Personal Risk Management: An Overview

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 much larger.

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 insurance.

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 deductible.

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 compensation benefits).

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 reports.

• 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 coverage summary.

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.

Conclusion

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!