Insurance Company Pricing

 

It is important to have at least a basic understanding of the way insurance companies do business because any one of the departments may have an adverse impact on the insurance policy that you have purchased.

The major internal departments in insurance companies are: Marketing, Claims, Underwriting, Policy Services, Audit Department and Loss Control. Other support positions include: Legal, Actuary, Subrogation, Internal Audit, Product Development, Information Technology and Management. Each of these departments will be discussed separately, with other support positions addressed in chapter 3.

Marketing

Marketing consists of both an internal and an external sales force. An internal sales force consists of the employees of the insurance company who “sell” to, or support, the company’s chosen distribution channel. External marketing (or “sales force”) sells the insurance company’s products to the final customer via the individual company’s chosen distribution channel. These distribution methods include independent agents, captive agents and direct sales.

The external sales force is composed of the independent agency or exclusive agency agents who sell the insurance company’s products. These external salespersons are often categorized as “sales” rather than “marketing,” but both are involved in the process of influencing the ultimate decision-maker, the consumer, to buy their company’s insurance product. Note that the directwriter company’s Marketing Department fulfills both

internal and external sales functions.

If independent insurance agents are used, the insurance company’s marketing representatives work to convince agents who have contracts with their company that they should be selling their company’s products. Where captive or exclusive agents are used, internal marketing provides sales assistance to the individual agent — such as training; acting as a liaison between agents and the company to help when there is a problem, and assisting in writing new insurance policies — referred to as “new accounts.”

Internal marketing also keeps others in the insurance company abreast of what competing companies are doing in the marketplace, and may provide assistance in development of new products or making changes to existing products.

There are pros and cons to each method of insurance sales from a customer’s point of view. Even though independent agents tout the fact that they do not work for any single insurance company, and do, in fact, have a duty to work in the best interests of their customers, they also have a fiduciary (legal) duty to each of the companies that they represent. This sets the stage for possible conflicts of interest.

Agents who sell the products of one company — or exclusive agents — must sell whatever is available to them via that single company, no matter how costly, or how good or bad it is. Companies that have chosen this method of distribution typically put much more emphasis on the “sales” process. The people who sell their products are well-trained salespersons who know how to sell around all types of objections.

Interestingly, many insurance agents are people who were previously sports stars, or have otherwise been involved in activities that result in name recognition in the communities where they sell insurance. Consumers of insurance feel “special” when they rub elbows with these agents, and are proud to tell their friends and neighbors who they buy their insurance policies from.

If a person does not have a well-known public profile and wants to get into insurance sales, he or she must typically have somewhere between 100 to 1,000 leads to contact prior to starting an insurance sales career path because there is no consumer name recognition.

Once someone is hired as an insurance agent and the initial 100 to 1,000 leads have been exhausted, how can the agent generateadditional leads?

There are a number of methods. They can be purchased from outside companies who specialize in this sort of thing. They can come as a result of advertising. However, the most popular method is to develop and work off of a list of referrals. Referrals come about when a person or business seeks out an agent based on something positive they have heard about the person, or when one of the agent’s existing customers provides the name of a friend or business associate to the agent. In a best-case scenario, the insurance agent’s existing customers pave the way for the agent to contact their personal friends or businessassociates.

While this latter method is the most popular way of making insurance sales, it does not necessarily result in the best situation for the insurance consumer. Many times the power of a referral is so strong that the buyer asks very few important questions, such as those relating to the experience and qualifications of the person selling insurance policies (refer to the section, “Some questions you should ask a prospective insurance agent” found later in this book).

Incentives are often used by companies to generate activity (new business production) on the part of their agency sales force. Captive insurance companies appeal to their agents’ desire for money and prestige (i.e., publishing their names in company-wide newsletters or making it to the top- tier “President’s Club”), as well as continued employment. Independent insurance companies offer exotic trips (cruises, trips to Switzerland and Hong Kong, etc.) and additional commissions (over and above “contingent commissions” discussed earlier and below) for selling their products instead of a competitor’s product. All of these incentives can adversely impact the type and amount of insurance you are sold, especially if you are unaware of them.

The issue of “contingent commissions” has been touched upon earlier. However, it merits further discussion. Remember, contingent commissions are additional commission dollars that are paid to agencies when certain, contractually agreed-upon criteria are met. Examples of when contingent commissions might be paid include:

“x-amount” of new business production is written with an insurance company;

“x-percentage” of profitability on the book of business that exists with the insurance company (usually determined by the loss ratio

performance of the book of business); or a combination of these, or other criteria

These incentives are rarely, if ever, discussed with the purchaser of insurance policies. In some ways, contingent commissions are no different than bonuses paid in a variety of other industries based upon certain criteria stated in the contract between, for instance, a mortgage broker and the financial companies they represent, or a manufacturer and their manufacturer’s representative for certain agreed-upon performance objectives.

However, there clearly is the possibility that an insurance agent is writing your insurance policy with an insurance company just to earn a better sales commission bonus — rather than because that is the best company for you to be written with. Make certain that your agent is not placing you with an insurance company to better the agent’s own self-interest by specifically asking whether the agent receives additional compensation for selling a particular insurance policy to you.

Another situation that merits discussion is when an insurance agent is so focused on receiving a contingency payment from an insurance company that he or she will actually refuse to write insurance policies for some customers. For example, one of my clients manufactures agricultural machinery. Part of my annual project involves obtaining renewal insurance policy quotes to ascertain which insurance company can provide the best combination of coverages and pricing for the upcoming year.

I began my project by lining up the best insurance companies to insure my client, keeping in mind their specific business operations. One of the insurance companies appeared to be an excellent fit for my client’s business

— in fact several agents wanted this particular insurer assigned to them. I vetted each of the agents and decided to assign the insurer to the insurance agent who had the second-largest written premium with the insurance company in the state of Wisconsin. My intent was to have this agent leverage their carrier relationship to provide a very attractive quote to my client.

Towards the end of the project, just prior to the deadline given for insurance proposals, the agent who was assigned the preferred insurer told me that he did not want the insurance company to release a quote. Why? He said he was afraid that my client might have a claim after he wrote the insurance policy and that this would adversely impact the amountof

contingency income that he had been receiving from the insurance carrier.

While this outcome was a surprise, remember that the insurance agent is an independent businessperson and is allowed to make decisions that he or she feel are in the best interest of their insurance agency. This includes areas such as profitability and which business customers they wish to insure. In my opinion, the significantly better course of action in this situation would have been for this insurance agent to decline to even get involved in the quote process for my client. If that had happened, another insurance agent would have had the opportunity to write my client’s insurance with the very same insurance company.

Before leaving the area of insurance sales, it is worthwhile to note that in most states insurance agents legally owe minimal duties and responsibilities to their customers. In general, it is the duty of buyers of insurance to tell their insurance agent the coverage that they desire, as well as the limit of insurance that they want. The insurance buyer also has a duty to read the policy that they receive.

Insurance sellers (agents) are responsible for making certain that what the customer ordered was delivered by the insurance company, and often, little else. Insurance agent duties, however, can become broader depending on specific situations, such as when an insurance agent actively provides advice in a consultant-type role, where fees are received in addition to commissions, the length of time that the insurance customer and insurance agent relationship has been in existence, and so forth.

Many people are surprised by the limited legal duties imposed upon insurance agents. While at first blush this may not seem fair, you must understand that there are many opportunities for misunderstandings to arise during the insurance placement process. It is not at all uncommon for insurance purchasers to say (or to think that they have said) to their insurance agent, “I want coverage for everything.” Of course, this is an impossible request.

My advice to insurance purchasers is to have their insurance agents acknowledge in writing any coverage that they feel is important, and to take the time to very carefully review any insurance applications prior to signing them. Ask questions if you are unclear about anything that pertains to the insurance policy you are purchasing. No one looks out for your best interests like you do.