May 22, 2018
Insurance’s Flawed Business Model
How do we effectively integrate “technology of tomorrow” with “business models of today” and interpret the “culture of yesterday”?
At its core, the industry is plagued by an inherent conflict of interest. Our customers don’t have an industry expert advocating solely on their behalf; the experts have financial incentives coming from the insurance industry.
As I say kiddingly, the first page of your insurance policy tells you, “We cover you for everything.” It’s the next 40 pages that take all that coverage away.
I firmly believe that there is strong opportunity to shift the traditional brokerage model away from one that is purely transactional and toward the strategic advisory role that companies around the world need, one that is built on trust.
But before we talk about the future, let’s explore the existing environment.
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Insurance brokers’ incentive is purely about the sale of a policy. They receive a commission when the policy is bound, not for providing strategic advice before, during or after the sale.
Brokers wear three hats representing themselves, the insurance company and then the client.
How can the client obtain the most comprehensive coverage at the market’s most competitive pricing when the broker wears three hats?
How can someone negotiate solely on my behalf if he has financial incentives and contractual relationships that potentially conflict with my best interests?
- If you are making 10% commission on a policy, are you going to be more inclined to sell a policy with a premium of $80,000 or $100,000 (assuming no differences in coverage)?
- Consider a smaller, regional brokerage, which may have three or four carriers that it primarily writes business with on a direct basis. If Travelers is the primary carrier, I hate to say it, but that relationship means just as much, if not more, to the brokerage than many of the clients do. If the brokerage upsets Travelers, perhaps by moving risk to another carrier or pushing too hard against the company in a claims negotiation, the brokerage is in a bad way. Travelers needs to be kept happy if a brokerage wants to maintain leverage to effectively price and win new business and of course retain existing business… not to mention the contingency commissions received for writing a certain amount of business with a carrier.
- Many brokers/agents, particularly the smaller, regional practices, are generalists, yet, in this era of emerging technology and data proliferation, insurance products are continuously refined and are often difficult to interpret without a deep understanding of both the particular client industry and new, relevant insurance contract language. Consider cyber insurance. There is no standardization in the industry, and almost every carrier has its own underwriting application and insurance policy language and structure. This leads many retail brokers to use a wholesale broker (specialist) to place the risk, as they do not understand how to properly explain the risk or terms of coverage (I can’t say that I blame them).
The insurance broker needs to move toward being a true client adviser, going beyond just the placement of insurance and including continuous engagement throughout the year on items such as the insurance and indemnity language in your lease/supplier/vendor/etc. contracts, letters of credit and collateral agreements/negotiations, claims analysis and negotiations and so on.
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True risk management is an in-depth analysis of both risk mitigation and risk transfer. To transfer risk most effectively, an extensive understanding of your client’s entire operations and, at the minimum, its contractual obligations, is a must. Simply reviewing a contract to see if your client meets the insurance requirements that the landlord stipulates in a contract is not strategic advice. Reviewing the contract and advising your client that she should not be responsible for “any and all liability” but rather “damages, expenses, etc. resulting from or in connection with the execution of the work provided for in the contract” is what I would call strategic advice. That’s just the tip of the iceberg.
As we consider new models of distribution and leveraging the rise of technology as we shift toward the “Insurance-as-a-Service” model with a focus on the customer experience, I firmly believe we must create solutions that provide insurance brokers (i.e. the industry distribution force) with the tools that they need to shift toward the strategic advisory role. We can diminish the current industry inefficiencies and yield more effective results on a consistent basis and with absolute clarity.
The question now is, how do we effectively integrate “technology of tomorrow” with “business models of today” and interpret the “culture of yesterday”?