Loss Ratios, Reserves and Your Agency. Is Your Head in the Sand?

September 22, 2022

Although carriers look at several factors when evaluating agency performance, like low-volume codes and retention, both loss ratios and reserves still play an important role. It costs a carrier to keep a code open, so it isn’t surprising they want an agency with a well-rounded and well-performing book. Agents need to be proactive, know their numbers and understand their impact on the bottom line.

The Value in Regular Loss Ratio Reviews
It is important to review your loss ratios regularly because it can offer early insights on potential problems. For example, high loss ratios can be a reflection on clientele. Too many high-risk accounts can increase a loss ratio. It can also be a symptom of the type of business being written—unprofitable. On the opposite end, a very low loss ratio can signify a lack of agency growth. Lastly, a high loss ratio in the absence of an external event (like catastrophic weather) is an indication that the book of business may need to be evaluated. A book should have a diverse blend of customers.

Loss runs should be requested prior to October 1 for timing purposes. That allows the final three months of the year to be used for large loss reviews and changes. In cases where the loss ratio is too close to the maximum cut off, examine the overall accuracy of these losses for the books. A carrier may conduct an agency deep dive if a loss ratio is high. In addition to reviewing claims, they are going to investigate whether the loss ratio is being driven by other things. Perhaps the agency is writing too much low-limit or incident business. Or maybe an agent isn’t classifying the risks accurately.

Reserves and the Bottom Line
Because claims reserves are meant to pay for incurred but unsettled claims, they represent liabilities and effect profitability. A sudden change in reserve can alter an agent’s loss ratio in either direction. If the change is a takedown, an agent’s loss ratio goes down. If the reserve change increases, the loss ratio increases.

An important piece to note is timing relative to increased reserve changes. Sometimes carriers make increased reserve changes before year-end and some close claims in January and February when they could have been closed by year-end. That said, carriers are unlikely to make significant reserve changes prior to October 1. If a claim appears to be over reserved, it is important to reach out to the carrier for further review.

When High Means Low
A high loss ratio can directly impact your ability to write business and agency profitability. Ultimately, carriers want to build relationships with profitable and successful agents. It is up to an agency to be proactive, practice front-line underwriting, and ensure that the numbers are adding up to success.