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What Steps Can Firms Take to Improve/Lower their E&O Cost?

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By Michael Ryder

The development of a firm’s premium for the carrier’s base policy coverages are determined in the underwriting review process, which involves both fixed and discretionary attributes. Fixed attributes are those that must be strictly adhered to by the underwriter, as they are pre-established factors or rates that are applied to the firm’s gross commission income (total revenues), prior acts years and type of services provided. Therefore, in theory, if two firms were identical in terms of gross commission income, prior acts years, type of services provided and claims history, their developed base policy coverage premium should also be identical before the underwriter applies discretionary attributes. However, this is rarely the case unless the firm is small (less than $100,000 in revenues), whereby the premium would likely develop out to the carrier’s minimum premium regardless of whether the positive discretionary attributes apply.

Discretionary attributes, on the other hand, are those in which underwriters are able to utilize their judgment to apply credits (or debits) in the rating process based on the firm’s internal controls, risk management and claims history. Firms that have strong internal controls and employ sound risk management to mitigate the likelihood of claims will receive the greatest premium credits. Alternately, those with poor or marginal internal controls and risk management will receive no premium credits or debits. Unfortunately, the application does not truly allow the firm to distinguish itself by simply answering boilerplate questions related to its internal controls and risk management practices.

However, there are other steps firms can take to improve their chances of securing the best premiums rates.

Best Terms Tip 1: Take the time to write a detailed narrative describing your firm’s internal controls and risk management practices.

This is not a mandatory component in the application process; however, it does allow the underwriter to better understand what separates your firm from others.

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