This is the first of what I expect to be several columns on the subject of
personal risk management. Like all first columns on any subject, this one starts
with an overview. It is directed to personal lines insurance agents who desire
to expand their services to personal lines clients and who wish to include risk
management advice to help those clients manage all their risks—property, liability,
life, and health.
Defining Personal Risk Management
Personal risk management (PRM), as I will use that phrase in this series,
is the process of applying risk management principles to the needs of individual
consumers. PRM is the process of identifying, measuring, and treating personal
risk (including, but not limited to, insurance), followed by implementing the
treatment plan and monitoring changes over time.
Risk Management Rewards Quality over Quantity
The problem with traditional agent compensation on personal lines policies
is that the premiums on most policies are relatively small and, therefore, so
are the commissions. Agent compensation is highest under that commission-only
structure for those who sell the most policies—not for those who best protect
the client. In short, personal lines agents currently get paid for quantity
rather than quality.
There is another inherent disadvantage to consumers in the current commission-only
structure. Agents with much more expertise, capable of designing better insurance
plans with fewer gaps, tend to leave personal lines where commission income
is small and gravitate toward commercial lines where the commission income is
Obviously, if agents are providing services beyond those contemplated by
the standard insurance policy commission, they are entitled to get paid for
their time and expertise, state law permitting. Fee-based risk management services
that agents add for personal lines clients will prove to be a significant advantage
to clients by making it possible to help them better manage all their risks,
reduce insurance costs, and significantly reduce the chances of major financial
losses at claim time. Also, adding fee-based risk management will help the agent
acquire much more coverage expertise, get appropriately compensated for that
expertise (without having to leave the personal lines market), and feel better
about by making a huge difference in the clients' lives.
Creating the Framework—16 Commitments
To add fee-based risk management services to a portfolio of services for
personal lines clients, agents will need to make several additional service
commitments. Here, for example, are the commitments I make to my risk management
clients, in no particular order.
Gain Considerably More Insurance Coverage Expertise,
Particularly in the Area of Policy Exclusions. The most important step
in the risk management process is identifying the risk. An agent can't manage
risks, like policy coverage gaps, if he doesn't have the skills to identify
them. This means both a commitment to obtaining advanced designations like CPCU,
CLU, or CIC, and a commitment to ongoing continuing education in all lines of
Develop Expertise on Every Type of Insurance Policy—Not
Just Property or Liability or Just Life and Health. To really practice
risk management, the agent must be able counsel insureds on all risks. It does
little good to have an outstanding risk management plan for life, health, or
disability risks, but to lose everything in a major uninsured lawsuit because
liability risks weren't recognized. If the agent doesn't address all areas of
risk for the client, who will?
Acquire and Maintain Expertise about the Risk Management
Process. The agent should know how to practice not only the steps in
the process—identifying, measuring, treating, implementing, and monitoring—but
also how to apply each of the various treatment options—avoiding, reducing,
retaining, transferring, and insuring.
Acquire Contractual Expertise To Identify and Handle
Risks in Every Type of Personal Contract. Agents should learn how to
identify property and liability risks in every type of personal contract and
learn how to most cost-effectively avoid, reduce, transfer, or insure those
risks for insureds. How can insureds avoid the $.60 per pound liability limitation
for movers in a household moving contract? How do insureds get the moving company
to waive its exclusion for breakage of fragile items? In a home remodeling contract,
whose responsibility is it to insure the building for structural damage and
liability risks—the homeowner's or the builder's? Agents can help insureds avoid
unknowingly assuming, in a wedding reception contract, the hosting restaurant's
liability for food poisoning of guests. Agents can teach insureds how to protect
themselves when they assume liability in a boat rental contract for all damage
to the rented boat, even damage they did not cause, such as windstorm damage.
When a client is asked to be a cosigner for his or her college son's school
apartment, the agent can explain how to amend the apartment rental contract
so that they are only guaranteeing the payment of rent and not assuming liability
for injuries at their son's kegger parties. Agents can also show insureds how
to identify, in the condominium association's bylaws and declarations documents,
the contract language obligating tenants to insure $100,000 of the interior
of their unit and also possibly to be responsible for the $25,000 master policy
Provide Counsel on All Insurance Policies—Not Just
Those Offered Through the Agency. Insureds often must choose which of
the three group health options available through their employer is the best
one to protect their medical risks; agents can counsel them as they make this
choice. Likewise, agents can counsel their clients on policies purchased through
their employer, such as group life insurance or disability insurance, and on
policies purchased through the mail or through other agents, such as the Medicare
supplements offered through retirement associations. Informed agents can counsel
clients on policies purchased in other states, such as vacation condominiums
in Colorado or Florida, and help coordinate the clients' coverage among all
policies to avoid inconsistent coverage between states. Agents can choose the
right options for professional liability coverage, for psychologists for example,
that is available through professional associations, at discounted pricing.
Agents getting paid fees can afford to counsel on and make available policies
that pay the agent little or no commission—policies an agent might not normally
use but that provide the best coverage and/or pricing for that particular insured—such
as the federal flood program, state assigned risk plans for health insurance,
or contingent workers compensation coverage for homeowners, which only pays
about $10 annual commission (defends the homeowner when the "independent contractor"
working on their home improvement project gets injured and sues for workers
Acquire Expertise in the Insurance Coverages, Contracts,
and Other Risks for Personal Lines Clients with Businesses Out of Their Home. This does not mean just expertise in the generally inadequate home business
endorsements. Agents should be knowledgeable about businessowners policies,
workers compensation, inland marine, product liability, professional liability,
business automobile, etc. Also, agents should obtain expertise on how to properly
protect the corporation's ownership interest and liability risks for those businesses
that are incorporated.
Maintain In-Office Specimen Copies of Every Single
Personal Lines Policy and Regular Endorsements Used. It's simply not
humanly possible to remember every coverage idiosyncrasy from one company to
another. After identifying the unusual risks in the personal lines insured's
life that are usually excluded or limited in coverage, the agent can look over
the specimen policies to determine the insurance company whose coverages best
cover these risks. About 30 percent of the time, I find myself pulling sample
policies or endorsements from our files to help select the best insurer for
a particular client's needs.
Create Spreadsheet Comparisons of Complex Coverages
between Insurers. This allows the agent to more easily pick the right
policy that best protects the client's risks. A great example of this is comparing
personal umbrella policies. Some provide automatic coverage for service on nonprofit
boards, liability, and physical damage on rented cars, boats, snowmobiles, etc.,
fellow employee coverage when using company cars, and accidental pollution liability
for underground heating oil tank leaks, etc. A side-by-side comparison completed
ahead of time makes it easy to properly advise the insured who has some unusual
liability exposures, as to which umbrella would be the best choice.
Always Order and Proof Prospective Specialty Market
Policies Prior To Placing Insurance with That Market. A good example
of this is a personal lines umbrella policy for higher risk clients who have
driving record problems or vicious dogs or swimming pools with diving boards
or trampolines. The agent should make sure all of liability risks are properly
covered by the specialty policy before recommending the policy. Scanning the
full policy into an electronic file makes it easy to reference and search at
a future date.
Have Internal Access to Policy Analysis Services,
Such as IRMI, and Refer to Them Regularly. This comes in handy when trying
to choose the best coverage option to cover a particular risk, as well as when
trying to convince an adjuster why they should cover a disputed claim.
Stay Current on Pertinent State and Federal Laws That
Affect Personal Lines Risks. An example would be laws such as the eligibility
for open enrollment for Medicare. Which communities are eligible for federal
flood insurance? Is the homeowner exempt from or legally responsible for the
added cost for demolition or improvements from building ordinance laws? Is there
an exemption from lawsuits for serving without pay on nonprofit boards? What
are the laws regarding insurance responsibilities for car rentals? (Minnesota,
for example, requires in most cases that the personal auto policy property damage
liability limit be applied without a deductible to all damage to a rental car
for which a Minnesota resident is responsible. It does not apply in every case,
which is why it's so important to know the specifics of the law and to have
a copy of it available as a resource in the office.)
What are the automobile insurance laws regarding mandatory and optional no-fault
or uninsured/underinsured motorist coverage? What about laws regarding homeowners
potential liability with regard to injuries to independent contractors working
on home remodeling projects, tree trimming, in-home nannies, etc.? New laws
spell out how restrictive homeowners mold exclusions and limitations are legally
allowed to be. On what grounds can homeowners policies be canceled for claims
experience? Agents should learn the laws pertaining to assigned risk pools for
all types of insurance. How do federal laws like COBRA , HIPAA, etc. work, to
allow individuals changing jobs to continue their coverage on a private basis
as long as necessary.
Really Know the Ins and Outs of the Claims Process. This makes it possible for the agent to better advise insureds that are reporting
a claim on how best to document the claim so they get paid everything they rightfully
deserve with the least amount of hassle. This would include the type of documentation
and the steps to take to most easily settle claims for homeowners structural
damage. Also, agents can provide tips to the insured on how to document the
pre-accident value of his car in a total loss and how to get paid more than
book value for the exceptionally clean car.
Be a Strong Advocate for Your Client's Rights in a
Claim Dispute. The agent can use his advanced coverage skills, his sample
policy file, his policy analysis reference services, his understanding of appraisal
and arbitration clauses in the policies, and all other resources at his disposal
to help resolve disputes. Over the years, I have probably gone to bat for clients
whose claims were unjustly denied or underpaid scores of times. Using my expertise
and these other resources in nearly every case I succeeded in getting the claims
department to reverse their position.
Keep Your Clients Informed of New Coverages, New Laws,
New Court Decisions, Etc. Changing laws and changing coverages can affect
insureds' risk management programs and agents can help them stay informed. A
personally produced and written newsletter sent to clients two to four times
per year is one way to do this. I have been writing and producing three newsletters
a year since 1986. Clients really appreciate it, and I feel good about keeping
them up-to-date on things that they need to know, a task I could never accomplish
without a newsletter.
Review All Changes in Your Client's Lives Periodically. This is usually done annually. Risk management programs should be modified according
to the reviews to protect clients from the changes in risks resulting from the
changes in their lives.
Offer Written Summaries of Risks and Decisions for
Managing These Risks. I offer my clients a choice of up to three management
- A one-page Risk Summary, briefly listing the risks we've identified
and the dollar amount of exposure for each.
- A multi-page Risk Management Decision Summary in which I list all the
unusual risks requiring special attention in a client's life along with
a summary of the treatment decision for each risk and the reason why that
particular treatment method was chosen over others.
- An Insurance Summary which is a spreadsheet listing every policy the
client has through me, through other agents, through work, through associations,
etc., including the insurance company name, policy number, annual renewal
date, current annual premium, agent's name and contact information, and
These reports should be updated annually. Ironically, although insureds greatly
appreciate the additional information, as their risk manager I also get tremendous
benefit in having these summary reports in hand when performing annual reviews.
They document what is being done with respect to the insured's risks and why,
making it easy to see if the strategies still make sense for the upcoming year.
In closing, let me say that there are hundreds of ways an insurance agent
could expand his or her services to personal lines clients to include risk management.
What you have read in these pages is how I have chosen to do it for my clients.
Best of luck!
Jack Hungelmann's book Insurance for Dummies, contains much
of this information and is available at your favorite bookstore or online.
For more information on his risk management and insurance business, go to www.JackHungelmann.com where you can check out sample newsletters, brochures, other articles written
on various issues. For background information, see Mr. Hungelmann's biography.