Tag Archives: coverage

Agents’ Standard of Care for E&O Purposes

To begin on a dreary note, I feel like I am beating a dead horse discussing agencies’ standard of care. This would not even be a valid topic, except:

1. Too many attorneys are involved who cannot see the forest for the trees. They look at every situation with the idea that, if the agency had not done this or that, they would have an easy time winning the suit.

Their ability to win a suit easily should not be a factor in advising agencies to shirk their standards. Telling an agency to not advertise that they are professionals so that when they are accused of failing to provide services at a professional level they can win a case more easily is horrendous advice. Agents do not need attorneys who cannot win hard cases.

See also: Are P&C Insurers Failing Agents?  

Furthermore, advertising is not the issue. To even bring it up is evidence the attorney or other adviser is completely missing the point. The real point should be to act as a professional so that the agency can advertise as a professional. By acting as a true professional, the agency does not have to worry about using better advertising. It does not have to worry about being called out as a hypocrite for advertising one thing while doing something less.

2. A preponderance of agencies seems to want to be considered incompetent. A low standard of care is evidence of incompetence. At the very least, a low standard of care encourages amateurism.
This combination of advice from on high, attorneys and advisers, with a willing audience that WANTS TO BE TOLD to act amateurish, is a death knell for independent agencies because NO ONE NEEDS AMATEUR AGENTS!

The need for professional agents is stronger than ever. With so many new distributors of insurance, including ones that do not seem to think insurance licenses are even important, existing amateur agents are being made redundant. Some of these new distributors are going one level of dumb further, but cheaper.

Other new distributors are far cleverer because one has to read their advertisements carefully to understand that they create the impression of professionalism but not the promise of professionalism. They are using the difference between implying and inferring. They have larger budgets to hire more professional advertising experts that can craftily navigate between appearance and reality. I do not agree with their approach, but I understand it, and I expect some will be successful. This group’s success further negates the value, whatever value ever existed, of amateur agents.

The space that is left, which is largely uncontested, is the space of a true professional agency. This requires closing your ears to those advisers and attorneys who incompetently cannot understand the difference between a professional agency’s E&O exposures advertising professional services and an amateur agency’s E&O exposures created when they advertise professional-level services or images.

A true professional agency will incur far less E&O exposure because its clients are far more likely to buy the coverages they need! What is the cause of most E&O claims? The client not having the right coverage. If the agency sells clients more coverages, then the odds of a client not having the right coverage decreases. E&O is not that complex. The #1 way to avoid E&O is to sell clients the coverages they truly need, no more and no less.

Executing at a professional level is harder than the strategy, which is why this space is open. It is difficult, and, if it was easy, the space would not be available. Here are a few key points for becoming a true professional agent:

  1. Learn your coverages.
  2. Use a coverage checklist with your clients. No single better tool exists, by far, than a checklist for determining coverage applicability other than my proprietary exposure training process.
  3. Read your forms. I flat do not understand why anyone would assume what coverages exist or do not exist in a non-ISO form without reading it and without regard to how well someone knows the ISO form. If one is not selling an ISO form, then one has to read the proprietary form to know what is or is not in it. This is work. This is what you get paid to do as a pro. Amateurs take short cuts.

Why do more agency personnel not take these three basic steps? To date, they’ve learned to make a living being partially ignorant, so why start now? Please understand, I am not trying to be cynical, satirical or facetious. The fact is, based on the E&O claims I have seen and the hundreds and hundreds of interviews I’ve conducted of agency personnel, ignorance and incompetence is not an overstatement. People with 10, 15 or 20 years’ experience cannot describe basic coverages, and yet they have made a living. Hence, they have made a living while remaining ignorant.

See also: Insurtechs: 10 Super Agents, Power Brokers

I can’t argue about past success, but, going forward, I do not see how this business model has much opportunity. The new disrupter agencies can achieve the same level of amateur knowledge for much lower commissions.

If an agent knows the coverages, identifies the coverages the client actually needs, sells the client those coverages and obtains the client’s sign-offs on the coverages he or she needs but will not purchase, and then reads the forms to determine whether the coverages actually exist, the odds of a client having an exposure is quite limited. Additionally, the agency’s sales will increase, and the agency can have more fun by advertising more powerfully. I think a smart agency owner would build the entire sales strategy around identifying other agents’ mistakes, which should be like shooting fish in a barrel.

Hiding behind an attorney’s caveats is no way to go through the world, and it is not much of a business strategy. Be bold by doing what your clients truly need you to do, enjoy your success and sleep better at night.

health

Endangered Individual Health Market

And then there were none?

The individual health insurance marketplace is endangered, and policymakers need to start thinking about a fix right now, before we pass the point of no return.

Health plans aren’t officially withdrawing from the individual- and family-market segment, but actual formal withdrawals are rare. What we are witnessing, however, may be the start of a stampede of virtual exits.

From a carrier perspective, the individual and family health insurance market has never been easy. This market is far more susceptible to adverse selection than the group coverage market. The Affordable Care Act’s (ACA) guarantee of coverage only makes adverse selection more likely, although, to be fair, the individual mandate mitigates this risk to some extent. Then again, the penalty enforcing the individual mandate is simply inadequate to have the desired effect.

Then add in the higher costs of administering individual policies relative to group coverage and the greater volatility of the individual insured pool. Stability is a challenge, as people move in and out of the individual market as they find or lose jobs with employer-provided coverage. In short, competing in the individual market is not for the faint of heart, which is why many more carriers offer group coverage than individual policies. The carriers in the individual market tend to be very good ; they have to be to survive.

In 2014, when most of the ACA’s provisions took effect, carriers in the individual market suddenly found their expertise less helpful. The changes were so substantial that experience could give limited guidance. There were simply too many unanswered questions. How would guaranteed issue affect the risk profile of consumers buying their own coverage? Would the individual mandate be effective? How would competitors price their products? Would physicians and providers raise prices in light of increased demand for services? The list goes on.

Actuaries are great at forecasting results when given large amounts of data concerning long-term trends. Enter a horde of unknowns, however, and their science rapidly veers toward mere educated guesses. The drafters of the ACA anticipated this situation and established three critical mechanisms to help carriers get through the transition: the risk adjustment, reinsurance and risk corridor programs.

Risk corridors are especially important in this context as they limit carriers’ losses—and gains. Carriers experiencing claims less than 97% of a specified target pay into a fund administered by the Department of Health and Human Services; health plans with claims greater than 103% of this specific target receive refunds. Think of risk corridors as market-wide shock absorbers, helping carriers make it down an unknown, bumpy road without shaking themselves apart.

While you can think of them as shock absorbers, Sen. Marco Rubio apparently cannot. Instead, Sen. Rubio views risk corridors as “taxpayer-funded bailouts of insurance companies.”

In 2014, Sen. Rubio led a successful effort to insert a rider into the budget bill, preventing HHS from transferring money from other accounts to bolster the risk corridors program if the dollars paid in by profitable carriers were insufficient to meet the needs of unprofitable carriers. This provision was retained in the budget agreement Congress reached with the Obama administration late last year. Sen. Rubio, in effect, removed the springs from the shock absorber. The result is that HHS was only able to pay carriers seeking reimbursement under the risk corridors program 13% of what they were due based on their 2014 experience. This was a significant factor in the shuttering of half the health co-operatives set up under the ACA.

Meanwhile, individual health insurers have taken a financial beating. In 2015, United Healthcare lost $475 million on its individual policies. Anthem, Aetna, Humana and others have all reported substantial losses in this market segment. The carriers point to the ACA as a direct cause. Supporters of the healthcare reform law, however, push back. For example, Peter Lee, the executive director of California’s state-run exchange, argues that carriers’ faulty pricing and weak networks are to blame. Whatever the cause, the losses are real and substantial. The health plans are taking steps to stanch the bleeding.

One step several carriers are considering is leaving the health insurance exchanges. Another is exiting the individual market altogether—not formally, but virtually. Formal market withdrawals by health plans are rare. The regulatory burden is heavy, and insurers are usually barred from re-entering the market for a number of years (five in California, for example).

There’s more than one way to leave a market, however. One method carriers sometimes employ is to continue offering policies but to make it hard to buy them. Because so many consumers rely on the expertise of professional agents to find the right health plans, a carrier can prevent sales by making it difficult or unprofitable for agents to do their job. Slash commissions to zero, and agents lose money on each sale.

While I haven’t seen documentation yet, I’m hearing about an increasing number of carriers eliminating agent commissions as well as others removing agent support staff from the field. (Several carriers have eliminated field support in California. If you know of other insurers making a similar move or ending commissions, please respond in the comments section).

So, what can be done? In a presidential election year, there’s not much to be done legislatively. Republicans will want to use an imploding individual market to justify their calls for repealing the ACA altogether. Sen. Bernie Sanders will cite the situation as yet another reason we need “Medicare for all.” Former Secretary of State Hillary Clinton, however, has an incentive to raise the alarm. She wants to build on the ACA. Having it implode just before the November presidential election won’t help her campaign. She needs to get in front of this issue now to demonstrate she understands the issue and concerns, to begin mapping out the solution and to inoculate herself from whatever happens later this year.

Congress should get in front of the situation now, too. Hearings on the implosion of the individual market and discussions on how to deal with it would lay the groundwork for meaningful legislative action in 2017. State regulators must notice the endangered individual market, as well. They have a responsibility to ensure competitive markets. They need to examine the levers at their disposal to find creative approaches to keep existing carriers in the individual market and to attract new ones.

If the individual market is reduced to one or two carriers in a region, no one wins. Competition and choice are consumers’ friends; monopolies are not. And when consumers (also known as voters) lose, so do politicians. Which means smart lawmakers will start addressing this issue now.

The individual health insurance market may be an endangered species, but it’s not extinct … yet. There’s still time to act. There’s just not a lot of it.

Google Applies Pressure to Innovate

This article was first published at re/code.

It’s a common thread in nearly every industry: Innovation occurs when consumers’ growing needs and expectations converge with intense competition. It’s no surprise, then, that insurance — not exactly known for being on the forefront of technology — is one of the last remaining industries to innovate and fully embrace data, analytics and customer communication technologies.

Insurance is a complex purchase business with a convoluted ecosystem and ever-changing regulatory requirements that has kept the industry in a well-protected bubble from external competition for decades. Now in 2015, the announcement of Google Compare for auto insurance pushes the industry to innovate from a technology standpoint, but most importantly from a structural standpoint, by changing the way insurance companies interact with their customers. The reasons below outline why Google has the greatest chance to succeed where others have not.

A Lesson From Other Industries

Google has previously disrupted numerous industries to great success — think health, travel and navigation — mostly because of its dominance in search. Many of Google’s consumer-facing businesses have followed as logical next steps in the Google search process. For example, do you want to use Google to search for the best insurance company, or would you prefer to find the best insurance company with the cheapest policy? Do you want to use Google to find the route for your road trip, or would you prefer to have Google find you the best route? Google’s constant innovation stems from a simple but effective idea: Eliminate an unnecessary extra step (or steps) in the process, and give the consumer what they desire most — ease and simplicity.

There are some who believe that the tech giant may not be doing anything noticeably different from other aggregators in the auto insurance space. However, if its accomplishments in other industries tell us anything, Google will find a way to engage the consumer better than incumbent insurers do. Rather than writing its own business and determining individual risks, Google has teamed up with carriers of all sizes to reach customers efficiently, allowing them to quickly search, get rates and compare policies “pound for pound.” Already, this platform has helped shift the insurance industry’s emphasis on the customer by allowing peer-to-peer ratings and allowing consumers to openly disclose any negative or positive experiences, which will breed superior customer service and experience.

Millennials Trust Google

It is highly unlikely that Google will ever become a full insurance company with its own agents and underwriters, but Google brings a brand name that elicits trust and familiarity. This is especially true of Millennials, who are set to overtake Baby Boomers as the largest consumer demographic, at 75.3 million in 2015. When Strategy Meets Action reported in early 2014 that two-thirds of insurance customers would consider purchasing products from organizations other than an insurer — including 23% from online service providers like Google — it created tension in the insurance industry. These findings are largely a reflection of consumer discontent with insurance companies and their seeming lack of transparency.

Millennials do not trust insurance companies, but they do trust Google with just about every engagement they have with the Internet. And consumers trust other consumers: Google Compare’s user feedback platform brings transparency to consumers and requires the insurance industry to reevaluate how to effectively engage customers in a tech-driven environment. Pushed by Google’s unique insight into Millennials, traditional insurance companies must acquaint themselves with their new consumers, who are often considered impatient, demanding and savvy about social media.

Establishing a Preferred Consumer Platform

An eye-opening Celent study recently found that less than 10% of North American consumers actually choose financial service products based on better results. Instead, a vast majority places higher importance on ease (26%) and convenience (26%). Based on these findings, Google is using a business model that embodies the preferred consumer experience, a notion that is being reinforced by initial pilot results in California.

According to Stephanie Cuthbertson, group product manager of Google Compare, millions of people have used Google to find quotes since its launch in March, and more than half received a quote cheaper than their existing policy. Other new entrants, like Overstock, have reported issues with completion of purchase because consumers will browse offerings but still hesitate to complete their purchase online in a single visit to a website. Google’s platform is attempting to avoid this issue by announcing agency support through its partnership with Insurance Technologies, allowing consumers peace of mind by speaking to an agent before purchasing a policy — but maintaining the online price quote throughout the buying experience.

Potential for Future Growth

While Google Compare is beginning with auto insurance, work with CoverHound gives a glimpse into where it may be looking to expand. CoverHound’s platform specializes in homeowners’ and renters’ insurance, the latter of which is growing exponentially with the Millennial generation, who prefer to rent rather than buy. According to a recent TransUnion study, seven out of 10 Millennials prefer to conduct research online with their laptop, computer or mobile device when searching for a new home or apartment to rent.

Google Compare has also already shown momentum by recently announcing its expansion of services to Texas, Illinois and Pennsylvania, while adding a ratings system for each company it works with — much like the insurance version of TripAdvisor or Expedia.

The Bottom Line

Nearly every industry undergoes disruption when consumer expectations shift and businesses are forced to adapt and keep up. For decades, insurance didn’t have the kind of pressure from outside entrants that it is currently facing. Whether Google fails or succeeds early on makes little difference: Its entrance is a wake-up call. The more tech companies enter the space, the more traditional insurance must struggle to play catch-up.

These new entrants are helping to not only force innovation from a technology standpoint but also to bring an innovation culture to the industry so insurers can stay ahead of consumers demands around buying and customer service. Agents and insurance carriers have a level of expertise that is unmatched by the Googles of the world, but it will be wasted if insurers can’t figure out a way to integrate that expertise in a modern way and connect to consumers through different social channels.

The writing is on the wall, and how traditional insurance reacts will ultimately decide its relevance in the industry of the future.

Where Price-Focused Sales Are Heading

I recently read an article about “digital insurance stores.” The article made some good points, though this was not one of them: “Agents need to go beyond their traditional roles as sellers of auto insurance because auto is fast becoming more commoditized.” [emphasis added]

Once again, we’re told that auto insurance is a commodity. In articles (see the “Price Check” article, for example) and webinars, we’ve communicated why auto insurance in particular, and personal lines insurance in general, is not a commodity, nor is it “fast becoming more commoditized.” If anything, the opposite is true. In his paper, “Reevaluating Standardized Insurance Policies,” University of Minnesota Law School Professor Daniel Schwarcz writes about homeowners insurance:

“The current personal-lines insurance marketplace is largely organized around a myth. That myth is that personal-lines insurance policies are completely uniform. This myth explains regulatory rules that do nothing to promote insurance contract transparency….

“Different carriers’ homeowners policies differ radically with respect to numerous important coverage provisions. A substantial majority of these deviations produce decreases in the amount of coverage relative to the presumptive industry standard….”

“If regulators do not act to substantially improve consumer protection in this domain, then it can be expected that coverage will continue to degrade for most carriers, in a modern-day reenactment of the race to the bottom in fire insurance that triggered the first wave of standardized insurance policies….”

Most of the agents I know recognize the demonstrated market share threat of direct, price-focused sales but don’t fear it. Transparent competition is generally a good thing. Historically, intensified industry competition has, more often than not, resulted in more broadened, innovative products. That’s no longer the case given the lack of transparency in the marketing of direct/online insurance products.

Given a focus almost entirely based on low-price, “painless” marketing by increasingly data-driven, tunnel-visioned and short-sighted financial bean counters, what we’re likely seeing now is the beginning of a lemming-like stampede over a coverage oblivion cliff. Too many carriers today couldn’t care less about the role their products play in protecting American families from financial ruin. They’ve convinced themselves (and much of America) that what consumers really want and need is fast, cheap and funny and that the way to sell that is through lizards with Australian accents and box store clerks who’ll sell you a generic brown-paper-packaged insurance product at whatever price you tell her.

So-called experts and researchers who likely have never read their own auto policies and almost certainly have never compared two or more policies tell us that car insurance is a commodity where the best deal is the cheapest price that can be quoted in two minutes (yes, one company implies that it can ascertain your unique exposures and quote you the right product in two minutes, not 15, 7.5, or five). The experts tout the efficiencies of the Internet as the marketing channel that can bring even greater riches to insurers, as they predict the imminent demise of ignorant, un-hip Baby Boomer insurance agents who foolishly believe that consumers need consultation and advocacy. Note, too, that virtually all of these research reports focus on the advantages to the insurance company, with almost complete disregard to the obvious disadvantages to the American consumer.

But let’s say they’re right, that the Internet provides efficiencies that traditional marketing and sales channels cannot compete with. When all you can offer is “fast and cheap,” at some point you can’t provide that product any faster or cheaper. You’ve become as efficient as you possibly can be. So, when price is your only value proposition, what do you do at this point when you can’t cut the expense ratio any closer? Presumably, you’d look to, by far, the biggest component of premium – losses and loss adjustment expenses. So, how do you reduce that component, which accounts for 75% to 80% of premium, to continue to compete on price?

One way would be to actually return to underwriting. But you can’t do that when you’re quoting in two minutes. So, what does that leave? Reducing coverage or becoming more restrictive in claims handling practices. After all, who will know? Everyone agrees that “car insurance” is a commodity, so no one is considering what the policy actually covers or doesn’t cover. Until claim time. And, on average, that’s only once every seven years or so. So, again, no one much will notice…other than the families who lose just about everything they own because they bought an inferior product.

As Mr. Schwarcz opines, that’s exactly where the industry is headed in auto insurance unless agents make their case to the consuming public about the value of consultative selling and claims advocacy. And unless regulators return to carefully vetting the products they approve for the marketplace to ensure that they do not leave unreasonable, potentially catastrophic coverage gaps for insureds and that they reasonably protect the public from becoming victims to overly restrictive policy exclusions and limitations.

Copyright 2015 by the Independent Insurance Agents & Brokers of America. Reprinted with permission.

What to Expect on Management Liability

Gradually, over the last four-plus years, several management liability insurance (MLI) carriers have shifted their underwriting appetite and guidelines nationally, most dramatically in California. These changes have included some combination of:

·         Increased rates
·         Increased retentions
·         Reductions in coverage
·         Reductions in total limits offered
·         Reductions or removal of wage and hour defense cost sub-limits
·         Non-renewal of insureds based on industry, asset size, financial condition or loss experience.

This is quite a change, as for the previous 10-plus years there has been a surplus of capacity and MLI carriers were eager to write accounts at very attractive rates and terms. While there are still numerous MLI carriers with significant capacity, including some new entrants, the marketplace appears to be reaching a point where this capacity will no longer be use to offer the terms and pricing that we had been accustomed to seeing. This raises the question, “Why?”

Based on our conversations with MLI carriers in this niche, here are a few of the reasons:

·         Poor economic conditions five to seven years, ago leading to a significant spike in the frequency of employment practices liability (EPL) and directors and officers (D&O) related claims

·         Dramatically rising EPL claims expenses (even if a claim is without merit — remember, these policies cover defense costs)

·         Significant and continual increase in the filing of wage and hour claims (wage and hour suits are up 4.7% in the last year and 437% in the last decade)

·         Uptick in D&O claims involving bankruptcy-related allegations, breach of contract, intellectual property, federal agency investigations and judgments, family claims  and restraint of trade

·         The duty-to-defend nature of the policies, forcing carriers to provide a wide expanse of defense coverage for what might be arguably uncovered claims or insureds

What can our current (and new) non-profit and privately held management liability insureds expect as a result of the changes in the marketplace?

Our recommendation is to set expectations as follows:

·         There will be increases in retentions and premiums.

·         Smaller clients will need to absorb bigger percentage increases in premium and retention (as well as possible reductions in coverages), although in many situations the incumbent carrier will still be the best option if the increases are not outrageous.

·         A reasonable degree of competition and capacity will still be available for the larger management liability client. This may help mitigate increases in premium and retention.

·         Increases will be felt by insureds located in major cities (carriers generally still like risks in smaller cities and outside of states such as California, Florida, Illinois, New York and New Jersey).

·         Coverage for the defense of wage and hour claims will be more difficult to obtain and, when available, likely more expensive to purchase and with possibly lower limits or higher retentions.

·         Non-renewals by some carriers, based primarily on class of business or location. Some of these classes of business include:

o    Real estate

o    Healthcare

o    Restaurant/retail

o    Social media

o    Pharmaceuticals

o    Tech/start-ups

·         Carriers are asking for much more underwriting information than they have previously, especially if the insured has challenging financials, the insured is seeking additional funding or the insured has a challenging loss history.

Since 2010, Socius has been advising our clients that the MLI market appeared to be trending toward a hardening, following on the heels of numerous years of softness. As we get deeper into 2015, we continue to believe that this is the case.  The gradual transition that we initially described has, in fact, taken firm hold. We hesitate to pronounce the market as officially “hard” only because we hear rumblings that suggest that market conditions could very well deteriorate further, making what we consider hard today even harder.

For the moment, the watchword to agents and brokers is: “Manage expectations!  Difficult news is coming, so let clients know early – and often.”