They also agreed that when different underwriters presented different quotes, the lowest quote was not always the one selected to present to the applicant.

For example, the producer who raised this question stated that it was the underwriter who had the rate book that, presumably, was based on credible actuarial data. That data and corresponding rates normally should form the basis for a firm quote. However, he also recognized that occasionally the price quoted bore no relationship to risk presented. In these circumstances, the producer does have some ethical obligations.

A Florida producer reported that some of his agency companies do not give a single price on some commercial accounts, but rather a price range. For that company, the producer will select a premium to present within the range. In the long run, this system allows the producer some flexibility in the immediate term if there is competition, and in the long term delivers fair pricing to both the insurer and insured.

An Ohio producer usually gets premium ranges only on special situations, such as liability coverage for a school fair, or movers and riggers coverage for a one-time move of an expensive type of equipment. Knowing the underwriter is using judgment rating, and that if an insured event does take place, no premium within the range will be adequate, this producer chooses the highest premium in the range as fair to both the company and the insured.

A Kentucky producer prefers a single price from the underwriter and tries not to indicate desired or necessary pricing in any manner. “My job is to provide the underwriter with all the relevant risk information he or she needs to evaluate the risk. I want to challenge the underwriter to thoughtfully examine the risk and give me his or her opinion in the form of a single price.” When given a range of prices, this producer will always select the lowest price in the range to present because he believes any price within the range is an acceptable price for the underwriter.

The majority of the producers also reported that when a price is given that the producer believes is either “too high” or “too low,” they would go back to the underwriter for an explanation. A producer from Chicago wrote: “There have been times we have told the underwriter that the price was too low. I do not think this is unethical because we usually know the risk and its exposures better than the underwriter, and it is our job to make sure there is a proper premium for the risk.”

Similarly, the Kentucky producer noted that an excessive or inadequate quote usually means the underwriter does not understand the account. “I will call the underwriter and go over the underwriting information to be sure he or she understands the exposures and ask that the price be confirmed. Underwriters who know me recognize that I am questioning their pricing. If challenged, I will, reluctantly, give them my opinion as to a fair price. After all, in the end, I am more aware of the circumstances of the insured than the underwriter.”

As to the ethics of not presenting the lowest available quote, all producers recognized that multiple factors affect price, such as coverage differences between insurers, and note that prices are only one driving force in their decision-making.

The Chicago producer highlighted one major difference: “The quality of the insurance company is becoming more and more a factor in our recommendation. Look at the recent significant declines in ratings and effective demise of some major commercial insurers. If you end up with an insolvent company because it had the best price, the ultimate cost to the insured will be much higher than expected.”

One risk manager–a former president of the Risk and Insurance Management Society–agrees with the producers. “There is a fair price based on (1) the exposures, (2) quality of the risk, (3) loss history, and (4) competition among others. It is incumbent on both the underwriter and producer to seek that fair price and not operate on the basis of what the account can afford to pay.”

An agent association executive also agreed: “I have observed over the years that the producers role is one of providing balance in the market. They fight for lower premiums when they believe quotes are too high, and they will suggest that some quotes may be too low during soft markets.”

A Minnesota producer indicated that it becomes his ethical duty to assist in both pricing and coverage when a problem arises. He notes that occasionally an otherwise “good” insured will have a string of bad luck. Looking at loss history, underwriters respond with quotes that are too high. “I will work with underwriters to modify coverage to bring premiums back to a reasonable level. Then, if the losses were just bad luck, I can expand the coverage in the future at about the same price.”

There was less consistency in the responses to the second question as to whether the producers response would be different with an agency company or an insurer with whom the producer was brokering the account.

For example, the Ohio producer will use an excess and surplus lines company only on rare occasions. “Currently E&S underwriters do not give my accounts the time the accounts deserve to price them. Quotes are given at the last minute and on a take-it-or-leave-it basis. If I am desperate and the quote seems too low, I will take it and let the underwriter live with his or her decision. However, if an agency underwriter comes in too low or high, I will ask how they came to their pricing because those underwriters appear to give the account thoughtful consideration.”

The Florida producer was blunt: “If brokerage company underwriters do something stupid with the account, I will let them. I will also tell my client that the premium this year will probably go up next year.” However, he said he would let an agency company know that he felt the premium was too low: “Its not ethical to focus on price alone for one premium for one account. It is ethical to seek a fair price for one account that, in the long run, will also be fair to other insureds and the insurance company.”

The Kentucky producer treats both types of underwriters the same. “If I believe the premium is wrong, I will ask how they came to their decision. Again, I want to challenge them to underwrite an account they understand and give me the price they believe is fair. However, I probably am more challenging to my agency company underwriters, as my clients will be having a long-term relationship with those insurers and I want to continue to represent the agency insurers to my clients.”

The Illinois producer agrees: “In the end, both agency and brokerage insurers will judge the producer on the profitability of the business written. It makes no sense to treat the underwriters for those companies differently. Also, over the long run, constantly underpricing will end up costing the producer and the company money, and may make insurance more difficult to place for the client.”

The risk manager summarized the situation: “The legal distinction between an agent and a broker is significant here. The agent is duty bound to represent the interests of the insurer. But as far as I (the buyer) am concerned, there is no distinction. An agent will look out for the interest of the insured as well, or he will not be my agent for long.”

In summary, the producer–whether an agent in the legal sense or a broker–has an ethical role in determining the premium that will be presented to an applicant or insured.

The producer should be in a position to understand the account better than the underwriter and the implications of the exposures better than the insured (in the absence of a risk manager). All parties should be seeking a fair price for the coverage afforded–a fair price now and in the long run.

While there are differences as to whom the producer might owe his or her primary loyalty in an individual account, in the end, the financial and ethical integrity of the business requires that the producer seek equity in premiums.

Peter R. Kensicki is a professor of insurance at Eastern Kentucky University in Richmond, Ky., as well as a member of the Ethics Committee of the CPCU Society in Malvern, Pa.

Sidebar #1

NU's Next

Question Of Ethics:

The quality of an insurer is returning as a potential major issue. Are there ethical responsibilities to insureds for a producer or the producers firm as to the “quality” of the insurer with which the insured is placed? If so, do these ethical responsibilities continue during the term of the insurance?

Please forward your responses to Dr. Peter R. Kensicki at [email protected], or mail them to him at Eastern Kentucky University, 107 Miller Hall, Richmond, Ky. 40475-3101. All responses will be kept confidential.

The next column on “A Question Of Ethics” will appear in the Oct. 20 edition.

Sidebar #2

Ethical Words

To Live By:

After an ethics column has been published in NU, we often receive additional responses. In most cases the responses are “ethical words of wisdom.” It would be a shame not to share these ethics nuggets with our readers.

One producer reported that his father had “street smarts” that shaped his standards. In my last ethics column on April 14, I cited situations where “producers feel uncomfortable with a risk, but do not have any concrete reason to walk away from the account.” This producers “Ethical Words to Live By” are as follows:

“An uncomfortable feeling should be a CONCRETE REASON to walk away.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.