E&O Alert: Has Your Agency Outgrown Its Policies and Procedures?

If your agency has grown over the years, then you’ve probably gone through many changes. Do the following scenarios sound familiar?

The organizational structure, policies and procedures that were in place when your agency reached $2 million in revenue are the same ones in place today. But your revenues have reached $20 million.

Your agency has purchased multiple other entities and is now structured into separate business units managed by separate owners. Each business unit has its own policies, processes and procedures. Some have none at all.

Your agency has multiple locations. But each has its own agency management system and business processes.

Your organization is managed equally among three or more partners. None have singular final authority for decision-making or change implementation.

You’re losing employees to your competition rapidly. But you don’t have monitoring systems for measuring performance or workload.

Your agency is using the same information technology system established upon inception-20 years ago or longer.

Your agency communicates with your customers. But each producer and customer service representative uses his or her own forms to do so.

Your agency has grown from two employees to 30, but there are no objectives, measurements or monitoring tools in place to regularly manage performance.

Many agency policies and procedures are developed and put into place when the agency is initially started up, recently purchased or merged with another organization. As the agency grows and changes it may very likely outgrow the established processes and procedures, and leave the firm at risk for errors and omissions (E&O) claims.

Growth, whether organic or the result of the acquisitions, is a sign of business success, right? After all, your revenues have grown significantly, your customer base has expanded and you’ve added to your staff.

That may all be true, but consider the ramifications of growth without internal process or procedure change. A firm that grows very quickly may begin to delegate tasks to employees who are not adequately trained or licensed to handle them, or may be unknowingly let work pile up.

The impact of consolidation

When there is consolidation among agencies, usually there is a mixing of philosophies, business practices and transactional methodologies. This fundamental fact is a contributor to the rise in E&O claims and the resulting increase in premiums that agents across the board have been subjected to during the past few years.

To effectively manage exposure, not only must merged organizations undergo significant change to allow for the effective integration of cultures, they also must review, analyze, develop and implement consistent business practices to replace those of the separate entities. Many organizations introduce the business of an acquired agency into their book, but “skip” the step of inducting or training their new employees on the overall organizational processes and procedures. This lack of orientation, or re-orientation, results in a multitude of differing practices all intended toward the same end, within a single entity.

And consider the converse situation. An agency is experiencing declining revenue. Does that make the agency less susceptible to E&O risk? The answer is an emphatic “NO.”

A firm with declining revenue that is looking to grow may begin offering new products and services without sufficient expertise in the area. They may lose their most highly trained and competent employees, leaving the care of their customers to those with less experience and training.

Regardless of the direction your agency is moving, when there is a change in the size, structure or direction of the organization, then the process and procedure practices, as well as the ongoing risk management activities, need to be considered.

Using audits for objective review

If you feel your agency may have outgrown its policies and procedures you should consider an in-depth review of your organization. Audits are an excellent tool you can use to accomplish this task.

An external audit can provide a review of operational effectiveness in all areas of the business and aid in risk management and E&O awareness and prevention. An external audit, conducted by an objective third party, will establish a benchmark for continuous review and improvement, including a detailed review of operations, processes and procedures so you can identify gaps that could result in E&O exposure.

An internal review process can be conducted at regular intervals to self-regulate the effectiveness of business practices as the business grows and changes. This internal process allows for the continuous, objective review of organizational operations and introduces a continuous and measurable improvement system to your business.

Internal and external audits allow for the objective review of the business, noting specific findings and suggesting specific recommendations for the remediation of problematic practices. They not only reduce the potential for E&O claims, but also give you a compliance and risk management tool to help you comply with the laws and licensing obligations of the insurance business.

In order to ensure that an audit of your organization covers your business activities comprehensively, the process should include a review of the agency’s infrastructure, including: front office, products and services, back office and administration, organizational capacity and corporate governance. It also should include a review of the agency’s business transactions, including producer activity and file reviews, and CSR activity and file reviews.

While the word “audit” may conjure up some negative images, but the process and outcome of undergoing this type of exercise can be a very valuable and eye-opening experience. Objectively reviewing your organization on a regular basis is not only good for managing potential E&O exposure, but it also allows for the review of overall business effectiveness.

With the results of an audit, you are better positioned to implement best practice policies and procedures-establishing and maintaining documented business processes and integrating risk management requirements into business systems. As a result, you can help guarantee your agency has the highest possible returns and customer satisfaction.

Andrea Dawes is vice president of Gold Seal

Risk Management Limited, a risk management
firm offering advisory services and products to

independent insurance agents and brokers. For
more information visit: www.goldsealcorp.com.