The challenges for insurance retailers serving the professional liability market continue to grow. The cyber insurance segment, driven by ransomware, led the charge. Social inflation now adds pressure on errors and omissions coverage, with the directors and officers segment not far behind. As a retailer providing business liability coverage, you may need to explain two unfamiliar premium types to your clients.
What Does Minimum Earned Premium Mean?
A minimum earned premium is the lowest payment an insurer will accept to provide coverage for a policy period. If a client cancels a policy under this arrangement, the insurer will only refund the premium above the agreed minimum. This provision discourages efforts by unscrupulous clients to game a policy with a claim and a quick cancelation. In the tighter professional liability segments, this provision is one way to improve loss ratios. MED percentages can range from 25% to 100%.
What Is Minimum Deposit Insurance?
Minimum and deposit premium — often shortened to minimum deposit or M&D — is another payment arrangement to ensure a predictable revenue flow for insurers and discourage frivolous cancelations. An insurer begins with an estimate of a client’s profits for the policy period. The insurance industry calls these profits turnover, even when policies use a different accounting yardstick to accommodate clients’ varied business categories. The policy also spells out an adjustment rate expressed as a percentage.
If the client’s actual turnover exceeds the estimate, an adjustment premium falls due at the policy end date. The calculation looks like this:
Adjustment Premium = ( Actual Turnover – Estimated Turnover ) * Adjustment Rate
If turnover falls short of the policy’s estimate, the client does not owe an adjustment premium but may not claim a premium return for the shortfall. When clients outperform their policy estimate, M&D is a win-win for insurers and clients: Insurers receive predictable revenue, and clients get to defer a portion of premiums to the end of the policy period.
What Are the Client Service Considerations?
Particularly with your clients in the legal and medical professions, you may need to move to a surplus carrier to maintain their coverage. If you tap a surplus line, take care as you walk your client through the policy provisions. Surplus carriers are more likely to institute M&D premiums, and this might be your client’s first brush with this premium feature. As you check in with clients every few months, diplomatically remind them about the possibility of the policy-end premium adjustment. This step will ward off hard feelings at renewal time and keep the client on your book.
A challenging professional liability market highlights the value of a managing general agent with strong excess and surplus relationships. Joining your customer service expertise with an innovative MGA is a formula for growth in any insurance market.
Cochrane & Company
For more than six decades, Cochrane & Company has been proudly at the forefront of the insurance industry. Our experience has enabled us to innovate in powerful ways, reimagining the E&S market, and providing technology solutions that make it easy to do business with us. Licensed in all 50 states, we proudly serve clients across the nation, providing personalized and powerful solutions to help you become an even better partner for your clients. Speak to one of our experienced professionals today by calling (855) 967-0069.
