Every dealer knows there is a relationship between the insurable losses the dealership suffers and their premiums. Insurance companies preach loss control, but what does it get you? Unfortunately, in the competitive insurance marketplace, the answers are not always as clear as you may think.
Over the past few years, insurance has become increasingly less regulated as to premium and forms. This is one of the reasons we have a competitive market today. The lack of regulation has allowed insurers to go to a loss based rating system rather than relying on the rates set by each State's regulators. Each and every company has its own system. This doesn't mean that they always use it. Sometimes, if they want your business badly enough, they'll just toss the system out the window and price your account based on the way they feel.
Please don't take this out of context. This doesn't mean you should disregard your losses because someone will buy the business anyway. Only a very few ever get this lucky! Here is a basic primer on how insurance companies look at losses:
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 suffers some loss now and thenthat'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 ten 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 five 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 exception to the rule is dealerships in the "Hail-belt." God just seems to like to pick on you guys. 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.
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% loss ratio (losses/premiums). This does not mean insurers are dying to write 60% 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% to 45% loss ratios and love accounts with less than 25% 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.
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) then communicate your efforts and results. 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 usually embrace the dealership that takes the necessary steps to correct their loss problems.