Is your insurer well? - Part II - discussion of insurance brokers

In Part I of this discussion in our last column, we pointed out that there are both formal and informal sources of information on the health of insurance carriers. We reviewed some of the rating services such as Best's and mentioned the availability of the carrier's own annual reports and other information emanating from the investment community. Despite a few caveats about total reliance on these formal advisory networks, even if one were to assume their fundamental soundness, there is still the problem of lag. The judgments rendered by the rating services and well constructed research opinions necessarily rely on the careful gathering, verification and assimilation of complex financial data. While the number-crunchers are at their terminals, the ship can already be listing. Historically, there have been a few instances of large carriers given top rating one year only to crater the next or shortly thereafter.

The Broker's Edge

A second body of informal information available to the buyer is without question less scientific, even anecdotal, and not published anywhere. What we are talking about here is a broker or agent's "feel" for the marketplace. Brokers, particularly the larger ones, do business with a broad segment of carriers of all types and sizes, and they get to know them very well through daily dealings. We should add quickly, of course, that responsible brokers subscribe to the rating services and regularly review many other sources of data available to the business community at large. Some brokerages also have legal and financial departments which can add special insight and render guidance in dealing with carriers on behalf of clients. But there is no substitute for being "on the street" day in and day out. There are times when lunch with an underwriter can give a better perspective on the health of a carrier than reams of financial reports. This is because of the immediacy of the contract. An underwriter saying to a broker over lunch, "I'm under tremendous pressure to meet my quota this month, just name your price," sounds like a competitive opportunity too good to resist; but, on reflection, it speaks volumes about that carrier's prudence and, possibly, their long term viability. In fairness, one must concede that insurance pricing is generally cyclical and highly competitive. In it's sensitivity to supply and demand, insurance in some ways resembles a financial "commodity".

So a sophisticated broker will put that harried underwriter's comment in proper perspective. But through repeated contacts in the course of business, the broker can spot trends with long term financial implications long before they're picked up by the press or the rating agencies. Here are a few examples of industry "folklore".

Pricing Cutting

Every competitive broker loves to save his clients or prospects money. But when a broker sees a carrier offering consistently irresponsible discounts, he becomes suspect: a deal which sounds too good to be true probably is too good to be true, at least in the long run. The buyer may be confronted with a choice between a short term advantage and a long-term stability.

Ignoring True Exposure

It is axiomatic that an insurance carrier must base its premium charge on realistic values (see our April 29 column on co-insurance). If your building is worth $5 million and an insurance company is willing to let you buy and pay for only $2 million coverage, one day they may not be able to pay you or the piper.

Under-Reserving

for Losses

Some background is needed to appreciate this very important issue. Insurance companies operate under stern mandates to maintain surplus funds adequate to pay future losses. Complex formulas are imposed by state regulatory authorities dictating how much new premium a company can write in relation to its available surplus. Since most carrier investment portfolios (also subject to regulatory scrutiny) pay a steady but not very exciting return, not much can be done about the asset side of the balance sheet. So it can be tempting in highly competitive times to boost the apparent surplus by unrealistically deflating the liability side of the ledger through under-reserving for future claim payments. Furthermore, a substantial portion of these reserves is supposed to be for claims that haven't even occurred yet but are inevitable in view of years of prior experience and the actuarial tables. But it is your broker, not the statisticians, who sees claim reports in his office every day and receives quarterly, or even monthly "loss runs" from the carriers with whom he does business. This can give him a better and faster feel for a carrier's practices than any published data.

Slow Claims Payment

Clearly insurance companies have an obligation to their policyholders and/or stockholders to investigate all claims carefully and thoroughly. But prudent practice can turn into slow payment or attempted denials of claims if a company has cash flow problems which it is trying to solve by pressuring the claims department to delay the adjusting process or offer arbitrarily inadequate settlements. A broker, whose main responsibility is to see that your claims are paid fully and fairly, will be the first to see if slow payment is the rule rather than the exception.

Poor Paper Flow

Insurance is a heavily paper-dependent business. Reams of correspondence flow between brokers and carriers. Binders, specifications, coverage orders, claims reports, policies and endorsements all require careful review and approval by numerous parties to each of many transactions. A carrier's inability to deal appropriately with communications and documentation can betray an attempt to run too "thin" in order to save overhead. A tight ship is important these days, but it must be adequately manned. Your broker is very sensitive to this issue: his inability to get a timely and correctly issued policy from a struggling carrier embarrasses him with his client.

Broker: Your Window

to Marketplace

An obvious caution: be alert to any broker or agent "Bad mouthing" a carrier in an irresponsible fashion, particularly a carrier whose policy is being offered by a competitor. Insist that any negative opinion is grounded in factual data or specific experience. (Section 2604 of the New York Insurance Law makes it illegal "to spread a false rumor regarding the financial standing of an insurance company.") Secondly, balance any anecdotal information with the hard data available. If a carrier has an A rating from A.M. Best and an AAA to BBB claims-paying ability rating from Standard & Poor's, you can be properly skeptical if you're told they're about to pull the shades.

Show and Tell

Insist that your broker show you the abstracts from the rating services on any company he proposes, and ask him questions about his experiences in the real world of how the company operates day-to-day. Insurance coverage is very competitively priced these days, but if the carrier can't meet its obligations down the road, the best deal today may be the worst tomorrow Outside of your spouse pledging to love, honor, and obey, an insurance policy is probably the most important promise that will ever be made to you.

Be sure that promise will be kept.

Marc Cohen is an account executive with Kaye Insurance Associates. He specializes in Kaye's comprehensive multi-peril insurance program especially designed for residential real estate properties. Kaye Insurance Associates is one of the largest brokerages in the nation.

COPYRIGHT 1992 Hagedorn Publication
COPYRIGHT 2004 Gale Group