As the end of the year approaches, we begin to think of contingency bonuses and profit sharing from our carriers. This is an important component of most Producer’s income.

Carriers use their own formulas for calculating contingency bonuses, but for the most part they are based on production, retention ratios and loss ratios.

For a new agent with a growing book of business, loss ratios may run higher than an older established agency because the amount of earned premium has not caught up with the actual premium on the Carriers books. The only remedy for this is to continue to write new business.

Carriers only keep a small amount of their loss exposure on their own books. Where the exposure is greater they will pass that exposure on to a reinsurer.

When Hurricane Katrina hit in 2005 most domestic insurers were able to pass that huge loss on to reinsurers and while they still had to raise their premiums it was nothing like it would have been without the reinsurance market. Still in some areas hit by Katrina, homeowners have seen their insurance premiums more than double. (nola.com)

The biggest year on record for reinsurers was 2005, but that has been surpassed by losses occurring in 2011. That includes the March 2011 tsunami in Japan, and the February 2011earthquake in New Zealand.

Most recently the huge storm on the eastern seaboard of the United States, Hurricane Sandy has resulted in untold losses in the billions and it will take many months for insurers to determine their true losses.

Prominent though in the aftermath of Hurricane Sandy is the growing discussion of the roll of climate change in the increasing number of natural disasters around the globe. Reuters has placed the amount of insured losses due to climate change in the U.S. at $510 billion dollars between 1980 and 2011.

To cover their losses reinsurers are raising their premiums and looking at environmental factors that lead to losses, i.e. building regulations and flood management. All of these costs eventually winding up in the cost of premiums for U.S. homowners.

Of course natural disasters aren’t the only thing driving up premiums for the insurance industry. A large number of, if not a majority of major reinsurance carriers are located outside the United States and service a global market. Congressman Richard Neal (D) and Senator Robert Menendez (D) with the support of President Obama have introduced a bill that would cap the amount of reinsurance premiums U.S. insurance companies could pay to international companies without paying a costly tax. In Florida only 9% of reinsurance dollars come from U.S. companies with the rest coming from foreign reinsurers.

Limiting or raising the cost of placing premiums with foreign reinsurers will only serve to increase the cost of insurance to the U.S. consumer.

The bottom line is that your Carriers are going to take an ever growing harder line when it comes to loss ratios in the next few years and as agents we need to bear this in mind when we are placing risks. While the premium may seem tempting, placing the risk with the wrong insured may have serious consequences for your Contingency or Profit Sharing bonus.

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