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  • Writer's pictureChris Burand

When a Carrier Increases Rates by 22%

What does it really mean when a carrier says they need to increase rates by so much? Let me translate: It means they screwed up.

They either need better actuaries or, assuming the actuaries made the appropriate rate recommendations in the preceding three years, their management team needs to listen to the actuaries. The fact is someone screwed up. It might be worth asking who got fired when the carrier announces these kinds of rate increases.

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Why would a carrier need a 22% rate increase? For losses? Don't be so sure of this regardless of what the carrier states. Look up or have them give you the loss ratio for the applicable line of business for your state, even your metropolitan area. I recently provided an analysis to a client of their carrier's loss ratio, and it was 42% over the last ten years (with 36% last year). Where in the world does a 20%+ rate increase come from? A 20% rate increase indicates a loss ratio of 75% or higher.

An alternative possibility is that TIVs are a problem, and the carrier is trying to get rate to cover their TIV exposure. But the correct approach is to insure the property correctly at the existing rates. If this is the situation, then again, the carrier is incompetent because instead of calculating and insuring property correctly, they are cutting corners.

A result of cutting corners on TIVs is that insureds with the proper coverage will incur a rate increase and so will the insured with inadequate coverage. Both insureds will be screwed. The former will over-pay and the latter still won't have adequate coverage! The result is that the best insureds will shop and the ones with inadequate options will stay. And 22% is not enough to cover poor risks. An adverse selection toilet whirlpool is created.

But, most often, the real story in many of these situations is that the carrier is out of operational surplus, and they need accounts to leave.

Adequate surplus is always a ratio between premium and dollars reserved to pay claims (surplus) in extremely over-simplistic terms. When a carrier runs out of surplus but prior to insolvency, they can either find new sources of capital (loans, selling new stock, buying more reinsurance, or inflating the value of their assets--but that's not legal so I'm sure no one ever does this). Or, as quite a few carriers are discovering, new capital is too expensive so they MUST layoff premium. If they are really desperate, they will do whatever it takes, even eliminating high quality accounts, extremely profitable books, and if the situation is a little less worse, they will raise rates enough to drive business away.

It's a short-term fix, which explains the level of desperation, because the business that sticks won't be as profitable, even with a 22% rate increase unless they can somehow deploy a 22% rate increase without any material retention reductions (by account, not premium).

Additionally, the tail will usually hit. Agents should therefore expect a reduction in retention, more work, and reduced profit sharing.

Not all carriers have these problems. And some carriers that have these problems deny they have these problems. Some who deny do so because they really cannot publicly admit to their situation for fear of the equivalent of a bank run. Others though seem to be run by management teams that truly do not understand the situation. I have seen them swear they don't have a surplus issue the week prior to borrowing millions with fairly steep interest rates because they had no other option other than eliminating profitable books, which they started doing a few months later because it turned out they couldn't borrow enough.

Agents have it tough in these situations. The best solution is to avoid these carriers from the beginning or at least minimize the amount of business placed with them in good times. I'm pretty good at identifying such carriers years in advance so this is not a crap shoot. But as many people have pointed out, most agents cannot sell anything but price so what's the point of aligning mostly with the strongest carriers? Valid point and therefore, I imagine these agencies find themselves in a tough spot today. So what now?

Move what you can. Get educated so you can better deal with these carriers and not exacerbate the problem by trying to convince them they're making a mistake. That's a pretty much pointless exercise in futility. Work to find the best accounts a better home on a proactive basis. Work to make the marginal accounts better by being sure you are providing correct information such as property dimensions, ITVs, usage (auto), and so forth. And accept you only have so much time and it is best spent on the better accounts. Let the other accounts, accounts that might otherwise stay, leave.

Then, most importantly, if you own the agency or are in top management, be a leader. No reason exists that going forward, producers and CSRs should focus on price. Doing so is an abdication of leadership. Many carriers definitely have their leadership issues, but so do many agencies and brokers. Elevate your agency or brokerage above the rest by offering your clients a professional level of service.


NOTE: The information provided herein 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.

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.

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