ALIRT Research – P&C Agency Carrier Oversight Best Practices

Introduction:

ALIRT Research recently completed its annual round of visits to property & casualty broker/agency clients.  An important agenda item in such meetings is the review of financially stressed insurer partners.  As often occurs, clients are eager to know how their due diligence processes stack up against those of their peers.  Interest in their comparative process – and ways they may improve on it – was especially keen this year as more private equity-backed firms seek to better integrate their operations.

In response, we list below the best due diligence practices witnessed over our more than 25 years providing financial oversight of insurance carriers for a wide array of P&C producers.

1. Management Buy-In:  There is little use in developing a due diligence process for the oversight of carrier financial strength if it does not have full management support.  Ideally, a member of senior management will sit on a formal security committee (see below), usually a CFO, COO, or CRO.  Management backing sends a strong message throughout the organization, and especially to producers, that placing business with subpar carriers will not be tolerated.

2. Written Due Diligence Plan: Another key element is a written plan for how carrier financial oversight will be conducted. This protocol serves not only as a roadmap for how to implement a due diligence program but, more importantly, details how it will be conducted on an on-going basis. Like management buy-in above, a written document sends a clear message that carrier oversight is a firm-wide priority. In our experience, informal processes are more often than not honored in the breach. Note that such a written plan need not be overly long and should provide for adjustments over time.

3. Point Person: Also essential is designating a person to “own” responsibility for this process. We have seen the best results from a staff person connected to a Chief Marketing/Placement Officer as the latter are often in regular contact with an agencies’ various insurer partners. This point person will ensure that all processes are in place and being adhered to. He or she will also be responsible for calling regular meetings (see below) and preparing documents needed in such meetings.

4. Security Committee: A formal security committee that meets on a quasi-regular basis (quarterly, semi-annually, or annually) keeps the firm’s “feet to the fire” regarding its commitment to insurance carrier oversight. The Security Committee should include the point person discussed above, preferably a member of senior management (CFO, COO, CRO), the Chief Marketing/Placement Officer, and perhaps the personal and commercial lines leads. There is no magic number of members, though we have seen the best results from committees with fewer (but fully committed) participants. Anywhere from 4 – 6 is ideal.

   Such meetings should follow a detailed agenda that includes a targeted list of insurers to be discussed.  Meetings should not exceed an hour so as not to be viewed as a burden.  Regarding recommendations that an insurer be potentially removed from active use, a formal vote should be taken as to next steps (see more below).  The point person should take brief notes of the proceedings and maintain an on-going record of these.  All decisions regarding suspension of insurer placements should be immediately implemented.

5. Isolating Troubled Carriers:  The heart of this due diligence process is isolating those insurers whose financial position has been substantially compromised.  Below we cite best practices to uncover such insurers.

   1. A list of all insurers writing business with the agency should be maintained and updated on a real-time basis. Technological advances have greatly eased this process with a growing number of agencies investing in creating their own data lakes tied to a proprietary reporting system.  Alternatively, these lists can be downloaded from customer relationship management (CRM) systems, with one central CRM system being the holy grail.

   2. The list should focus first on the actual entity underwriting the policy (i.e. the company whose name is on the declarations page of the policy) and not the parent organization. This is critical because an insured’s legal recourse is only to that entity and not to the parent.   That said, the parent holding company should also be included so that total premium written across a holding company’s various insurer subsidiaries can be easily ascertained.

   3. Various steps should now be taken to isolate carriers that are more financially problematic:

      • AM Best Ratings: these ratings are central to any discussion of insurer oversight given that minimal A.M. Best rating levels are frequently embedded in D&O policies (often a rating of A- or better when a policy was placed is necessary to avoid the insolvency exclusion).  Placement of insurance with any carrier with an A.M. Best rating that does not meet or exceed the D&O policy minimum standard should be accompanied by a letter, signed off by the insured, indicating that the carrier in question does not meet the agency’s minimum rating standards.

      • To avoid non-compliance with the above, a best practice is to block placement of a policy with an insurance carrier that is not on the agency’s approved list. Some agencies protect against “rogue” carrier appointments/policy binding (i.e. a producer accepting an appointment directly without prior approval) by simply not paying commissions on such placements. 

      • All partner carrier A.M. Best ratings should be tracked on a real-time basis, and special attention should be paid to negative outlooks or carriers placed under review with negative implications. In addition, attention should be paid to ALL carriers rated at the critical A- threshold as potential downgrades from this level can contribute to additional financial stress given consequent marketing difficulties.

      • Non-Rating Oversight: ALIRT Research obviously provides independent quarterly analytics that trace the on-going relative financial performance of individual insurance companies, but we need not be the only solution.  Some additional means to access the direction of a carrier’s financial health include:

        • Subscribing to a data service (examples include A.M. Best and S&P Global) that provides statutory and GAAP financial data for U.S.-based insurers. A template can then be established into which critical balance sheet, income statement, and cash flow metrics are downloaded on a regular basis to track financial trends.  A flagging system should be overlaid on this data to isolate carriers breaching minimum financial metric criteria.

        • Agencies often leverage their production with core carriers to gain access to and develop relationships with senior management. These relationships provide an excellent opportunity to engage in regular discussions about financial performance.

        • In addition, agencies should play close attention to deterioration in claims paying practices, upswings in the departure of key management and/or underwriting and claims staff, sudden exits from business lines, substantial underpricing of competitors to achieve rapid premium growth, and/or engagement in loss portfolio transfer or adverse development cover transactions with reinsurers. These factors, along with others, should trigger a more in-depth look at a company’s financial profile beyond ratings.

6. Insurer Watchlists: After the hard work of isolating which carrier partners are facing financial hardships, they should be grouped on Watchlists for on-going evaluation.  One common practice is maintaining a tiered system of oversight; e.g. categories can include “Monitor”, “No New Business Placement”, or a more serious “Move Existing Business” (these are sometimes anonymized as Watchlists A, B and C).

   The Security Committee should peruse the Insurer Watchlists on a regular basis to discuss steps to be taken, which can include removal of insurers from Watchlists or shifting of insurers between different tiers of oversight.

7. Execution, Execution, Execution: The last critical step is to take immediate action on whatever decisions are reached re: any insurer partner facing undue financial stress.  As discussed above, these actions should be communicated on a regular basis throughout the organization so as to further reinforce the firm’s stated commitment to carrier financial oversight.

Conclusion

In ALIRT’s experience, P&C agency/brokerage due diligence has traditionally lagged behind that of other clients (such as financial institution distribution arms).  This is now gradually changing.  A commitment to more substantial carrier oversight has accompanied consolidation trends which have produced ever larger agencies/brokers.  The need for serial acquirers to better integrate their operations is a relatively new phenomenon but has provided an additional spur to develop more substantial risk management cultures. 

Financial oversight of insurer partners need not be overly complex, time demanding, or expensive; a system simply needs to be put into place via a dedicated point person, and a security committee established.  If the protocol is thoughtfully developed and supported by decent internal systems, the screening out of potential problematic carriers can be accomplished with minimal effort. 

Writing business with a failing insurer that ultimately does not pay its obligations (or slow/low pays them) is a reputational and potential legal hazard.  The risk of doing so should, and can, be largely avoided.   It is our belief that making financial due diligence a habit rather than a burden is just one further step in developing an agency’s overall commitment to operational excellence.