy of contingencies, loss ratios, and even sometimes, commissions is next to impossible. Sometimes when my clients request this data, the carrier representative responds, "Why do you need that? No one else ever requests that data." At the very least, the response should be, "I trust you, but I need to verify the data because everyone makes mistakes sometimes." However, there are a few cases, to put it bluntly, where I would not trust some carriers at all. The magic involved in changing these numbers could put the magician David Copperfield to shame.
A new wrinkle in these reports by more forward-thinking carriers has appeared in the last two years. The carriers are showing metrics around the acquisition cost of new clients. This metric is important because every carrier I know that is responsibly managed is focused on their expenses, especially the acquisition cost of new clients. This concern is why forward-thinking carriers are showing hit ratios, the carrier's position within the agency, submission quality and the like. A few carriers now have contingency contracts that consider these factors in their bonus program.
The inclusion of these factors in bonus programs makes sense if that carrier has an excellent predictive modeling program. The loss ratio is now fixed, the variable is new business acquisition cost, and therefore the bonus needs to be built around the variable cost. The carriers showing this data in their production reports may therefore have serious competitive advantages and this is a visible reflection of that advantage. Carriers that cannot provide earned premium figures probably have not even begun to think about how to measure hit ratios, touch points or submission quality much less how to help their agents improve their results.
After 35 years, how can the one common scorecard between carriers and agencies not have been improved upon, much less how could it deteriorate so materially if carriers had their act together? For those carriers with great production reports, especially those with all the added parameters, might this be an indication of a material competitive advantage? In some cases, based upon my analysis of carrier financials, some correlation exists between the two. This correlation makes sense as well managed companies, in all industries, manage by the numbers and if no one knows what the numbers are, how well can anyone manage the company?
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None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.