Tag Archives: wilson

Need Proof Policies Aren’t Commodities?

I’m going to borrow the approach taken by Chuck Schramm, a Chicago-area insurance agent with more than 50 years of industry experience and one of the premier insurance educators in the country. He has done a series of seminars that examine a single policy (commercial property, business auto, CGL, etc.) by providing several case study-based claim scenarios. Participants must determine for each claim whether the policy covers the damages and why or why not. It’s a wonderful way to learn HOW to read, understand and APPLY policy language to coverage and claim situations.

Many insurtech startups and online comparative quoting systems take the position that auto insurance is little more than a commodity distinguished almost solely by price, that insurance buyers do not need professional representation by insurance agents nor advocacy at claim time because the product and process are so simple and there’s so much information available on the internet. Let’s dispel that ludicrous assertion with the following scenario….

Bubba owns a car insured in his name with the State Insurance Company. His wife, Bubbles, owns a car insured in her name with the National Insurance Company. Their adult daughter, Bubbette, and her six children live with Bubba and Bubbles, and Bubbette owns a car insured in her name with the ARP Insurance Company. All three insurers use the 2005 ISO PAP.

See also: Geospatial Data: New Key on Auto  

Using the ISO policy, determine who is covered for liability by what policy in the following claim scenarios AND why or why not are they covered. In other words, in each scenario, are the parties insureds under the policy, and, if so, does a liability exclusion apply?

Claim #1:  One afternoon, Bubba drove Bubble’s car to the liquor store, ran a stop sign and had an at-fault accident.

Bubble’s PAP   __ does   __ does not   cover Bubbles.

Bubble’s PAP  __ does   __ does not   cover Bubba.

Bubba’s PAP  __ does   __ does not   cover Bubba.

Bubba’s PAP  __ does   __ does not   cover Bubbles.

Claim #2:  That evening, Bubba drove Bubbette’s car to a local tavern and had another at-fault accident while returning home at dawn the next morning.

Bubbette’s PAP  __ does   __ does not   cover Bubbette.

Bubbettes’s PAP  __ does   __ does not   cover Bubba.

Bubba’s PAP  __ does   __ does not   cover Bubba.

Bubba’s PAP  __ does   __ does not   cover Bubbette.

Claim #3:  Upon his arrival at home, Bubba and Bubbles separate, and Bubbles moves in with her mother that afternoon. That evening, Bubba asked Bubbles if he could borrow her now-repaired car again to take his new girlfriend to visit her mother and had yet another at-fault accident.

Bubble’s PAP  __ does   __ does not   cover Bubbles.

Bubble’s PAP  __ does   __ does not   cover Bubba.

Bubba’s PAP  __ does   __ does not   cover Bubba.

Bubba’s PAP  __ does   __ does not   cover Bubbles.

I’ll post the answers within the next week, so make a note to check back later. If you simply can’t wait because you’re just too darned excited that you know the answers, feel free to email them to me, and I’ll respond.

See also: Auto Claims: Future May Belong to Bots  

If you find this kind of exercise valuable, let me know, and I’ll do others. Another one I have in mind for the PAP involves three people – Moe, Larry and Curly – two of them with PAPs and all involved in the rental of a car.

Is Insurance Really Ripe for Disruption?

This morning, I was reading a new article essentially about how insurtech disrupters were going to destroy the insurance industry. As is often the case, these startups were compared to Amazon, something I’ve blogged about on several occasions, including in the article “Insurance and Paper Towels.”

Among the predictions of this article were:

“And you’re going to get disrupted in a way that’s staggering in its infinite nature, with infinitely more data points, infinitely greater opportunities and, as a result, infinitely more options amid a sea of competition, which makes you feel infinitesimally small. Suddenly. This competitive force has built such a commanding, unexpected lead. Yes, a good, old KO before you even heard the bell go off. You will likely default, and it will be too late to pivot.

“For the lucky, the ability to slip into obsolescence and appreciate the nostalgia of the past will do. (Of course, not the positive vibe-nostalgia, the punch-drunk love of sentimental warmth. Nope, as you become a relic of history, the nostalgia will be more like the Greek word root for nostalgia, which translates to pain, or more specifically the debilitating and often fatal medical condition expressing extreme homesickness).”

See also: How to Respond to Industry Disruption  

Yikes! Gadzooks! Godfrey Daniel! (and other “old-timey” expressions of fear and terror used by industry fossils like me). Or, better yet, he “blathers like a bubbly-jock,” an 18th century expression that means to prattle like a gobbling turkey or “to talk rubbish.”

The article concluded with:

“…you’re about to be disrupted. Amazon ring any bells?”

Yep, so does Google Compare. And Airbnb Insurance and Guevara and Guild and Health Republic and Risk Genie and Tribe Cover and Zensure and RiskGone and….

Amazon sells products with a known cost. Insurance involves parties entering into complex, legal, highly regulated indemnification contracts where the costs are not fully known and one event can be financially catastrophic for either or both insurer and insured. Insurance is more process than product. It begins with an individual risk exposure analysis, continues with matching the results of that detailed survey with the proper risk management technique (one of which is “insurance”), then moves to interpreting a complex legal contract IF a loss event occurs.

Insurance in its present form does not lend itself to an Amazon-like “1-Click” purchase. Insurance contracts are not commodities distinguished only by price. If I buy three pairs of crew socks on Amazon and they don’t fit or I don’t like them, at worst I’m out a few bucks or the inconvenience of a return. If I choose the wrong insurance product, I may almost literally lose everything I own, and, in the particular case of liability claims, I may have my income garnished for the next 20 years.

Insurance is a complex process, not a single event where all that matters is a fast/easy/cheap convenient and pleasant customer buying experience. The true test of the insurance product is whether it covers a claim. Again, in the particular case of liability exposures, the value of the purchase may not be known for years.

See also: Why Insurance Is Ripe for Disruption  

Those who think they can disrupt a centuries-old industry with a phone app and an AI bot that extracts bad data from a county tax database without human intervention aren’t being innovative. They simply lack a valid historical perspective of the industry and a fundamental misunderstanding of what the industry is all about.

What the insurance industry is all about is assisting individuals, families and organizations in identifying their exposures to loss and implementing the most appropriate risk management techniques to minimize the potential for serious or catastrophic financial loss. How many insurtech startups will figure this out before they run out of venture capital or ruin the lives of an unsuspecting public?

Why Are Direct-Sales Carriers Winning?

Agency consultant Chris Burand wrote an interesting article published in Insurance Journal. The article discusses the declining role of the agent as an underwriter and the increasing use of data analytics and predictive modeling. It also cites a recent J.D. Powers survey that identifies a correlation between advertising by direct sales carriers and growth and profitability. For example:

“Another nail was driven into the coffin of agency upfront underwriting with a J.D. Powers study reported in the June 19, 2017 Insurance Journal. The study, specific to private passenger auto (PPA), shows a strong correlation between advertising and underwriting profitability. Several companies that spend the most on advertising, and do not have agents, have the best underwriting profits. Furthermore, they have some of the highest growth rates. If then, underwriting profit is high, and growth is higher, with more advertising and less agents, at least in PPA, why should companies focus on agents?”

I remember seeing this study and questioning two things. First, “correlation” is not cause and effect. Second, are there possible reasons for this alleged superior performance other than advertising and the use of direct, rather than agent-driven, sales?

See also: Why More Don’t Go Direct-to-Consumer  

I suspect there was a “correlation” (vs. cause-and-effect) between advertising and direct sales (vs. agents) because that’s all J.D. Powers really considered. I’m pretty sure there are other correlations that can be identified, correlations that quite possibly have far more cause and effect. Advertising no doubt measurably impacts growth, but does direct sales vs. agent sales really improve profitability or is something else at work?

The most notable alternative correlation could be that carriers who heavily advertise and sell direct sell an inferior product and/or “more stringently” adjust claims. Given that the loss side of the combined ratio is the larger component of premium and profitability, that’s where the biggest payoff comes from. Perhaps J.D. Powers didn’t consider this in their “study” because the authors know nothing about the substantial differences among carriers in product quality and claims practices.

As a coverage wonk, for years I’ve seen increasing numbers of coverage-deficient policies being allowed by regulators into the marketplace and I have literally thousands of anecdotal examples of coverage denials on clearly covered claims. Sometimes I can just about predict the carrier(s) involved in such denials.

Whether you’re using direct sales, phone apps, data analytics or whatever to reduce costs, at some point you are probably going to be operating as efficiently and predictively as possible. If you sell on price, as these direct sales carriers almost always do, what do you do then? The only way (and probably most effective way) to continue that downward pricing spiral is to reduce how much you pay on claims. You do that by reducing coverage and/or “tightening up” adjusting.

See also: Where Can You Find Growth (Part 2)?  

Developing and selling inferior products and adopting more stringent claims practices is potentially a far more cost-effective way of increasing profits than using agents or investing billions in sophisticated predictive models, especially if your sales strategy consists largely of using technology to churn customers by the tens of thousands. As long as regulators allow the sale and service of shoddy merchandise, this is likely to be an increasingly popular path to growth and profitability for some carriers.

As legendary salesman Morty Seinfeld said, “Cheap fabric and dim lighting…that’s how you move merchandise.”

Time to Revisit the ‘Grand Bargain’

I honestly did not know what to expect, yet I was somewhat shocked by the results. And it is making me rethink much about our current educational strategies.

I’ve had the tremendous fortune over the last few years to present at numerous conferences and seminars about various areas of workers’ compensation. Many of those presentations mentioned the “grand bargain,” yet, it wasn’t until last week that the thought ever came to me. We spend a great deal of time talking about the tenets of the grand bargain, or the “great compromise”; but how many workers’ compensation professionals even know what it is?

I spoke at the Texas DWC Educational Conference in Dallas recently. My scheduled topic was titled “Opting Out of Opting In – The Cost of Non-Subscription.” I did not simply wish to focus on the accounting aspects of employer liability within the Texas non-subscriber world. I wanted to talk about the real cost to the employer, worker and society of not protecting our most valuable assets – our human workforce. Part of this presentation mentioned the basic doctrines of workers’ compensation, both the grand bargain and exclusive remedy. Shortly before the presentation began, however, I had a thought. I wondered, how many people, embedded in the day-to-day minutiae of workers’ comp, even know what the grand bargain is? I decided to ask, for the first time ever, that question of this audience.

See also: Taking a New Look at the ‘Grand Bargain’  

My session was the last one of the conference, the mightily feared “closing session.” A number of attendees had already departed, so I would estimate that there were only about 100 people in the room. As I began my presentation, I told them that I would like to ask what was likely a stupid question. I said, “By a show of hands, how many of you have ever heard of the grand bargain?”

Probably just a dozen or so hands went up. I claimed at the time that I was not too surprised by that, but I was truly taken aback. The grand bargain, the covenant that created basic protections for injured workers in exchange for limited liability protections for their employer, is the underlying foundation that created and has guided our industry for more than 100 years; yet 90% of the workers’ compensation professionals in the room had never heard of it.

How could we let that happen?

It is often said that, to understand where you are going, you must have a clear vision of where you have been. People working in workers’ compensation today may have a clear understanding of process, but they may be fuzzy on why we exist in the first place. I’ve often said that one of the problems of the workers’ comp industry is that it has been essentially commoditized over the last 100 years. It is not clearly understood by the people it serves, and those who experienced the confusion and tumult that brought the industry to life have long since departed this earth. Today, workers’ comp is viewed by many employers as a pain-in-the-butt mandatory expense that they would be better off without. They do not appreciate the benefits and protections that workers’ comp can provide them. They don’t know about the grand bargain.

And, apparently, many in our industry are not prepared to educate them. That must change.

This shouldn’t be difficult. The grand bargain can literally be explained in minutes. It should be required curriculum at all conferences and within workers’ compensation training programs. People must understand the “why” in addition to the “what” and the “how.” In fact, the “why” is probably the most important part, as it can motivate and guide the way our processes and procedures are performed.

See also: ‘Opt Out’ Will Return; Pay Attention  

This was not the fault of the people in that room in Texas. It is the failure of an industry to embrace and understand its heritage. It is the result of a relentless focus on process versus one of purpose and recovery.

We need to teach our professionals about the grand bargain. It is part of understanding our history; and, as we all know, a failure to understand history means we may be doomed to repeat it.

The Comparative Rating Illusion

Speaking of comparative rating….

I was just reading an Insurance Journal article about Compare.com where the CEO referred to the semi-startup as a “disrupter.” Disrupting what? Independent agents have been doing comparative rating for decades. There is nothing new or disruptive about doing it online. And, in either format, it’s a dangerous thing.

Compare.com’s CEO says that what consumers want is choice:

“If you come back to that as the fundamental premise, do you want to walk into your grocery store and be offered one option for soup? Do you want one option for fruit? No, you want lots of options. Do you want a simple way to shop for it? That’s what compare.com does.”

See also: It’s Rush Hour in Telematics Market  

For the nth time, “insurance” is not a product you buy off a store shelf. Why do these people keep making comparisons to consumer products? I guess the upside is that at least he didn’t throw Amazon into the mix, as I wrote about in the blog post “Insurance and Paper Towels.”

And what “choice” does comparative rating provide to consumers? Would this premise work for buying, say, used cars? Let’s see what choices UsedCarComparison.com would give us:

Ford       $4,167

Chevy    $8,246

Honda   $8,963

Toyota  $5,920

Kia         $6,743

Need a boat? Just go to BoatComparison.com:

Bayliner            $48,450

Crest                 $27,248

Chapparal        $51,506

Regal                $86,727

Bennington     $34,999

Easy choices. I’ll buy that Ford and use it to tow my new Crest boat. After all, the only thing I need to know is the manufacturer and the price, right? Similarly, in the case of insurance comparative rating, all I need is the name of the “manufacturer” (aka insurance company) and the price (i.e., premium), correct?

Needless to say, NOBODY would buy a car or a boat with only the information provided above. Then why should consumers be expected to buy insurance sold that way? The answer to that question is easy…because we’ve conditioned them to believe that the only thing that matters is price. Any true insurance professional knows that, but apparently few insurance professionals make decisions for insurers when it comes to advertising.

See also: How Technology Drives a ‘New Normal’  

Even in independent agencies, we are all too eager to simply plug some information into a comparative rating system, then tell the consumer which quote is the lowest, without any regard for which carrier, product and service is the best fit for their unique needs. If this practice continues, we might as well concede the industry to the startups (and entrenched carriers) that sell on price and/or convenience, as opposed to providing a real, professional service that helps consumers avoid catastrophic loss.