Agents who don't worry about a carrier's solvency until it is downgraded may wait too long, forcing them to go into "emergency mode." This does not have to happen. My research shows that carrier instability is obvious years before downgrades occur, giving alert agencies time to act.

An unstable company is more likely than a stable carrier to become insolvent, which can cause problems for its agencies. For instance, state statutes and case law have raised the E&O bar above the usual requirement that agents simply avoid writing business with low-rated carriers. Agencies now must also notify customers of carrier downgrades. Attorneys have realized that even carriers with high solvency ratings can be unstable. As a result, E&O suits have been filed against agents for inadequate due diligence regarding carrier stability, even when a carrier was adequately rated at inception or renewal.

Moving business from an unstable carrier can be both expensive and hard to explain to clients. It's even more difficult when an unstable carrier is trying to keep customers by "buying" their business with low prices. Agents need to explain why the low price isn't really a great deal, or their clients may not want to move their accounts.

This can be an easy explanation to make, if agents emphasize the importance of service and responsiveness. Customers don't want to pay higher premiums, nor do they want problems getting their claims paid. Stable companies may pay claims with less hassle, whereas unstable companies approaching insolvency may struggle to keep every dollar as long as possible. Agents should ask their clients, "Is a lower premium worth having your claim possibly delayed?"

We've recently seen that these are realistic concerns. For example, Reliance was known to be unstable before it was downgraded to the weak categories, and it appeared the company was trying to stave off insolvency by undercutting prices. It probably will pay all its claims, but some clients will have to wait. Kemper is another example. Four years before its demise, we advised agents who asked us about Kemper's condition that the company was quite weak. Agents who acted early had an advantage over those who waited too long. When downgrades were announced, "proactive" agents already had moved their business and were free to pick off unhappy clients from "reactive" agents, who were working long hours to reassure clients and find new markets.

Kemper never reached insolvency. Instead, it entered into a voluntary runoff program. According to an article in the May 25, 2004, National Underwriter, "The firm supervising the Kemper Insurance Companies' runoff is using such hardball tactics to squeeze out revenues that some clients are considering taking them to court." The same article noted that Marsh was advising clients to consult with legal counsel over some actions this firm has taken.

Agents who did not move their business early-when the company was solvent but obviously not stable-have significant customer-relations issues and possibly E&O problems. None of us enjoys battling lawyers. Alertly moving accounts to more stable companies lessens the chances we'll face such a battle.

Whether a company becomes insolvent is not as important as whether it is stable. Understanding this can result in better customer relationships, more sales opportunities, more income, lower E&O exposures and better protection for clients. Agents must be prepared to explain this difference to clients and ask them to choose between low prices and reliable service-including reliable claims payment.

If all you can sell is price, you might be in for a wild, eventful and disappointing multiyear ride, with few sales opportunities and a lot of scrambling to keep what customers you have. If you can sell quality, you will most likely have an endless supply of prospects.