Killing a Sacred Cow

Killing a Sacred Cow

Sacred cows make the tastiest hamburger.” Abbie Hoffman

Abbie Hoffman was a counter-culture revolutionist of the 1960s with a strange sense of humor, yet his attitude toward scared cows rang true.

Sacred cows are those ideas that, though unreasonable, are held to be above criticism.

There is one sacred cow that I would like to see finally exposed.

“Agents Are Only as Good as the Loss Ratios They Produce. . ..”

Insurance companies have a right — and a duty to their shareholders — to do what is necessary to make a profit. That is true, but they can only do what is legal and ethical in the pursuit of maximized profits.

It is common for insurance companies to restrict access to certain programs, or terminate contracts, based on their poor loss ratios with an agency. Contractual changes seemingly occur most often with personal lines insurance companies and their agencies.

Yet, most personal lines agents don’t place enough business with a single company to amass a volume that is actuarially creditable. I’m not an actuary, but in my opinion, most premium volumes under $1,000,000 lack legitimacy when applying the Law of Large Numbers.

Agents don’t have access to the black box algorithms used by companies to match a risk with proper premium levels. My years at an underwriting desk lead me to believe that without the ability to price and classify risk, most underwriters would fail to develop a profitable book.

Insurance laws, like those in Minnesota, prohibit agents from declining a risk. Since agents are statutorily prohibited to decline a risk and have no ability to set a price, aren’t agents being held accountable for outcomes over which they have little control?

Insurance companies occupy shaky ethical grounds when their actions to maximize profits are based on decisions that will create economic troubles for their contracted agents. This is especially true when companies act despite a weak nexus between agency loss ratios and the quality of representation provided by the agency.

My agency has housed two operations during the last three decades. One side of the office contained a traditional general agency that provided outsourced underwriting to specialty companies. The other side housed the administrative arm of an agency aggregation. The management of both operations was identical and grounded in the same intense desire to produce positive results for our companies.

The general agency side of our operation, the side that had pricing, classification, and risk selection capabilities, consistently produced award-winning profits for our companies. We were the most profitable agent in the nation for one of our general agency’s companies for two different years and near the top many other times.

The agency aggregation operation produced highly varied loss ratio results despite our diligent efforts to follow our companies’ marketing wishes.

It is my belief that loss ratio is an improper gauge of performance. Profitability is mainly the function of the company and NOT the agency. My five decades in this industry have led me to believe that an agent’s job is to provide an insurance company with a strong flow of business that closely matches that company’s underwriting appetite.

That’s a job description I can accept. It doesn’t frame the agent as a target when an adverse loss ratio is developed. It clearly defines what the agent must do to satisfy the relationship with the carrier. All that is needed is a meeting of the minds on quantifiable goals.

I’ve been an underwriter, the top executive for a small insurance company, and an agent. I believe most insurance programs develop loss problems because of poor execution, or planning, at the company level.

A poor loss ratio might be an indication of a risk characteristics problem within an agency’s book of business, and possibly brought on by faulty marketing. Agents do, from time to time, find company errors. Company actuaries make mistakes and often create soft spots in their company’s underbelly. If agents diligently exploit those weaknesses, they could be developing books of business that are horribly flawed and don’t represent a strong flow of business that closely matches the company’s appetite.

On its own, without looking for supporting reasons, an agency’s poor loss ratio is almost meaningless. Sometimes a poor loss ratio is merely a result of events. Bad things happen, and people buy insurance to protect assets otherwise lost when those incidents occur. Without a certain amount of loss activity, insurance loses its purpose.

Given today’s data-mining capabilities, pruning agency representation based on loss ratio alone is highly unethical. If an agent has selected against his company, placing only those risks that are highly advantages to his customers and detrimental to his company, he should be educated. Then, if necessary, that agency should be reprimanded and remedial actions taken. If he persists in presenting a flow of the wrong kind of business, the agency contract should be terminated, as the agents needs do not match the appetite of the carrier.

As a general agent who specialized in small, commercial, hard-to-place risks, I felt I had a good read on an agency’s principles by the fourth or fifth application we received from them. If their applications were incomplete or seemingly misleading, we would ask for more information. A rogue agent would rarely respond, knowing that we would decline the risk.

It would seem that insurance companies could easily create a matrix for risk characteristics that would allow a much more revealing “ratio” to be calculated. That ratio would compare the percentage of high-profit potential business to the percentage of acceptable business that has much less potential for profit. That ratio would be much more meaningful.

It is a time-honored tradition within insurance companies to review risks that have incurred large losses. The first question is normally, would we have written this risk had our underwriting standards at the time been properly imposed? The second question normally would be, is there anything about this risk that should have alerted us to its large loss potential? Instead of wrongly fixating on loss ratios, companies need to become much better at quantifying desired risk characteristics (prior to loss) and holding agencies responsible for delivering a desired flow.

Prior to the advent of the black box, agency loss ratio was a more accurate measurement of performance. With today’s technology using an agency loss ratio as a litmus test is a sacred cow past its prime that should be shipped to McDonald’s.

James Holm is a five-decade veteran of the insurance industry. Despite the tone of this article, his agency had one of its best years in 2014 in regards to the amount of profit-sharing income received. His remarks are reflective of overall trends in the industry rather than entirely personal circumstances. You can read more of his blogs at


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