There are two main ways that insurance policies can go off the rails. First of all, underlying changes in the environment, like new laws, can make the plan no longer workable, Secondly, the people who actually use the plan might wind up costing the agency too much money. For these two reasons, insurance agencies need to keep a close eye on their plans, the legal and economic context, and the pool of people signing up for those plans. It is a critical part of doing business as an insurance agency in a complex and competitive market. Effective plan development takes insight that is only available through internal monitoring.
Insurance is a highly regulated industry. Some parts of insurance are quieter, while others are more active. For example, healthcare is currently going through a massive upheaval. The regulatory environment is changing in ways that significantly affect individual plans. Agencies need to be cognizant of this fact and ensure their plans are in compliance. The regulations vary by state as well, so what works in one state might not in a different one.
If the people in the pool of a given plan make too many claims, then the agency will start to lose money on that plan. This is the specialty of actuaries. They can predict who will sign up for a plan and help the agency price it out. But this always changes over time, so the agency has to be vigilant and ensure that the plan’s pool is still in line with the actuarial predictions. The plan or its price might need to change to reflect changes in the underlying pool of applicants. The picture gets more complicated when you consider the fact that insurance agencies have to assess the risks from all of their plans together, not individually. So they can use a high-profit plan to cross-subsidize a low-margin one. But this can only be successful with careful monitoring.
Insurance is a difficult business because it relies so heavily on statistics and technical skills. Constant upkeep for the plans the agency offers is a critical part of staying profitable. Considering that changes to plans and prices might have to be approved by a regulator, which takes time, the window of opportunity to react to changes is small. It’s a skill to be able to look ahead and see how a plan needs to change- a skill that agencies value highly.