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Posted on 26 Apr 05
One proposed anti-steering regulation reads, in part, “If the producer represents multiple insurers, the producer must either forward to the client a proposal from each available insurer, or select the proposals to be forwarded to the client based solely on objective criteria supplied by the client or disclosed in writing to the client.”
Such proposals present significant problems for customers, agencies, and companies. One such problem is that very few consumers adequately understand the details of insurance company financial stability, coverages, and claims service. They understand the importance of these issues in general, but not the details because the complexity is simply huge. Even some people within the industry struggle to understand all the details. (Just think about how many people are upset at the rating companies for not pulling ratings quickly enough on several now defunct insurers!) However, agents do generally have a significantly better understanding of these issues than consumers and they typically try to combine the best price with the best of those other factors.
These other factors, however important, are much less tangible than price, which makes price the primary focus point for consumers. Every agent has probably seen the situation where a weak company undercuts a stable company’s price and no matter how the agent explains the importance of choosing a strong company, the money talks.
If rules like the one above are enacted, I believe price will take on an even commanding role. As a result, I predict a steep drop in prices because agents will be less able to steer clients to the stronger companies, the companies with the better claims service, and the companies that generally provide better products. A sale based on anything but price will get tougher.
Which companies usually lead the soft market? The weak companies! So who will benefit? The weak companies! The problems caused by weak companies will be exacerbated by these regulations. Just think about who had the lowest prices before Reliance went out of business. Think about which companies often have the lowest prices.
These regulations mean considerable additional E&O exposures because if more clients are placed with weaker companies, agencies face the potential of having more clients not getting their claims paid. It becomes imperative that agencies implement tracking systems to notify clients of downgrades when they occur, not just at renewal. It becomes imperative agents specify the difference in company ratings and consider more than just one rating company’s rating. And at times, it requires agencies advise clients that based on a company’s stability, you do not recommend the client go with that company, regardless of the price.
Under these regulations, when a company goes out of business agencies are more likely to have larger books with weak companies than they otherwise would. Therefore, agencies also run a significant reputation risk. Agencies must prepare in advance to protect their reputation in these situations.
Obviously too, in addition to higher costs due to having to prepare more quotes, customers being placed with weaker companies, higher E&O exposures, and higher reputation risk, agency revenues will probably decrease too, but not because the customers are getting better deals. The customer’s premium may be lower, but considering the extra risks of the better price, their total cost will probably increase and at the same time, lower rates means lower commissions for agencies.
In addition to generally lower rates, retention may decrease too because greater focus on price means less loyalty to an agency. Also, brokers and large agencies are often compensated better than regular agencies and at times, they can also obtain lower prices for clients
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