Losses are never a good thing in our business, right? But which is worse, in terms of loss, Frequency or Severity?
Generally speaking, if you go to insurance school, either at university or the school of experience, you will find that insurance companies generally hate frequency. They don’t like severity either mind you, but frequency is the issue that gets insureds cancelled and agents fired.
The reason is simple. Frequency leads to severity! The more claims you have, the more statistical probability there is that you’ll have big claims too (severity). Also, claims do happen to even the best insureds and the best agents.
But, insurance companies have learned, through long experience (and record keeping!) that the best risks (insureds), and the best agents, have relatively low frequency of claims. So, as an agency you may have claims, and you may have big claims, and occasionally you may even have a loss ratio that that isn’t too hot. You can survive all of that.
But you can’t survive frequency.
What I mean by this should be clear. But let me be specific. When the hard markets come (like now), insurance companies will fire agencies with lots of claims (relative to their size and other agencies). They will fire you regardless of how big you are (but bigness does help in many cases) and they will fire you regardless of how long you have represented them (even 30 or more years!).
At this point in the market cycle, it’s too late to make promises. If you are a frequency creator you need to get bigger fast (consider joining OAA), dump problem accounts quicker, write only high quality new business, consolidate losses in as few carriers as possible or get out of the business.
And you can’t use the carrier’s pricing strategies and “smart” underwriting as an excuse. They don’t care. Their job is just to make money for their shareholders. Anyone from CEO to Marketing Rep will lose their job if they don’t get rid of “bad” agencies. It’s tough. But it’s reality.
If this keeps you up at night, you’re in good company! But all of these issues can be addressed. At OAA we are very aggressive, and very good at it. If we can help you, let us know.