THE SECRETS OF HOW INSURANCE PRICING WORKS

By Neal McConnico, Murphy & Associates, www.murphyinsure.com

Have you ever wondered why your insurance agent tells you to NEVER give the premium to a competing agent? Do   you think getting a blind insurance bid is where you get your best quote? These are some of the myths or secrets we will try and clear up in this article.

My Current Agent and Blocking the Market

We often hear from prospective clients that our current agent shops our insurance out every year with different carriers.  That may or may not be correct. Often, insurance agents will do what we call “Block the Market”. When actually you may be thinking your current agent is shopping the market for you, he is actually hurting you from getting a better rate. Let me explain how this works. An agent may represent anywhere from 1 to 100 different insurance companies.  However he may only have a couple that he uses on a daily basis. When he/she starts shopping your insurance he/she may send in an application to an insurance company that he never intends on using your coverage’s thus BLOCKING another agent from getting a quote from that company.  The company he is blocking and never intending on using may be the very company that will give another agent a better rate.

How do I avoid falling into this trap? Ask your current agent or prospective agent to supply you with the name of 3 different insurance companies he plans on your marketing your insurance to. Tell him/her they DO NOT have your permission to market to different insurance companies than they have listed. This way you will truly see what the market has to offer for your insurance needs.

Should I Show my Current Premiums?

The answer is YES if you want to save money on your current insurance premiums. Why is a blind bid not better? With all the different pricing options available to an insurance company underwriter or agent, unless they know a target premium, the agent cannot put the pressure on the underwriter to lower the premium.

I cannot tell you how many times I have seen a customer think they were getting a good deal on insurance because they get a blind bid on insurance year after year only to see they insurance cost not going down in a soft market. They then give the current premium out and I can assure you they will get a better rate on that insurance.

Tools for Purchasing Insurance

Insurance works on two very important principals. The law of large numbers and spreading of the Risk.  Another important tool when shopping for insurance is do you belong to an association or buying group that offers you insurance products. Insurance works on the law of large numbers and within a buying group or association it helps you gain a better advantage with the larger numbers.  Know the coverages you need to purchase for your business. Ask your agent to explain what he is selling you. Important coverage’s are: General Liability, Property Insurance, Automobile Insurance, Worker’s Compensation, Umbrella, and Employment Liability.  It is too late to purchase a coverage that you need if a loss has already occurred. Read your policies when you receive them.

Below are some of the factors that are taken into consideration when insurance premiums are calculated by the agent and the insurance company.

How Do Insurance Companies Develop a Rate

All insurance companies that operate in your state have filed their rates with your state insurance commissioner. This is generally open to the public to see the rates an insurance company has filed. However, this is where it gets more complicated. Insurance companies file what we call a manual rate for every product it sells. This is also done by line and class of business that company offers.  In addition to that manual rate the insurance company also files debits and credits that they can also apply to the same manual rate. Some companies file as much as 80% off that manual rate. They can also debit that manual rate and charge as much as 80% higher than the manual rate.  Some of these debits and credits that can be applied are controlled by the agent based on the pros and cons of each individual risk.  To take this a step further, most insurance companies have anywhere from 2 to 5 different writing companies within one insurance company.  What this means is the insurance company may put you in their best, good, better or worst pricing tier before ever applying any of the debits or credits that we discussed.  The agent may also have some control on which pricing tier the insurance company places you in.  As you can see, there are many different pricing scenarios that both the insurance company and agents can use.

What Factors Determine Insurance Pricing

Property Insurance- Building Values, Content Values, Construction of Building, Alarm system, Sprinkler System, Age of Building, Updates on Building, Prior Loss Experience, Protection Class, Building Purpose, Location of Property

General Liability- Type of Business, Limits of Liability, Type of Exposure, Prior Loss Experience, Location of Business

Business Auto- Vehicle Type, Gross Weight of Vehicle, How is Vehicle Used, Age of Drivers, Driving Record of Drivers, Radius of Vehicle Usage, Value of Vehicle, Prior Loss Experience, State Vehicles Operate In

Worker’s Compensation- Class of Business, Payroll, State, Experience Modification Factor, and Prior Loss Experience

Hard Market Verses Soft MarketThe Commercial Insurance Market goes thru hard and soft market cycles. The economy does have some impact on this market cycle but many other factors are also included.  There is not one key contributing factor that spins the market into a hard or soft market trend; however, some key contributing factors include the investment dollar, global catastrophe losses such as 911, earthquakes, hurricanes, and storms and the impact this has on insurance carrier’s and reinsurance carriers.  When the economy is weaker we tend to enter into a soft market. Soft market usually means insurance companies are willing to write the most risk and the premium size is much smaller. It is nothing unusual for a renewal policy to renew 10% to 15% cheaper than the prior year in a soft market.  Also during a soft market the insurance companies are willing to accept a broader class of business and it is not as difficult to place your coverage with an insurance company.  These cycles change slowly and we are seeing evidence of this when the insurance companies will increase rates to help offset losses and the carrier’s underwriter becomes more selective with the type or class of business they are willing to accept.

Insurance Carrier Verses Reinsurance Carrier

Most people know the household names such as The Hartford, Allstate, The Travelers, State Farm, etc., but that may not be the driving force behind your insurance company and the rates they charge you.  The above mentioned companies operate in the United States, however, they buy reinsurance from companies that operate globally.  These global companies are Swiss Re, Zurich Re, Lloyd of London, etc.

Let me explain how this works: Let’s say you had a building that was insured for $2,000,000 with The Hartford.  The Hartford has a reinsurance treaty with Lloyd of London that states they are only responsible for the first 40% of the loss and the reinsurance pays the remaining 60% of the loss. Your primary carrier pays a premium to the reinsurance carrier for this coverage. They are spreading the risk. You will never know of this agreement your carrier has with a reinsurance carrier.  The reinsurance carriers dictate to the primary carriers what class of business they are willing to write.

How does this affect me? Well, believe it or not the reinsurance carriers have been affected very hard over the last several years globally starting with 911, Hurricanes, Tsunami and Earthquakes in Japan and most recently the storms that have pounded the United States.  They start raising the rates they charge to the primary carrier. We are starting to see some of this happening now.

What Does this Really Mean?

Insurance is very important and it is also important to be insured correctly and not underinsured or over insured and to get the best premium the market has to offer.  With every industry there are good agents and bad agents and you must trust who you deal with on insurance.

 Neal McConnico

Murphy & Associates

Office 901-758-8513 Ext 289

Toll-Free 1-800-237-0472

Cell 901-461-7689

Direct Fax 901-302-1620

www.murphyinsure.com

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