Monitor and adjust – Once you’ve got your jigsaw puzzle of partners, approvals, and technology in place, it’s really just the beginning. A good MGA or program administrator will vigilantly monitor their book of business and adjust to meet their short- and long-term goals. There are a number of statistics you’ll want to monitor, as your carrier will ultimately judge your performance on key metrics. These include the following:
- Incurred loss ratio – the dollars paid and reserved for losses relative to premiums earned over the same period. It’s one piece of the profitability pie and is often used to calculate contingent commissions.
- Combined ratio – the ultimate cost of losses, loss adjustment expenses, and underwriting expenses relative to the premium earned in the same period. It is the most common profitability metric used in the industry and is easily comparable across competitors.
- Renewal ratio – the number of policies renewing versus those that are available to renew. Renewal ratios are the lifeblood of the insurance industry, and higher ratios relate directly to lower acquisitions cost per policy. Therefore, books with higher renewal rates tend to be more profitable.
- Quote to bind ratio (hit ratio) – the number of bound policies relative to those quoted. Higher hit ratios typically translates to lower acquisition costs per policy.
- Loss costs – the average losses per policy or unit of exposure. There are two components of loss costs:
- Frequency – the number of incurred claims relative to the earned policies or earned exposures
- Severity – the average amount of losses per claim
Remember, you’re going to want a long-term, profitable relationship with your carrier. That means managing the overall performance of your book and the ability to explain anomalies. Poor performers who are unable to explain or correct shortfalls will not be with a carrier for long. Being dumped by a carrier is typically a scarlet letter for your program. You may not be able to attract the same quality of carrier, if any, for your program after that.
BriteCo has an extensive array of analytical data we manage on a day-to-day basis. The above metrics are just a few of the items we look at to measure success. Although we’re in our early stages of building a book of business, we consider monitoring a top priority. Our philosophy is to be proactive rather than reactive with program management. When we see oddities, we investigate, correct, and follow up. Furthermore, we regularly communicate results with our partners and manage expectations on performance.
You’ll want to make adjustments constantly to stay one step ahead of the competitors. Despite the insurance industry’s reputation as a slow-moving giant, carriers are adjusting and frequently refining their products. Adjustments extend beyond just tweaking or refining price; there are multiple levers to pull. Consider the changes you can make to underwriting, marketing, distribution channels, and coverage. Stagnation is the enemy of progress. Expect to be disrupted if you don’t continue to innovate.
In summary – It’s no easy feat to start an insurance intermediary. The size of the checklist is daunting, and compared to other industries, the process can move at a glacial pace. As with any new venture, be prepared for people to say “no” a lot. Arm yourself with as much data as possible, as insurance professionals are an analytical bunch that want to see the numbers behind your vision. If you’ve spent your professional career outside the industry, you may want to consider recruiting an insider as a co-founder to navigate the landscape. Good luck out there, and hope to see you headlining the insurance publications one day!