CLASSIFYING RISK–WHY PROPER RISK CLASSIFICATION IS IMPORTANT
(April 2022)
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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 that 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