The current hard insurance market has created a return to the days of doubt and concern for obtaining quotes from insurance carriers. This is a condition not seen since the early 1990’s. For many, it has even brought consideration for using the dreaded “assigned risk” pool again. So how does a company determine the options available with this market? The first step is to determine your insurance desirability; that is, how attractive you are to the insurance carriers.
Determining your insurance desirability involves many factors. When an underwriter gets your submission, he is going to focus on certain points to determine if your account is favorable to even consider a quote, much less give a competitive price. Therefore, you must package your submission in such a way that it provides the underwriter with the information he needs quickly, conveniently and completely. Otherwise, he will just decline the submission and send you elsewhere (remember it is now their market).
The five primary types of information an underwriter considers are Exposure Base, Underwriting History, Risk Management Program, Insurance Program Type and Company Financial Position. Failing to include any of these pieces of information jeopardizes the opportunity for receiving the quote. Since your first goal must be to get a quote, it is critical that each of these components is present. Once you have determined that they are there, you will want to work on the attractiveness of each section. Let us look at each of these areas in detail.
Exposure Base
Required documentation: projected payroll code by state
The “Exposure Base” is used to determine the type of business on which your company focuses its operations. Are you clerical, light industrial, industrial, technical, medical or a combination thereof? Many staffing company owners assume that clerical has the least exposure and will be the easiest to insure. That is not necessarily the case. Although clerical exposures tend to have fewer incidents, often they can be very expensive claims (carpal tunnel for example). When you consider that clerical premium rates are among the lowest, not much premium exists for funding losses that may occur. Therefore, it only takes one or two claims to make your account unprofitable for the carrier. The most attractive mix of business for carriers is a combination of clerical and industrial exposures. This provides them with the comfort of knowing adequate loss funds exist to pay claims.
Changing your exposure (from light industrial to clerical for example) is not something that is easy to adjust in a short period of time. You only have limited control over making your company attractive in this component. The best approach is to provide complete and accurate payroll projection information. Projecting too low to get a lower quote will only send up red flags that you are either hiding payroll or expect a business slump. Since carriers like to insure companies that are in a steady growth position, you are best served to be optimistic, yet realistic, in your projections.
Underwriting History
Required documentation: 5 years of payroll & premium totals, current & 4 prior years of loss runs, and experience modification worksheets
Underwriting history is your company’s track record for performance on your prior insurance policies. In essence, this is the underwriter’s scorecard for determining quotability and pricing. Unfortunately, this area is where many companies experience the greatest problem in obtaining the quote. The soft market from the mid to late 1990’s caused many firms to place less emphasis on the importance of controlling losses. The result is negative underwriting experience. Leaving out certain years of information may seem to be a good idea but this tactic will only delay the process, as most every underwriter will hold the file without complete updated information. Additionally the underwriter may also become uncomfortable with a company that has poor record-keeping procedures.
The payroll and premium provided to the underwriter should be audited at least for the second through fourth years prior; thereafter, estimates may be used. The underwriter will refer back to your projections to establish growth patterns and fluctuations in payroll. If you have downward or extreme changes, be sure to provide an explanation as to why the action occurred. Loss runs should be valued (“as of” date) no more than 90 days from the date you will be providing information to the prospective carrier. If all claims are closed, underwriters may accept older loss runs for third and fourth prior years. Any action that your company has taken to address loss trends will improve its appeal to the carrier. The underwriter will be looking for both claims frequency (number) and severity (dollars). If you have dropped a client or specific type of business, made changes to the workplace, implemented new policies, etc., include this information with your submission. It sometimes makes the difference between getting a competitive quote and getting a declination.
Finally, you will need to submit your experience modification worksheet. For most states, this comes from the NCCI, although a few states develop company experience modifiers themselves. Obviously this modifier is used for developing your premium as it compares to others conducting similar business. Another unknown is that the modifier also serves as a validation source. Your experience rating worksheet includes both your payroll by code and your claims history for the second, third and fourth prior years (the modification process does not use the current or first prior year). If these numbers do not match up, the underwriter will, at the very least, request additional information and this will slow down the process. Some underwriters will see this as a sign of a dishonest submission and will not proceed. Review or have your broker/agent review your experience rating worksheet and provide support explaining any numbers that do not match.
Risk Management Program
Required documentation: list of representatives, list of resources, manuals, forms, procedures, internal or third-party evaluations
Your risk management program is perhaps the most distinguishing component of your submission. It is definitely the one over which you have the most control. This area sends a message to the underwriter of how serious you are about making your company a profitable venture for the underwriter, and that is the goal of a submission. If you have only the basic, standard procedures in place then you had better have a stellar record in all other components. A solid, proactive, working risk management program will produce the greatest amount of interest and most competitive quotes.
Your risk management program starts with your company representative. It is advisable not to take this assignment lightly. This is not just a position of claims reporter or carrier communicator. It is the individual(s) that protects your company from having claims and minimizing the damage when they do occur. It is not required that you go out and hire a designated individual, but you should definitely make sure your representatives are knowledgeable, trained and qualified for the tasks for which they are responsible.
Extensions of your in-house representatives are your risk management resources and contacts. Many companies will hire third-party consultants for those situations that in-house representatives are either not qualified to deal with, or do not have the time to handle. Some companies will even go to the extent of designating a third-party company as their risk manager. Additional resources include any organizations with which you are affiliated, such as ASA, TempNet, etc. that provide additional risk management resources. Include companies that release manuals like BLR or CCH if you use their services. Each of these affiliations should be described in detail with regards to their role in your company. If you don’t have at least one of these resources, strongly consider securing one of them before your next submission.
The foundation of your risk management program is your manual, your forms and your procedures. If you do not have your risk management efforts documented, the underwriter will most likely not recognize them. The perception is that if it is not written, then how can it be a standardized practice by your entire company, not to mention the lack of proof that will exist should you encounter a claim. It is not necessary to bury yourself in paperwork, but simple, easy-to-complete forms make a big difference. On the other hand, if you have a manual that just sits on your bookshelf, you are not going to receive credit for an effective risk management program. Insurance carriers perceive that many companies in the mid 1990’s bought a manual for that very reason. Underwriters are now looking for evidence that risk management manuals are actually being used. The aforementioned forms are one step in providing this proof. Another is accessibility of the program. Considering current technology, manuals that are on the computer (CD, Internet, etc.) are given greater consideration as effective manuals as opposed to hardcopy. Using a third-party to confirm the active use of a manual is also beneficial. Copies of any of the above types of information will only serve to enhance your submission to the underwriter.
Insurance Program Type
Required documentation: expiring insurance policies
The type of program your company desires and has experienced will have an impact on your submission. The mid to late 1990’s were a period when guaranteed cost was frequently used at bargain prices. Due to the recent catastrophes and the high number of losses in general due to insured apathy, underwriting profits have decreased significantly. The focus by carriers on these events has become even more important with the downturn of investment income. Thus, competitive guaranteed cost policies are rare. Carriers are more interested in companies retaining some of their losses through retrospective programs, higher deductibles and other forms of self-insured retention policies. Your company’s experience in retention insurance affects the types of policies for which you may qualify. Carriers want to know that you are familiar with how alternative insurance works before providing that type of quote. Your financial resources will also come into play. Most deductibles and hybrid-captive programs require collateral such as cash or letters of credit. Cash flow businesses such as the staffing industry often have difficulty acquiring letters of credit and usually have limited cash available. Yet selecting this route will grant you much more favorable quotes than the traditional guaranteed cost. Make sure you do your research and speak with your broker/agent or consultant before choosing an alternative program. A mistake in interpretation can literally cost you hundreds of thousands of dollars.
Company Financial Position
Required documentation: financial statements (audited if available) including balance sheet, any other pertinent documents
The company’s financial position is the fifth basic component of the submission process. Underwriters need to establish that the prospective insured is financially stable and capable of honoring the insurance contract they are going to quote. This is the component most companies have the greatest objection to providing due to confidentiality. A method to accomplish this is to request that the carrier sign a confidentiality agreement. This can be included in the submission cover letter. It will protect your company against the release of your financial information; yet provide the carrier with the documentation necessary to verify your company’s stability. If there are any potential issues the underwriter or CPA may identify, explain these in a separate cover letter and include it with the financial.
The above process of course is simplified. Underwriters use many statistical formulas and spreadsheets in review of each submission. In order to increase your chances further, you may want to consider requesting from your broker/agent or a consulting firm to provide a third-party opinion or synopsis to the carrier and to make certain that all of the proper documentation is included in your submission. This will avoid delays and ensure that you receive the most competitive quote available.
Typically, a quote will be provided 60-90 days after your submission is received by your broker/agent. Your internal preparation should begin no later than 120 days before your policy expiration. No guaranteed process exists for getting a quote, but following the above formula will grant you the best opportunity to stay afloat in a hard insurance market.