Tag Archives: E&O

COVID: Agents’ Chance to Rethink Insurance

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.

See also: 5 Transformations for a Post-Pandemic World

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.

Insurers Must Collaborate on Cyber

We are living in the accumulated aftermath of the countless cyber breaches that, since the turn of the century, have cost the global economy over $2 trillion. We are in the untenable situation where insurers find it nearly impossible to provide security for their insureds while safeguarding their own profitability.

However, the destruction and loss of the past need not be the fate of the future. If cyber liability and technology E&O insurers learn from the recent past, then insurers can help give rise to a future cyber realm that is free from the doubt and fear that are prevalent now.

Over the past two decades, insurers have not worked with members across the private spectrum to put into place unified laws governing the cyber realm, so there are now laws across the world that have been enacted or about to be enacted that are making it more difficult to provide cyber liability insurance. What may be even worse is that, for the past four years or so, different governments have argued against end-to-end encryption (E2EE), and insurers have not responded swiftly to that threat, either. If a country, especially one like the U.S, were to pass a law making E2EE unlawful, then providing cyber liability insurance to anyone would be made more difficult than it already is.

Thus far, insurers rarely speak to each other regarding their most prominent common adversary: hackers. Perhaps the only time that insurers might broach the subject of that adversary is when they are at a NetDiligence or PLUS Cyber Symposium conference, and even then hackers are treated as more of an appetizer than as a main course. If a hacker or hacking group causes five different insurers a combined loss of $50 million, then clearly such attacks represent a inconsequential loss. However, because insurers do not talk to each other, not only do they not know the common methods of attacks on their insureds, along with the collective loss they suffered, but they also have no way to focus efforts on removing that hacking threat. There is also no way to know that a hacker or hacking group is targeting a specific sector of the private sphere, because the only way to know that is through shared intelligence.

Every day, threat actors from nation states or hacking groups or standalone hackers are using the advances in cyber breach techniques learned from each other to create the next unstoppable attack. It is time for insurers to pool their own resources so that they and their insureds can begin to level the playing field with respect to the main adversary so that laws passed are to the benefit of insureds and insurers alike.

Insurers also need to look at the complete picture to be responsible netizens and help craft a safer cyber future. When semiconductor technology in the form of computers began to integrate with the personal and professional realms in the 1980s and into the 1990s, at least in the U.S, it was a very tortured process. Almost as soon as businesses had upgraded to 33Mhz processors, 66Mhz processors came out. Similarly, the original floppy disk drives quickly gave way to 3.5-inch disks, which gave way to Zip drives, CD-Roms and so forth. In software, things were no better. After finally using computers and learning DOS, businesses were introduced to Windows 3.1 and thereafter were upgraded to Windows 95, 98, 98SE and beyond. Every part of binary technology over the past 40 years has seen a relentless drive toward cutting-edge technology, and that pursuit thrust upon the people of this world a technological reality that very few understand.

Today, most people are unable to say what SoC (System on Chip) drives their smartphones, what a GPU stands for, what the differences are between 4G and 5G wireless technologies and what many other basic technological concepts are. Even among insurance professionals, there are still many people who hunt and peck and are unable to achieve a typing speed of 45 words per minute.

Worldwide, almost all schools lack a structured curriculum for the K-12 system that not only teaches binary fundamentals to the young but also helps them to understand computing history and the potential future of computing and networking technology. Consequently, despite the significant numbers of people using social media and smartphones, and the rise of IoT, most people do not know the fundamentals of our present binary world.

Perhaps more damaging is what the future holds. If most people barely understand current technology, then quantum computing, carbon nano tubes and neurotropic technology will be ever more unnerving for even more people. This disparity between the few who understand it, and the tremendous numbers who access the binary world without comprehension, creates a dangerous situation in multiple ways. Yet, this is the situation in which cyber liability and technology E&O insurers are trying to insure a binary usage world.

See also: Future of Insurance to Address Cyber Perils  

With the whole picture in mind, it is time for insurers to start implementing, soonest, solutions that will prevent the future from being like the past two decades. Insurers and insurance brokers alike need to start to act in accordance with what being part of a community means.

In its most basic form, a community is a group of people or organizations that exist in the same area or share a common purpose, and the most successful communities are the ones that come together and put the good of the community ahead of any individual member. Insurers would do well to start to establish a series of townhalls in physical communities to talk about not only what cyber liability and technology E&O are but also go over every aspect of what cybersecurity is, from anti-virus software to which CPUs and GPUs are the least vulnerable, to cyberattacks.

It would be especially helpful if some of these townhall seminars were dedicated to people 65 and older, because many organizations are wanting to “help” seniors without providing them with reasonably secure cyber products. To date, seniors do not seem to have borne the brunt of cyberattacks. However, it is only a matter of time before cyber criminals begin to realize the monetary value of focusing cyberattacks on seniors.

Many insurance professionals are eager to point out that small and medium-sized businesses are extremely vulnerable to cyberattacks, but warnings from a distance are not an acceptable substitute, on such an urgent issue, for face-to-face human interaction. There is a reason that property and auto insurers in the 20th century, used a phrase such as “like a good neighbor, State Farm is there.” A neighbor is a community member who is invested in the success and challenges of others.

With the 2020 U.S census coming up, there still has not been a unified community outreach effort on the part of insurers to help the census begin and end in a secure form at the community level. The most efficient way insurers can help with the census is to provide public libraries and community centers with new computers and networking equipment and lending IT staff.

Insurers also need to work with the cybersecurity community and with K-12 schools around the world so that students understand how to be responsible netizens. There needs to be encouragement in education, from letting the young follow what is popular technologically, to what is actually effective and useful. If
insurers do not work with the cybersecurity community, then how can educators and parents ever really know what responsible netizen activity looks like? Insurers can either work with others to start reducing that deficit, which will also reduce the frequency of breaches, or insurers can repeat their mistakes and forever put their profitability and the safety of their insureds in doubt.

In terms of effective global communication, we who are living now are standing where once stood those who coped with the changes in communication wrought by the printing press and its transformation of the world. However, modern global correspondence faces challenges that require insurers to start putting solutions into place now that will have benefits that last in terms of decades and centuries. With that in mind, it is time for insurers to bring to life an international competition that will encourage students in the seventh to 12th grades to create educational websites or advanced robots or allow for a structured and interactive way for them to point out zero-day exploits and other vulnerabilities that would have a $500 million or larger impact on the world economy if the exploit were to be used against the netizen community.

Insurers also need to start to rate every piece of technology with an independent testing lab. The lab needs to be built with the authority and autonomy to ensure that its ratings are as impartial and accurate as possible so that insurers can work with information that is as close to factual as possible. Insurers also need to tackle higher education and work with an organization like IEEE to finally bring the training of software developers/engineers into the 21st century. It is time for software engineers to have to meet requirements that are on par with structural engineers and attorneys. Not only will this enable a minimum higher level of coding competency, but it will prevent the non-certified engineers from being allowed to put pieces of inept software code into programs upon which this world depends.

Helping the brilliant young become useful and positive contributors to the cyber community, creating an independent testing lab and working with other members of the netizen community to produce certified software engineers can only enable a netizen community that appropriately values and pursues safety, the common good and the future success of the cyber realm. All of this would be to the great benefit of cyber liability and technology E&O insurers and their insureds.

See also: Surveying Wreckage of Cybersecurity  

People often cite the increasingly sophisticated breach techniques of hackers or the hyper evolving technological innovations of technology companies as reasons why dark knight cybersecurity specialists have managed to become so formidable. However, the reality for the rise of hackers is the inaction of implementing long-term solutions by insurers.

Cyber liability and technology E&O insurers perhaps have the best vantage point of any other part of the private sector, because they get to watch in real time everything that happens before, during and after a breach. It is those insurers, especially cyber liability insurers, who say they can help and protect insureds, and who are actively offering their services on the world’s stage. Unfortunately, insurers have thus far acted as if they need only sprint to the finish line to help their insureds. This is not, though, a sprint. It is in fact a very long journey that insurers must undertake.

However, if insurers pace themselves, unite with each other to overcome shared challenges and reach out to other members of the netizen community, then they will be able to leave the winter of desolation behind and step into a future spring that is lively, safe, profitable and enduring.

Important Perspective for Insurance Agents

By pure chance, at a completely non-insurance event, I found myself seated next to a deputy commissioner of insurance for a prominent state. This deputy commissioner, when he learned through the pleasantries of exchanging minor personal information around the table that I consulted for insurance agencies, let me know in no uncertain terms that he thought agents were mostly scumbags.

It was a wonderful way to embark on a two-hour dinner with strangers. His perspective was that he saw so many cases of agents selling the wrong coverages, purposely selling inadequate coverage and leading clients to believe they had far more coverage than they had. Honestly, through all the E&O work I do, I cannot disagree. It happens every single day. I do not know that I agree agents do so from an unethical basis as much as an incompetency basis, based on my E&O audits, but the issue is real. And I understand from a department’s perspective that only sees the problems and never hears about the good outcomes (how many insureds call their department of insurance to exclaim how great their agents are?) that their perspective would be highly biased. I get that.

The examples are plentiful. An industry newsletter that often lists new E&O cases recently included cases for a multimillion-dollar coverage shortfall, failure to disclose a major exclusion, an agent arguably not providing realistic client expectations and an agent advising a client they didn’t need more than $x liability limits. A separate recent list of E&O claims followed a natural catastrophe, and, while the data I reviewed was limited, it suggested strongly that most of the situations were caused by agents not selling the right coverages or coverage limits. Some of the situations were truly massive incompetency on the part of the agent. An example might be something like advising someone flood was not necessary when the house was on the water or that the client had coverage for a business in the home when the policy specifically excludes such coverage unless the endorsement was purchased. I am not suggesting these are the claims, but these are the types of claims.

See also: Agents, Brokers Are Dead? Not So Fast!  

I can understand the insurance department thinking agents are scumbags, although I truly prefer thinking these agents are just incompetent. Idiocy feels better to me than the connotations of a scumbag.

Insurance departments have a role in this because, as one Michigan judge ruled not long ago, the licensing requirements for an agent are less than that of a beautician. Insurance departments could always raise the licensing standards.

Insurance associations and their members are at fault, too. I have heard for decades how agents want to lower the standards of care, so they are less likely to be sued and, if sued, more likely to win. I have heard E&O attorneys and instructors pound into agents’ heads to not increase their standards of care. This is truly the epitome of cutting off one’s nose to spite their face. If agents want licensing standards far less stringent than someone who paints nails (I am not saying painting nails is not a difficult profession that requires considerable training to avoid injuring a client’s fingers or toes) and if agents and their associations want standards of care so low the agent is basically not responsible for much of anything, then in reality who needs a licensed insurance agent? My conclusion is: Absolutely no one.

Which brings me to two new legal developments. The first is legislation whereby only “natural” persons will be required to carry a license but non-natural persons, i.e., artificial intelligence computers selling insurance, will not be required to carry a license. This is real and likely to pass. Think about this just for a moment or more. The computer will have no standard of care because it won’t be licensed, and, with no offense, though it may be offensive, an incompetent but licensed human cannot compete with an unlicensed supercomputer that actually probably is fairly competent.

Another development is a recently passed law that requires insureds to “understand” their insurance. How any reasonable person could vote for a law that requires a consumer to “understand” their insurance is beyond me. That is an impossible standard, but it negates a standard of care for agents and companies. In fact, it makes agents mostly irrelevant because companies can then sell whatever to consumers, and the consumer loses the middleman agent, the good ones of which are fantastic protectors of clients from insurance companies and incompetent and scumbag agents.

That law might be applauded by agents who want no responsibility for selling clients the coverages they truly need. It probably is being applauded by certain companies, especially those that like to cut corners. (As an aside, I wanted to ask the deputy commissioner about his department’s efforts to prohibit some companies’ filings of policies that actually provide almost no coverage, but that seemed pointless.)

I hate it that insurance commissioners and others think of agents as scumbags. These perspectives make it so hard to create trust for those who do their job well and with pride. Someone else at the table asked me if all agents are scumbags, and I explained that in my interactions with thousands of agents over 30 years a large percentage of agents are absolutely the best. They take to heart their clients’ coverage needs. They are extremely well-educated in the coverages clients need. They work hard to protect clients from companies, especially when a company is not interpreting coverage correctly after a claim. These are good, hard-working, ethical people who make a positive difference in people’s lives.

See also: Use Insurtech to Help, not Replace, Agents

The high road is always the hardest road. By definition, the high road means climbing, working against gravity and working hard. The low road goes downhill. You know what rolls downhill. With the new laws being passed and promulgated, with many companies working to push aside agents, with the “scumbag” perspective many important people have of agents and the industry, with how insurtech and AI are working to replace agents in some venues, understand all these forces are aimed at eliminating incompetent agents. Incompetent agencies are paid too much, and their extinction creates a cost savings. The low road leads nowhere good.

The high road is the ethical, positive legacy and financially beneficial road. If you want to learn more about the high road and if you do not already know where that road is and how to counter all the negatives, let me know. I have created a special path for those wanting to develop a high road that makes their clients’ lives better and ultimately rewards them financially and in their hearts.

Misunderstood Role of the Attorney

Personal observations have demonstrated that some insurance companies have some very serious misunderstandings about the attorneys they hire.

I. The company’s defense attorney is not its adjuster.

Let’s say the first notice of a claim was via a lawsuit against an insurance company and that the insurance company immediately hires a defense attorney to respond to the suit — but the insurance company does nothing thereafter to investigate the claim because it thinks that, somehow, its attorney will investigate the claim and then tell it what to do. This type of thinking may ultimately provide a great reason for the lawsuit to be amended to include the company’s bad faith.

  1. Hiring an attorney to handle the claim does not shield the claim file (based on attorney-client privilege) from discovery.
  2. The insurance company is, in this case, the attorney’s client, and the attorney does not owe the insurance company’s policyholder the duty of good faith and fair dealing in handling the claim.
  3. The insurance company owes its policyholder the duty of good faith and fair dealing, and the duty can’t be delegated.
  4. Every state has rules set up regarding who can be licensed as an adjuster, and, invariably, attorneys are exempt for limited purposes — it is not a blanket exemption for attorneys. For example, in Oklahoma, persons not deemed adjusters or required to obtain license include: “a licensed attorney in Oklahoma who adjusts insurance losses from time to time, incidental to the practice of law, and who does not advertise or represent that he or she is an adjuster” and “a person employed solely for the purpose of furnishing technical assistance to a licensed adjuster, including but not limited to photographers, appraisers, estimators, private detectives, engineers, handwriting experts, and attorneys-at-law.”

See also: A Key Point on Limiting Attorneys’ Fees

II. The defense attorney the insurer hires for the liability lawsuit against its policyholder is not “your” (the company’s) attorney, even though “you” (the company) pay his bill.

The attorney the insurer hires generally has fiduciary duties to the policyholder, not the insurer, even though the insurer is footing the bill.

I have heard managers say, “Well, why did our attorney not tell us that the policyholder was not really covered?” I’d say, “Because he or she is not our attorney. Telling you that his client, our policyholder, was not covered would violate attorney-client privilege.” While the insurer can get raw information from the attorney, do not expect him to point out coverage weaknesses that may allow the insurer to withdraw from paying for the policyholder’s defense costs.

Even if the insurance manager would really like to know this information, don’t expect a competent attorney to set himself up for a legitimate complaint to the bar and to subject himself to sanctions for his ethical violations to his client, your policyholder.

III. The coverage attorney should not be the insurance company’s defense attorney.

Perhaps the coverage opinion given by a defense firm may be based on developing its defense business. Lawyers are human, so, to avoid any appearance of conflict, use different sources for coverage opinions and defense. Getting a coverage opinion from the same group that will be defending the suit based on the denial (which was based on the coverage opinion) is not only a poor claim practice, it is a good way to increase the company’s defense costs. Lawyers who defend insurance lawsuits are no more experts in insurance than lawyers who defend doctors are medical experts. Hire your defense lawyer to perform in what should be his area of expertise: court.

See also: Top Reasons Why Injured Workers Seek Attorneys  

IV. Insurance company corporate counsel is not its defense.

Corporate counsel is generally an employee of the insurance company, and he or she holds the law license; the insurance company does not.

  1. Insurance companies are not authorized to practice law, not even pro se.
  2. The corporate counsel is not very likely to be on the “panel counsel” list of the insurer’s E&O carrier.
  3. The insurance company is not protected by any legal malpractice coverage under the insurance company’s E&O policy.
  4. Such coverage is likely prohibited by the language in the insurance company’s E&O policy, and it is the E&O carrier that will choose the insurance company’s defense counsel.
  5. Corporate counsel did not attend law school and obtain a law license so the insurance company may get a cut-rate deal on its legal defense fees.
  6. Defense fees are a part of defense costs, while salaries are generally not. Corporate counsel is generally paid a salary as an exempt employee and not an hourly defense fee.
  7. Corporate counsel may be called as a witness or representative for the insurance company.
  8. Good defense attorneys (trial lawyers) are a specialty, different from corporate counsel. Treating them as the same would be like hiring an ENT physician for a kidney infection — yes,  he or she is licensed to practice medicine, but that is not his or her most competent area of practice.

Corporate counsel is not the proper attorney for an insurance company’s proper attorney to respond to a suit against the insurance company.

Have Insurers Lost Track of Purpose?

Insurance is risk transfer. A consumer has a risk. The consumer wants to eliminate or minimize the financial impact if that risk is, unfortunately, realized. Therefore, the consumer purchases an insurance policy. The insurance company takes the vast majority of the financial risk in return for a relatively small payment. The consumer eliminates the larger risk, however minimal the chances of realizing a loss, for a cost.

For example, the consumer possesses the risk that his or her house will burn down. The homeowner wants (or just as likely, the mortgage company wants) to transfer to a third party the financial burden he would have if the house burned down. Let’s assume the financial risk is $300,000. An insurance company accepts the risk of losing $300,000 in return for a $1,000 premium. If the insurance company has priced the risk correctly, then on average the company will make about $2 based on the last 10 years of results for homeowners insurance. That is quite a transfer of risk! (It may also qualify as a psychological study in madness because is it really worth $2 to go to all this effort and risk?)

Some, maybe even most, people might argue that insurance companies have absolutely lost track that they are in the business of risk transfer. Some companies clearly have taken the attitude they are not in the business of incurring claims. Everyone, of course, claims to understand this, but actions speak louder than words, especially when internally their words echo their actions. They only want to write risks that have an incredibly tiny probability of a claim. As a reminder to all insurance company people, the world does not need you if there are no claims. This is your purpose, your reason for existing.

Insurance company people are saying, upon reading this, “What does this author think claims people do all day? Of course, we have claims!” But what do claims people do all day is a valid question. On a broad scale, people do not have claims at nearly the frequency they had prior to 2001, according to A.M. Best data adjusted for more population, more cars, more homes, more businesses, and more drivers. All else being equal then, some claims employees may be twiddling their thumbs.

One reason I suspect claims frequency has decreased so much is because agents are continually telling clients to not turn in claims. They do this because companies have conniption fits if they even think an insured has had a claim. Some underwriting is so tight, I am not going to be surprised to see a nonrenewal for an insured who even utters “claim” in a conversation. Again, no one needs companies if no reasonable chance of a claim exists.

I understand the underwriting philosophy that once a person has incurred a claim the person is more likely to have another claim. That philosophy is as old as Lloyd’s. I am not doubting a high-quality statistical study has been completed that uses an entire universe to prove this point. (I’m sure someone has actually completed this study and it just is not public because I have not seen one in 30 years.)

See also: Underwriting, Marketing: Sync Up!  

I doubt correlations are universal across lines. I doubt, too, that opportunity does not exist differentiating between types of first claims and types of insureds. Insurance companies, though, seem to throw the baby out with the bathwater. Underwriters and underwriting managers are too scared of a large, second claim occurring. More precisely, they are scared their boss will tear into them for not nonrenewing the account after the first claim, no matter how unrelated the first claim was to the second. So they go scorched earth and nonrenew everyone. Agents know this, so they tell insureds to not turn in claims.

Underwriting behavior like this is highly problematic:

1. Agencies are damaged. Companies want their agents to survive and thrive, but they damage those agencies with their underwriting and claims actions.

  • When agencies tell clients to not turn in claims, the agents are creating huge E&O exposures for themselves.
  • Reputations are dulled and even damaged, especially relative to the new disrupters, because they have clean and better branding with no history.

2. The data used is questionable.

  • How good is a particular company’s one-loss regression analysis leading to a second loss? What is the true correlation, and is it really a simple regression? I doubt that. I imagine a quality statistical study would discover the correlation is a multi-factor relationship, and, therefore, simple underwriting rules should not be applied.
  • If a large percentage of claims, even small claims, are not being turned in, then the database used to draw the correlation is inherently and materially biased.

3. I am not doubting a relationship does not exist between some small claims and future larger claims. One of my first underwriting lessons is that an old man backing out of the driveway and hitting a bike only had a small claim due to luck. The bike could have been a kid. The nature of the claim, though, dictates the probability of the future claim; the issue is not that a claim may have occurred. The industry’s reputation is damaged when companies are so tight. If the reader does not see this, I am not going to explain.

4. Premium growth is impaired. One of the reasons premium growth has been so sluggish is that in the last 15 years tort reform, among other reforms, has arguably been too successful. I am not arguing such reforms should be relaxed, because, in my opinion, such reforms have been good for society. However, if fewer claims are filed or claims are settled for less, premiums decline. The fewer claims dollars paid, the lower premiums will be. The price for the risk transfer decreases because the risk decreases. When claims are not turned in, rates do not increase. When claims (not even claims, I’ll call them “incidents”) result in automatic nonrenewals or large rate increases that force insureds to find more reasonable companies, rates do not increase.

What is the definition of a claim anyway? When does a client’s inquiry become a claim?

Reputation damage, lower premium growth and increased litigation potential against agents should be enough to open eyes, if not at least slightly modify underwriting behaviors.

Some companies wonder why agents do not sell more of their product. The policies are good, the rates are good and yet sales are minimal. What the agents do not say is they do not trust the company to be fair. The last thing agents want is having to deal with a client who has had a claim and is not being dealt with by the carrier fairly. The best solution is to not sell policies of those companies that have this reputation. Please believe me, most companies that have this reputation do not know they do. But look at growth rates office by office.

See also: Shifting Balance in Risk Markets (Part 4)  

Another bad situation for agents is to rewrite policies unnecessarily. Rewriting policies is a lot of work, and the agents do not get paid extra. So when companies take unnecessarily harsh underwriting positions, agents have to rewrite more policies. It is easier to just not write new business with those companies.

For example: A young driver is backing out of a packed parking lot during the holidays. A careless driver is screaming through the rows trying to find a parking space. The two cars touch, but the young driver stops quickly enough to avoid any damage. The dust on both cars is wiped off, but the paint is not even scratched.

At first, the simple and novice conclusion is the young driver should be more careful. But I suggest no one is going to see the speeding driver driving any more expediently than the young driver did. Yet, the insurance company canceled the young driver’s policy simply for reporting the possibility the other driver might file a claim. The young driver did the responsible thing. The insurance company did the irresponsible thing. This is a true story.

An insurance company should at least think these “claims” through or build better algorithms. Otherwise, no one really needs insurance companies, or at least ones that do not think. At the very least, just get rid of the underwriters by 5:00 pm because human underwriting without thinking is pointless and useless.

Nothing good comes of increasing rates or nonrenewing accounts for incidents. Nothing good comes from agents telling clients to not turn in claims because insurance companies are taking ridiculous positions regarding incidents. Insurance companies are in the business of risk transfer, not writing risks that are absolutely perfect. If you run an insurance company or underwrite for one and cannot stand the pressure, sell the company or find a different job because absolutely no one needs an insurance company afraid of claims.