Published in Dealer Magazine, April, 2008

Every dealer knows there is a relationship between the losses printed on your loss runs and the premiums you pay. Insurance companies preach loss control, but what does it get you?

Every dealer knows there is a relationship between the losses printed on your loss runs and the premiums you pay. Insurance companies preach loss control, but what does it get you? Your losses go a long way toward determining your price. However, the way insurers look at losses does vary depending how profitable they are, especially within their investment portfolio.

In times of high investment income, insurers may be willing to write your dealership at a 50 percent or higher loss ratio so they can invest the cash. Maybe you remember the soft market of the late 1990s. In depressed or stagnant economic times insurers may price the same risk at 25 percent to 30 percent. Today we are somewhere in the middle. But if the stock market continues to trend lower and investment income drops, so will loss ratios; and premiums may go up. Loss ratio underwriting is not an exact science. As always, it is competition that gets any insurer to write your dealership at their lowest cost.

To give you an idea of the real effect loss ratio underwriting has on premiums, look at this example. Let’s assume for the last three years your dealership has had an average of $75,000 in losses each year. At a 50 percent loss ratio, you could expect to pay $150,000. But at a 30 percent loss ratio those same losses will generate a premium of $250,000. Regardless of how low your losses go, insurers will have a minimum premium based on the size and location of the dealership.

Just to complicate matters a bit more, insurers will often have different target loss ratios in different parts of the country. If you are located where that insurer wants market share, the loss ratios go up, premiums go down, and they get market share. If you are in an area the insurer is not excited about, the opposite can happen.

Some insurers look at a loss as a loss; they don’t care how or where it came from. Others are smart enough to give your loss run a little analysis. Assuming your bidders do look closely at your experience, here is what they are looking for.

Severity vs. frequency
In ‘insurance-ese’, frequency is a four-letter word. Insurers would much rather see one large loss than ten smaller ones. Why? Everybody sooner or later has an insurance claim; that’s why we have insurance. However, the dealer with a lot of small losses may have a management problem that could ultimately result in many larger claims. The dealership with 10 small fender benders concerns the insurer much more than the dealership with one big claim two years ago, and rightfully so. There’s a good chance the dealer with one claim just got unlucky, where the dealer with ten claims got lucky that five of the claims weren’t big ones.

Acts of God
Insurers have a pretty good history of turning the other cheek when losses can be termed an act of God. The obvious exceptions to the rule are dealerships in the ‘hail belt’ and East/Gulf coast. Generally speaking, insurers do not count fires, tornadoes, unusual rains, etc., against a dealership unless a pattern develops in either the dealership or the geographical area. Be wary though of insurers that do not discount these claims as it could result in higher premiums than necessary.

Loss ratios
How much is too much? This is a tough question, because so many factors come into play such as severity, frequency and acts of God. There are some general rules, however. Insurers break even at about a 60 percent loss ratio (losses/premiums). This does not mean insurers are dying to write 60 percent loss ratio accounts. The chances of this account’s losses getting worse are greater than the chances they will get better, unless specific steps have been taken by the dealer to reduce losses. As a rule, insurers like accounts with 25 percent to 35 percent loss ratios, and love accounts with less than 25 percent loss ratios. Loss ratios are usually reviewed over a three or four year period to see if the loss ratios have been consistent and predictable.

Loss run accuracy
Take a very good look at your loss runs, preferably on a quarterly basis. Be certain that before you send copies to prospective bidders that they are correct and accurate. Changing loss runs once released to the bidding public can be difficult. Sometimes there are clerical mistakes on loss runs like a stolen vehicle that continues to show up even though it was recovered without damage. There can also be timing issues such as a large claim that settles for much less but it is too quick for the change to be reflected on your loss run. Contact the insurer and try to get your runs updated before you the send them out.

What to do when you have ‘bad losses’
Communicate and advocate! Find out where your losses have come from, take steps to correct them (possibly with your insurer’s help), and then communicate your efforts and results. Don’t wait to be asked. To communicate and advocate is particularly important if you are bidding your coverage. Those bidders only have your loss runs to look at, and if you don’t communicate, they will assume your bad losses will continue. You must also be an advocate when your losses result from unusual circumstances or have been mishandled by an insurer. Remember that insurance is not a constitutional right. Insurers do not have to provide insurance to the dealership that disregards their losses. On the other hand, even if your losses have been poor, insurers often embrace the dealership that takes the necessary steps to correct their loss problems.