New Business, New Issues

The role of the insurance broker is becoming more complex all the time. We need to perform our job at a speed that will match client demand and still take the time necessary to fulfill our duty as a professional.

This dichotomy of purpose may be the leading cause of a stunning increase in broker errors and omissions claims surrounding the new business process.

Statistics based on the Swiss Re/CG&B book of business show that over half the claims against brokers in 2010 involved the writing of new business. This by no means the only area of concern, but it will be the focus of this article. To understand the issue properly, we need to look at a series of statistics that play a part in developing the focus on new business.

Traditionally, brokers benefited from having a large percentage of their portfolio in personal lines. However, we see the claims percentages growing closer to an even split between personal (43%) and commercial business (54%). One area of concern is this: commercial business written on a Claim Made form is producing 3% of claims, on a book that may be a little as 2% or 3% of all commercial business.

Over time, homeowners (22%), commercial property (22%), general liability (18%) and automobile (18%) lines have been the leaders in the types of coverage producing claims. By way of explanation, rates in homeowner and commercial property lines are on the increase due mainly it seems to water damage, insurance-to-value and co-insurance issues, respectively. General liability has remained constant and auto is down a couple of points. The activity in the auto book has not resulted in a reduction of claims; rather, the claims percentage for auto looks better as a percentage as the number of claims in other areas go up. Professional liability as a class has increased once again, albeit to only 4%, but this is still an area on which to keep an eye.

Here is where we see numbers of great concern. The transaction related to the alleged error or omission is key: new business for truly new clients accounts for 35% of claims; new business for existing clients covers another 22% of claims. That produces a shocking 57% of claims in the new business process. These claims relate to the point in the broker-client relationship at which all the necessary investigative work is to be done by the broker. This is when brokers determine their clients’ exposures and needs. Brokers at this point should be making recommendations on the best insurance to take care of those exposures and needs.

The renewal process is not to be ignored. It has grown to 18% of claims and should continue to grow in light of changing renewal processes in the industry. It is difficult to keep pace with changes in clients’ exposures and needs if brokers are not communicating with their clients on a regular basis.

The process step leading in claim percentage is risk assessment. Poor assessment of client exposure is alleged to be the cause of 18% of claims. That is followed closely and logically by 17% of claims alleged to be a result of coverage recommendation.

Last in this series of statistics relates to the actual error alleged, the failure to procure coverage. This broad phrase really just means the client didn’t have the coverage necessary when a claim occurred. This represents 36% of the claims.

In short, a failure to assess exposure and obtain coverage on new business opportunities is leading the pack by a long way when it comes to Broker E&O claims.

As of the time of this writing, I don’t have final 2011 numbers. But some trends that are showing include an increase in the number of auto-related claims, a rise in the allegations of failing to procure coverage, a rise in the number of claims in suit and a rise in the number of claims that show an indemnity payment or reserve. The number of claims with alleged damages in excess of $500,000 rose by 46% in 2011. We need to be concerned about all of these numbers as we go forward.

Many leading factors go into addressing these claim issues. They include complete and accurate gathering of information about the client, complete and accurate assessment of exposures, as well as meticulous coverage recommendations and reviews. Effective communication to clients and documentation of the broker files are required in order to be sure “the story is told.” Changes in technology, products and broker authority are all items to be addressed. These require an increase in the training and mentoring of all employees and, in particular, those new to the industry or just a position in the firm.

All broker offices need to have standards of practice for all transactions and processes. These clearly need to be communicated to staff.

Production pressures may have the greatest impact on claims issues surrounding new business. These pressures are common to the entire industry. Insurance companies want to grow. As a result, they will often be more aggressive on new opportunities than on their existing book, for which the acquisition cost has already been paid. Insurance brokerages look to add business to make up for what is lost on the renewal book, and in fact seek to grow beyond that.

A brokerage’s production staff is compensated based on what it sells. In a market of reduced commercial rates, there is a need to sell more to balance things.

In many lines of business, we have an over-capitalized market, with much of that capital being new capacity. In such an aggressive market, the playing field is falsely evened out. Brokers with little or no experience in a class of business are often able to get the same quotes and terms as the more experienced broker, often from insurance companies that are also at a loss for experience.

Anxious underwriters may make it too easy to get quotes and terms, requiring minimum information on the risk. Given plenty of available capacity, there is a rush to place the business before the other guy. Be careful: too much business with a market based on price may lead to a huge re-marketing job when that market changes its tune or perhaps even withdraws.

Everyone is looking for ways to do more, faster. That condition may be creating a serious reduction in the quality of the work being done. Although this is not just a broker issue, brokers are definitely the front-line contact with clients. It must be remembered that increased competition for the business requires a greater attention to the quality of the work. We cannot sacrifice quality for quantity. Any gains acquired through speed could be short-lived once clients learn that “they can get that anywhere,” and make claims against brokers to recover any shortfall in their insurance as a result of rushed or inattentive work.

Although volume is important to maintain markets, the quality of the book should be what will keep that market in the long run. This is not always the case these days, I realize. However, the high-quality book will have an easier time replacing a lost market than a business featuring lots of bad volume.

In summary, it seems the speed of business in today’s market may be the biggest factor leading to broker errors and omissions claims. Perhaps we need to just slow the pace and pay more attention to detail in order to do the quality work expected of an insurance broker. Each brokerage needs to take charge of what they do and how they do it.