CLASSIFYING RISK–WHY PROPER RISK CLASSIFICATION IS IMPORTANT
(April 2019)
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Consider
this scenario: "Doctor, good to meet you. As a new patient from out of
town, I brought along my medical file. You can tell what is going on based on
my old doctor's information--so no need to run tests or examine me--just
prescribe the medicine I've been taking and let me get out of here. I'll see
you when the prescription runs out."
The
doctor will:
- Write the prescription and charge for
the visit
- Laugh hysterically as he escorts you to
the door
- Explain that while the file is
important, he needs to make his own examination before prescribing any
treatment.
I've
moved a lot and every time we meet a new doctor, the
old information is never enough. The doctor must be satisfied that the
treatment from my former physician is in line with the situation he observes.
The doctor is not willing to make a diagnosis based on old information or
previous treatment for three reasons:
- He generally doesn't know the prior
physician's skill or ability to accurately diagnose.
- My physical condition might have
changed since the last time I was examined.
- Research may have developed additional
information that would be pertinent and could impact the treatment plan.
Now,
the question is--what should an agent do when working with a potential new
client? One common practice is to obtain copies of the old policies and
complete the application based on this information. This is like the doctor
relying on the old file to treat you. The possibility for error is high.
- First, as the new agent you really
don't know who classified the old policy. The current agent could be a
very knowledgeable individual who might have been having a bad day or,
even worse, may have relied on what the prior producer
had done. Should an agent who wants to take over an account rely on the
thought process of the current agent?
- Second, most successful commercial
operations change over the years. The past fifteen years have had boom
times and tough times. Many businesses may attempt to diversify as a hedge
in order to add cash flow and utilize excess capacity.
- Third, ISO changes classifications
regularly. While the applicant may have been accurately classified in
years past, changes in the ISO Commercial Lines manual may make available
a more accurate classification or require that operations be split or
combined.
The key
to effective medical treatment is an accurate diagnosis. A physician cannot do
anything but treat symptoms until the diagnosis is complete. Similarly, an
applicant can never be properly placed and priced until its operations and
exposures are understood and accurately classified.
The
agent is the person closest to the applicant and the one who should provide the
appropriate classification and exposure to the company for pricing.
Improper
classification always leads to serious pricing errors because
classifications are the starting point. No matter how many corrections are made
in the pricing along the way, if the starting point is wrong, the price will be
wrong too. Yes, sometimes incorrect classifying brings a lower price; but when
correction time comes (just as with a stock market correction) a client will
have a nasty surprise. The result is the loss of a client. Consistent
misclassification also can strain company relationships and may lead to removal
of pricing authorities and other extras.
It is
very important to remember that ISO provides several options for an individual
risk which can appear close, so the agent might be inclined to throw a dart and
take the "cheapest,” but that is not how classification works. There will
be one “best” classification that is found by careful review of the risk and of
the ISO CGL Manual classification rules.
The
following articles explore specific types of risk and provide classification
suggestions for each:
Amusement Parks, Centers, and Devices
Day Care Facilities–Adults and Children
Lodging Establishments – including Casinos