Bulletin: NL000036

Dear Associates:

We are all aware that the payment of a claim creates an immediate loss of profits. What is not readily apparent is the cost of the claims in terms of increased work and assumed liability in order to replace the lost dollars of profit. Below is an example of the ripple effect of claim losses.

1. A claim payment of $5,000 is made by an office.
   
   
2. Assume the office has pre-tax income of 10% (after expenses, the office earns a profit of 10 cents of each dollar earned).
   
   
3. The office would have to generate $50,000 in gross premium income in order to pay this loss. ($50,000 x 10% = $5,000).
   
   
4. Calculations:

   a. Assume average policy premium     $500.00
   
   b. Needed income ($50,000) divided by average    $100.00
   premiums ($500) = number of orders
   
   c. Assume average policy liability of $75,000    $75,000.00
   
   d. Number of orders needed (100) X Average    $7,500,000.00
   Policy Liability ($75,000) = Total Policy
   Liability Assumed to Pay Claim Loss

Of course, we are assuming that all abstracting, examining, and closing on the 100 orders would be done perfectly and no additional claims are created. If another claim or claims is/are created, then additional work, costs, orders, and liability would be incurred. Also, had the claim been $10,000.00, all figures would be doubled.

Claims are costly. As you can see, your company can spend the better part of a year playing "catch-up" on profits because of a small loss. We must all work to prevent claims and maximize profits.