The Wizard of Oz is a wonderful movie that has given our culture so much. Glorious music, vibrant color palettes, and probably our first ever documented case of CTE.

That said, what I appreciate most about the film is how it shows that what happens behind the curtain, while less glamorous and exciting, is what really matters in the wish-granting industrial complex. And since we all are wishing for lower insurance premiums these days, I think it's a good time to pull back some of that curtain and talk about how the wizards work. I spent over a decade selecting, pricing, and sometimes excluding risk for insurance companies. Let's talk a bit about how that works.

Quick aside: from this point forward I'm going to be mainly discussing lower middle market and middle market commercial accounts. Like checkers, personal lines and small commercial have mostly been solved. They are being run and governed by Skynet now. The model kicks out a quote, no one really knows how or why it's priced that way, but not even the President or Chuck Norris has the authority to change it.

Everything works on speed, the opposite of what Dorothy got in that poppy field.

Everyone is overworked and underpaid, but carriers (insurance companies) are squeezing everyone. As such, we were always trying to do more with less. That made speed and decisiveness paramount skills in underwriting. 90% of underwriters can tell you within 5 minutes of opening a file if they are going to "go to the mattresses" in order to write a policy. Because that is what it is. Writing insurance policies in a hard market is a battle. A soul-crushing, meeting-intensive, documentation bonanza of suck.

In 270 seconds, I could review the fleet, losses, model scores, credit, website, BUR, CAB, etc. to know enough to gauge if I could overcome the 880-page underwriting manual telling me all the things we shouldn't be doing.

That said, the first 30 seconds in every file were reserved for two things:

Honestly, you can reverse those.

Agencies have a reputation with the market and with each company they work with. Agents have the same. Secretariat was a great horse, but he couldn't have won the Derby with Shaq as a jockey. He probably couldn't have won any races that way. So, pick your jockey correctly if you want results. If an agent promises anything, the next question should be how they will deliver. Underwriters only have so much capacity, so they only work with good partners on tough accounts. Period.

If an insured is a loss-free electrical contractor with no autos, cool, pick any agent. If not, choose wisely.

Which brings me to the Insured's name. After 3 years in a market, I'd know almost every insured in my space. The good ones, the bad ones, the ones we got a submission for every year from all the sleazy agents in town. Those accounts were never getting the good deals. Underwriters want loyalty. We want a partner in risk. If an insured had a reputation of being flighty, difficult on adjusters, non-responsive, or was submitted by an agency named like a swamp, we just didn't have time for that nonsense.

I know The Matrix taught us that machines win in the end, but until then there will be a seasoned, exhausted, talented, overworked risk professional who will read your TCOR like a book in 5 minutes flat. If you want to get their best quotes, and the competitive market frenzy it leads to, then monitor your & your agents' reputations. Being a good business is table stakes; having solid partnerships is how you win this game.

Feel free to reach out with any questions or just to gauge your market reputation. Trust me... I'm a bit of a gossip.

One of the fallacies I push back on is the "there is a rate for risk" conversation had in underwriting about submissions.

Our job was to drive revenue and profit to the carrier. Period. I know deep in the bowels of the home office there were some actuaries trying to solve pricing (good luck! You can't spreadsheet human stupidity or carelessness without the law of large numbers you get in PL & small commercial), but for us on the front lines it was mostly about getting as much premium for as little risk as the market would bear.

Besides, at the speed we were usually working, so many of our decisions were made on accrued muscle memory & sheer reps of accounts reviewed. If you've seen a thousand HVAC accounts, you don't need a ton of data to know if you have an opportunity to write the next one. A couple of things slowed me down based on opportunity, one good and one bad for the insured.

First, if I saw a high hazard or vertical type account from an agent that didn't specialize in that field (I mainly worked on construction accounts), that was an interesting sign that the account might not be placed or priced competitively. Agents that specialize get almost as many reps as an underwriter and thus know the market inside and out. Hard to arbitrage that.

Not so for accounts that use their golfing buddy or brother-in-law as an agent. Those accounts can get stale or neglected, or the agency doesn't have my most bitter competitor carriers to sharpen the price. Either way, I wanted to know more and found that I was usually able to get "fatter rate" (shout out my underwriting documentation) than normal.

Likewise, if I had an agent really pushing business my way and giving me my "better than fair" shot at the account, they could call in favors and pricing that moved me off what I wanted to what I could tolerate from a pricing standpoint. Both are examples of how relationships matter in our business.

I'm not here to say that accounts shouldn't keep using their fishing buddies as agents. Life is complex and there are so many other factors than just insurance pricing to consider when determining your correct partnerships. That said, everyone should know that your uncle's stepson is probably costing you additional premium in your insurance program.

Ok, at this point:

I've spent the 5 minutes and determined an account is worth writing because its risk profile is lower than the expected premium I should be able to charge. I've spent another couple of hours verifying and pulling my file together, running everything through our analytics, discussing the opportunity with the agent, and getting a second pair of eyes on my file to make sure I'm not out in left field (ideally this would be a manager who could also sign off on the file, as large loss reports are easier to write that way). Now it's time to get some "boots on the ground" in the form of a risk control visit. My last piece of file documentation awaits with their report. But there is a secret here:

Risk Control doesn't matter. Or it does matter, but not in the way it's talked about.

Loss (or Risk) Control is the in-person meeting with a safety professional that carriers love to hype up as a value-add service, but what really amounts to an annual or semi-annual verification report. Does the insured really have a fleet safety program, what is the actual construction of the building, are any parking stops out of place? That stuff. It's a relic from a time before Google Maps, websites & big data, for checking to make sure the risk the carrier THINKS it's writing is the risk the carrier is ACTUALLY writing. As that, it has functioned pretty well! But just like the Buggles (look it up) predicted, new technology reduced the need for the existing way of doing things. Insurance companies have struggled with that lesson, so LC visits will continue.

I think this creates a few issues:

Ok, enough with disparaging loss control and the good people who do it (and some bad people). What DOES matter about loss control? And the answer is:

What isn't in the report.

What I really wanted to know as an underwriter was:

As underwriters, we are looking for a partner in risk. Someone who will work with us on the risk profile and treat our teammates correctly. If you are prompt & courteous at an LC meeting, I know you care enough about your business and the insurance product to be worth insuring and are probably even nice enough to work with. If the answer is no to any of the 3 questions, then I'd pass on quoting or hammer their rate on renewal.

That's it. Treat LC meetings like they matter. Even though they don't.

After our loss control report is dropped in the file, it's time to do the last (and most important) part of underwriting: finalizing the premiums.

Before I do that though, I think it's important to break down that pricing so everyone can understand the math a bit when it comes to risk sharing (insurance), and because some things haven't changed at all since I was working a desk back in 2017. In fact, they haven't changed much since half-drunk ship captains & fully drunk diligence experts (the OG underwriters) were negotiating deals at Lloyd's (a bar!!!! because of course that's where insurance had to start) in the 17th century. That is, the math... is just the math.

That math is this:

For every $1 of premium received, the insurer splits the money into 5 buckets. Those buckets break down to roughly $.55 for claims, $.15 for distribution, $.10 for ALAE & ULAE, $.10 for underwriting & UW services, & $.10 for management.

Anytime a new player comes into the market, they try to mess with this math for a competitive advantage. It never works.

The math is the math.

Now that we have done as much math as a Texas Tech alum is legally allowed to do, it's time to finalize the quote and get it out to the agency/prospect.

One of my favorite sayings on insurance pricing, and I've used it so long I'm not sure if I stole (borrowed?) it from another underwriter or not, is:

"The cost of uncertainty is rate and the cost of certainty is time."

That's it. That's the whole insurance pricing game.

I can't tell you how many times I've talked to a business owner who says they are paying too much for insurance (spoiler, they're right, because everyone is paying too much), and then when we dive into the root causes of the rate, suddenly there isn't the time or resources to address the carrier uncertainty that is causing the pricing inflation.

If you want long-term rate reduction results, time will have to be invested in culling underwriter uncertainty. Done correctly, the agent's diligence and expertise will shorten that time investment.

If you do have those experts on your side, you'll be amazed at the results.

Considering I've been in the insurance industry for 20 years, people expect me to defend it, and I will in a lot of ways.

It's a cumbersome system in which really good people work really hard to help as many people as they can. It's not perfect, but it has allowed our financial system to achieve some amazing things over the past 100 years.

The best advice I can give to an insured struggling to digest what they are seeing behind the insurance curtain is to find smart, specialized people who have the courage to lead with their hearts.

It might not take you all the way to Kansas, but it will lead to the best possible outcomes.

This is a guest post by Russell Luttrell, CPCU. You can connect with Russell on LinkedIn here.

If you’d like to guest post for Max Revenue please shoot us an email at [email protected]