July 29, 2020
COVID: Agents’ Chance to Rethink Insurance
by Chris Burand
The COVID-19 virus has given agents a wonderful opportunity to rethink insurance in general and their operations specifically.
When dealt a hand of cards, the goal is to play them as best you can. In other words, be constructive. The COVID-19 virus has given agents a wonderful opportunity to rethink insurance in general and their operations specifically. I’m going to start with a brief synopsis of what insurance is designed to protect.
Many writers have written that the pandemic is a Black Swan event (a few creative writers have stretched for more exotic animals, but a Black Swan is more applicable to insurance). Black Swan events were brought to the financial world’s attention through Nassim Nicholas Taleb’s book, “The Black Swan,” which gained considerable popularity for its seemingly prescient prediction of the credit crisis. Taleb considers how luck, uncertainty, randomness and risk all coincide and how, as the subtitle suggests, The Impact of the Highly Improbable can be managed.
The pandemic was absolutely expected by the scientific community, if not by regular citizens and politicians. I think one might conclude that insurance carriers expected it, too, because of the exclusions they built into their policies. Insurance is designed for Black Swan events, but in many ways carriers, agents and the public have lost this perspective. Insurance is designed to restore the policyholder to the financial status (a balance sheet position) enjoyed immediately prior to the unexpected loss. Insurance would not be affordable if the losses were expected. Those are maintenance policies.
Moreover, insurance would not be affordable if the events were unexpected but occurred frequently. A really good example of how insurance companies have lost track of this point is in my home state of Colorado. For some reason, insurance company after insurance company has opened up in this state for property without realizing that hail happens all the time in all of the major population centers. Hail should be expected to affect a large number of properties on a fairly regular basis, if on an irregular schedule.
A good play to make with poor cards is to simply rethink and go back to the basics of what insurance is designed to do. Then, build your agency and value proposition to clients from there. Insurance is a fantastic tool for reinstating a person’s wealth to its position immediately prior to a highly unexpected and relatively rare event. While auto crashes occur all the time, auto crashes per capita are relatively rare, and outside of fraud, always unexpected.
E&O claims often occur because agents fail to address unexpected and rare events. Business income coverage is a great example in this environment. Claims are virtually always unexpected and relatively one of the rarer insurance claims. Insureds are, therefore, less likely to recognize this exposure as an important insurance coverage. Agents are less likely to recognize it. too (ignoring for the moment most agents’ lack of adequate understanding of this coverage). If both parties fail to recognize its importance, the odds of an insured having adequate coverage if an unexpected business income claim occurs is low.
I read a quote from a business owner who had a pandemic-related business income claim denied. He said something to the effect of, “But that is what I thought insurance was for! That is what I thought I’d bought.” I don’t know anything about that particular claim, but my guess is that he never read his policy and maybe even if he did read it he did not understand the need for pandemic business income coverage. There is no reason to expect he should have.
Humans have an incredibly difficult time understanding the unknown. Humans do not have a great ability to appreciate the importance of Black Swan events. (I encourage you to read Taleb’s book “The Black Swan” and his book on fragility, “Antifragile: Things That Gain From Disorder.”) Yet insurance is designed for Black Swan events. Arguably, insurance is designed for larger-probability events than Black Swan events but still at the tail end of the normal curve. This is why actuaries are employed. This is also why claim stories are so much fun and fascinating and often earn the sobriquet of, “You can’t make this stuff up!” You can’t make up the claims stories, because they are rare and unexpected.
This re-established insurance foundation provides the cornerstone for helping manage the agency, remotely or otherwise, helping clients and navigating insurance distribution going forward. There are two classes of insurance agents — “order-takers” and “professionals.” Agents who are order-takers work from the assumption or presumption that insureds know what rare and unexpected claims they want insurance to protect. The insured orders these coverages, and the agents obtain those coverages to the best of their ability. It’s pretty simple, except that most insureds have a limited knowledge of what the unexpected events are for which they are likely to need coverage, and, in my experience, most order-taking agents are even less knowledgeable. The blind leading the blind is a great combination for eventual disputes, unhappy clients and E&O claims.
Going forward then, managing the agency should perhaps start with deciding whether your agency will be an order-taker or a professional agency. Once you make this decision, you can then best determine how to manage your agency and help your clients. Because, as an order-taker, you will not be making thorough coverage recommendations, if any recommendations at all, the key is going to be speed and low cost.
These are the benefits you will thrive upon because these are the benefits best appreciated by this class of customers. You will want to hire people focused on speed and efficiency. You will want to invest in technology that emphasizes speed and low cost. The entire agency must be focused on speed and low cost.
This may mean online quoting systems. It may also mean hiring employees who can process emails, calls, paper, etc. at a fast pace but are not skilled in insurance coverages. The technology used is different from the technology of professional agencies because coverage analysis, intimate meetings with clients — “close” work, in other words — is unnecessary in the order-taker environment. Employees who fit the order-taker environment will have a different personality than those who focus on coverages. Hiring specific to your model is vital.
From an E&O perspective, the historic middle ground is being eliminated due to the pandemic. The lines are being drawn more clearly than ever. Agents need to choose to operate as one type of agency or the other because the middle ground has become a dangerous trap. The best way to play this hand of cards is to fold on the strategy of following the middle ground.
The professional agent will focus on hiring people who have excellent communication skills, great insurance technical knowledge and critical thinking skills. These three skills are mandatory for “close” client work at the professional level. These people will educate clients on their exposures. Exposures are common and identified. The question is whether, once a client understands the exposures, the client wants to buy insurance for the unlikely event that an accident (unexpected) occurs relative to that exposure. The education required for this kind of service is challenging, and not everyone has the skills or patience to achieve it.
See also: Managing Risk in a Pandemic
The technology required for a professional agency is different from order-taking agencies because quality Zoom-like meetings will be far more important. The agencies will probably want to train their people on Zoom backgrounds, voice delays and other improvement protocols and will likely find ways to meet in person with clients when possible. These agencies will, more than ever, focus heavily on insurance technical training.
No universal answer exists to this paradigm change other than deciding which kind of agency you will be. Just like a hand of cards — other than the fact that every hand needs to be played — no universal answer exists. Be constructive and decide who you will be going forward. Decisions become much, much easier when you know your point of origination.
You can find this article originally published here.