Impact of Underwriting on Your Dealership

As you re-evaluate dealership processes throughout the year, consider your relationship with your product administrator.

Be sure their reserves are handled properly to ensure any unpaid claims don’t reflect back on you. One of the easiest ways to determine whether a product administrator will benefit your business is to look at the relationship.

First, determine your product provider’s A.M. Best rating. It signifies the company’s financial strength and ability to meet ongoing insurance policy and contract obligations. If the underwriter is a reputable company known for following through on its obligations, it’s highly probable that your product administrator is, too.

However, look beyond the credit rating. Investigate the strength of the relationship between the product administrator and the underwriter. If the administrator has a relatively new underwriter, look into their history with others to determine if they move from one to another frequently. You also should find out whom they have done business with in the past.

Looking into how long the company has been with its current underwriter or whether it flips from one to another can tell you a lot about the company’s viability. If it can’t maintain a long-term relationship, it could be mishandling reserves and putting the underwriter at greater risk. If your product provider has worked only with strong underwriters, their products probably are handled properly. If they can only attract weak underwriters, this should raise a red flag.

Another area to evaluate is the product provider’s reserve structure and whether they adequately price products to manage the reserve to pay claims. While inexpensive products are always appealing, be aware that low costs could negatively affect funds put in reserve to pay claims. How much income from each product sold goes towards paying claims? How many claims are paid each year? You also should look at their Better Business Bureau rating, because if the BBB has several consumer complaints about unpaid claims, there could be a reserve issue.

One way to determine whether reserves are handled appropriately is to find out whether their underwriter’s actuaries help the product pricing process. The actuary’s primary role is to protect his company from the negative impact of having too little money to pay claims. As a result, the actuary would be the most stringent and reliable in making sure reserves are appropriately priced to accommodate the associated claims exposure.

You also should learn how the product administrator takes seasonality or market changes into account. Does the company compile data to identify long- and short-term trends and refine coverage and rates accordingly? For example, more claims are filed during winter for tire and wheel policies because of bad road conditions due to potholes. If the product provider has taken this trend into consideration when evaluating pricing structure, it will be better prepared to manage loss ratios.

Last but not least, consider customer service in the product provider’s claims department. How fast are incoming calls answered? How quickly do they process requests? How often are calls abandoned?

These statistics help shape the customer experience. If customers spend too much time waiting for their call to be answered or for their request to be processed, you can bet you will not receive repeat business. Even though their claim is handled by a third party, the experience will reflect on you.

For the success of your business, it is imperative you take a periodic look at how your product administrator to understand its relationships with underwriters, its ability to pay claims through reserves and how it handles customer service. These dynamics influence both your reputation and profits, and ensure flexibility to manage through a number of market situations that could arise.

John Stephens is senior vice president of Dealer Services at EFG Companies. He can be reached at 972-445-8910 and [email protected]