Price-Optimization Ban Might Result in Market Disruption

Price-Optimization Ban Might Result in Market Disruption

Two months ago we held Insurance Partners’ seminars in three locations around the state. My brief message was that state after state had seen fit to ban price-optimization. I predicted Minnesota would soon follow suit. It appears I was right. However, I wonder if in making their ruling the regulators in Minnesota have reacted to a genuine need and have a plan of enforcement going forward.

Price-optimization is known by other names, such as “predictive-modeling.” It was defined in a recent bulletin by the State of Minnesota as “any method of taking into account an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes.” The State of Minnesota went on to say this practice includes “varying rates and premiums in order to maximize insurer retention, profitability, written premium, market share or some combination of these.”

An example of this practice would be an insurer charging an attractive initial rate that over time they would increase. In order to be actuarially sound in this practice they insurer needed to have a good idea how long the insured would stay with them and how much rate increase tolerance the insured would have. That is where the complex algorithms for predicting consumer behavior come in. If a person is deemed to be a potential long-term client, not easily swayed by rate change, they’re offered a favorable initial rate.

According to the State of Minnesota our current statutes demand that rates must be an accurate estimation based on expected loss, expense, and degree of risk. On that basis they have demanded that all companies currently engaged in “price-optimization” shall immediately cease this practice.

Agents sell an intangible that often is hard to explain to our customers, and price-optimization can result in a loss of face. A good agent is never uncomfortable explaining a justifiable rate increase. However, the argument is often over before the conversation has begun. If the agent initiated the conversation to discuss a premium increase and possible alternatives, the customer response will normally be favorable. If the agent sits back and waits until the customer reaches a pain threshold that prompts the customer to contact the agent, the battle is probably lost before it started.

Obviously, when a rate is set below market, with a five- or six-year plan to become profitable “over time,” the agent is faced with repetitive rate increases that are hard to explain. Often, because of electronic funds transfer, or payment through escrow, the customer isn’t sensitive to smaller increases.

Over the last two decades, I’ve watched one particular company use this practice to carve out a huge market share in Minnesota and across the nation. Other companies have followed suit. Given the success of the initial company those other companies had no choice.

While I accurately saw this ban coming and believe the State of Minnesota basically got it right in their bulletin, I have some misgivings.

  •        Given black box underwriting how will the Commerce Department enforce this ruling? With millions of dollars of written premium knowingly underpriced on the books, how will companies comply with changed pricing in the sixty days demanded by the State’s bulletin?  Are they expected to simply take a huge fiscal loss?
  •        Just because I don’t like this practice, doesn’t make it wrong. Just because fourteen other states have banned this practice, doesn’t make it wrong. Our laws are based on charging a fair, non-discriminatory price for a product. Our laws specifically ban predatory pricing. I believe a very valid argument can be made that “price-optimization” is a lawful practice within the statutes cited in that it is both fair and non-discriminatory.
  •        As I’ve seen “price-optimization” used I’ve not seen any evidence of “price gouging” which is the rallying cry that caused this practice to be banned in the other states. In some of the other states the ban resulted from legislative action with people like always-misinformed consumerist Robert Hunter crying “wolf.” For example; a person’s annual premium for auto insurance would be $1,000 a year, but for price-optimization and periodic premium pricing adjustments. Using characteristics primarily taken from credit history and buying habits the insurer believe the insured will stay with them for six years through several rate increases. The insured is charged $900 the first year, $940 the second year, $980 the third year, $1,020 the fourth year, $1,060 the fifth year and $1,100 the sixth year and thereafter. Under either system the insured pays $6,000 for six years of identical coverage. The insurance company is assuming the risk that the insured will stay with them through the six years. The insured has not experienced a disruptive (more than five percent) increase in premium, so has not shopped their insurance.  Since the net is the same to the consumer, how is that price-gouging? Agents will act in the customer’s best interest and will move policies to other companies when rates become too far out of line.

It will be interesting to see how this plays out. I believe this bulletin could be positive for independent agents as it will prevent direct writers from creating undue disruption in the market by using overly-aggressive “teaser” rates. On the other hand, price-optimization has created opportunity for agile agencies. They’ve managed to maintain agency retention ratios in the nineties, while individual companies have struggled to keep above eighty.

Overall I think independent agents will do slightly better without price-optimization. Direct writers will have substantially worse retention as this has been a great pricing advantage for them. Captives will also do slightly better as price-optimization has been disruptive for them when their agents lacked alternatives for their customers.  

The cynic in me believes that several large direct-writing markets will continue to price their product using price-optimization tools, but will be artful in how their filings reflect this practice.

I don’t like price-optimization, but in matters of pricing I’m very skeptical when government thinks they can do a better job of consumer protection than the free market. I fail to see the harm in allowing a customer to think they’re getting a better deal. If a consumer doesn’t use an agent to help them negotiate the insurance world I have little sympathy for their ensuing economic loss. Agents will work to retain clients through smooth pricing. Most agencies have agency management systems set to alert them of irregular increases. I think that in an environment where we see customers move their insurance from one company to another for very little advantage it is highly unlikely any pricing scheme can result in “gouging.”

James Holm

Every Boat Policy Comes with an Anchor

Every Boat Policy Comes with an Anchor


Every Boat Policy Comes with an Anchor

His parents have had their insurance in your agency since the first year you started in business. Noah has had his insurance with you since he graduated from college twenty years ago. He considers himself a sophisticated buyer. Noah does the research necessary for his major purchases. In fact, you’re aware that it took him nearly five months to make up his mind about the nineteen-foot Ranger fishing boat he purchased.

He told you about its top-end of 46 mph powered by its Mercury 115 HP outboard motor. He swears he got a really good deal on it at $22,100 new and you believe him — given his family’s penchant for tracking down the best value.

You turn the marketing of his boat policy over to your customer service representative and he runs it through several companies’ rating programs. You sell him a policy for $279 and are confident that your diligence found him the lowest price in your agency. You rarely consider commission when selling a policy, but in this case you know you didn’t sell him a policy that would have paid your agency twenty percent on new and renewal, and did sell him a policy that is going to pay you 12.5 percent new and five percent on renewal. The loss of commission doesn’t bother you because you write several policies for him and want him to have the best value. Besides the company you placed it with makes it really easy to order the policy so your CSR likes working with them.

But did you find a policy that provides great value? ..and all the coverage you need?  Policies vary greatly.

Does your policy include mechanical breakdown coverage?

Most boat policies provide coverage for accidental direct physical damage to the boat. An example of this is when your client crashes their boat into a dock or runs onto a submerged rock.  Most boat policies however, exclude coverage for mechanical breakdown. If the engine ingests debris and overheats …or if some internal engine part fails and the engine is then ruined…most policies will not cover this damage.

The good news is certain boat insurance policies do provide mechanical breakdown coverage!

Did you sell the policy that does? The Ranger bass boat we used in our example above has half its value and purchase cost of the boat in the boat’s engine. A Mercury 115 HP engine cost about $12,000. Is it covered for mechanical breakdown?  You want to be certain it is.   And you need to make sure the mechanical breakdown coverage covers the ENGINE  (not just the lower unit).  

Always be certain you have sold a policy written on an Agreed Value basis.  This means in the event the boat is a total loss the insured will be paid the “Agreed Value” as it appears on the policy declaration page. This will avoid the surprise and potential gap in coverage you can have with an ACV policy.

Boat and yacht ownership (and insurance) has a very interesting issue. If the boat sinks, the boat owner is financially responsible for the raising and the removing of the wreckage of the boat. Question? Does the boat insurance policy cover the cost of raising and removing the wreckage?   Many boat policies do not cover this cost and you need to make sure you sold your customer a policy that does cover these costs.  Raising a large vessel off the bottom can cost tens of thousands of dollars. Don’t leave your insured without this coverage.

On yet another interesting twist in boat ownership….did you know if a boater were out boating and found themselves in imminent danger (i.e. at risk of sinking for some reason) ..that the rescue vessel coming to their aid and providing a  “rescue” of their vessel is entitled to the full value of the rescued vessel?  Yes, this is true. If the rescue vessel were to put a temporary patch on a vessel taking on water and then tow that vessel safely back to shore…the rescue vessel, (i.e. salvage team), would legally be entitled to the full value of the vessel they rescued.  For example, if a $75,000 boat had sustained $10,000 in damage (i.e. a $10,000 hole in the boat) …this would mean the salvage team would be entitled to a $65,000 marine salvage award.  This also means the owner of the rescued vessel either pays $65,000 or receives a salvage lien for $65,000.   The question for you is  …did the boat insurance policy you sold provide your client with coverage for a marine salvage claim. Many policies do not. Please be careful to sell your client a policy that does cover this potential gigantic exposure.

A few other things for your consideration:

Does the hull deductible match your customer’s appetite for self-insured risk? Some companies have ten percent deductibles, while others go as low as $100.

Does the policy you sold him contain accidental fuel spill coverage?

Did you cover the trailer?

If your customer is left with a loss that isn’t covered, when it could have been, he may go fishing for a new agent, and take his extended family with him.

James Holm

By The Numbers

By The Numbers

By The Numbers

The insurance industry lives and dies by the numbers.  A.M. Best published its 2014 annual figures for the property and casualty industry in June.

The first thing that struck me was a dose of personal humility. It occurred when I realized my agency, which I think is significant, places only .0035% of the $570 billion that makes up the P&C total for the United States.

Then I started to look inside the numbers.

Private Passenger Auto still dominates the industry comprising over 53% of the total. Homeowners’ makes up another 15%. Workers’ Compensation, although a sizable chunk, at $55 billion is just under 10% of the total premium.

However, if driverless cars were to become fully functional and Obamacare was to right itself and absorb Workers’ Comp, our industry could easily drop to half its current size.

State Farm is still the 1,000-pound gorilla in the personal lines world with just slightly under 20% of the market share. GEICO has just over 11% of the private auto. AIG and Travelers’ dominate the commercial side, but their share of the market is much less.

Overall the market grew 4.4%, which is beyond inflation, indicating the industry is starting to assume more of the ever-growing risk in the world.

Nationwide is the king of the $4 billion farm market, with about 10% market-share.

In the tough private passenger auto market, Travelers’ had the best underwriting performance of the top fifteen companies with a 58.4% adjusted loss ratio. Homeowners’ adjusted loss ratios were much better than auto with Travelers’ again having the best year at 40%.

James Holm

Usage-Based Insurance Could Become a Problem for Your Agency

Unfortunately, usage-based insurance (UBI) could become a problem for your agency.

You can always tell the pioneers because they’re the ones with the arrows in their backs. When insurance companies wander into uncharted grounds, they often drag agencies along with them.

If you have a company who is involved in UBI using telemetrics to collect their data, you could become a party to future lawsuits. UBI is also known as pay as you drive (PAYD) or (more commonly) pay how you drive (PHYD). The data is collected and reported to the carrier through a telemetrics device.

A few weeks ago Wired published an article about a hacker remotely high-jacking the controls of a Jeep Cherokee. When I read that article, I wondered if this had implications regarding the telemetrics dongle used by companies like Hartford and Progressive to field-test a driver’s actions, such as braking.

A subsequent article in Business Insurance seems to suggest my concerns were well-grounded. Researchers at UC San Diego used the dongle for Metromile to take over some controls on a Corvette. Metromile is a new, west coast company that is charging for auto insurance based on actual miles driven.

Should one of your customers experience a loss due to a hacker, your agency could be named in a suit, claiming you advised your customer to install the dongle.

You should:

1.)   Consider advising your customers NOT to use the UBI telemetrics based on hackers.

2.)   Consider contacting your customers who are using the dongle, to tell them about the potential for hacking.

3.)   Consider contacting your companies to see if they’re willing to provide a hold-harmless for your agency.

Usage-based insurance isn’t going to go away. Your agency doesn’t need to suffer the slings and arrows of a pioneer.

Killing a Sacred Cow

Killing a Sacred Cow

Sacred cows make the tastiest hamburger.” Abbie Hoffman

Abbie Hoffman was a counter-culture revolutionist of the 1960s with a strange sense of humor, yet his attitude toward scared cows rang true.

Sacred cows are those ideas that, though unreasonable, are held to be above criticism.

There is one sacred cow that I would like to see finally exposed.

“Agents Are Only as Good as the Loss Ratios They Produce. . ..”

Insurance companies have a right — and a duty to their shareholders — to do what is necessary to make a profit. That is true, but they can only do what is legal and ethical in the pursuit of maximized profits.

It is common for insurance companies to restrict access to certain programs, or terminate contracts, based on their poor loss ratios with an agency. Contractual changes seemingly occur most often with personal lines insurance companies and their agencies.

Yet, most personal lines agents don’t place enough business with a single company to amass a volume that is actuarially creditable. I’m not an actuary, but in my opinion, most premium volumes under $1,000,000 lack legitimacy when applying the Law of Large Numbers.

Agents don’t have access to the black box algorithms used by companies to match a risk with proper premium levels. My years at an underwriting desk lead me to believe that without the ability to price and classify risk, most underwriters would fail to develop a profitable book.

Insurance laws, like those in Minnesota, prohibit agents from declining a risk. Since agents are statutorily prohibited to decline a risk and have no ability to set a price, aren’t agents being held accountable for outcomes over which they have little control?

Insurance companies occupy shaky ethical grounds when their actions to maximize profits are based on decisions that will create economic troubles for their contracted agents. This is especially true when companies act despite a weak nexus between agency loss ratios and the quality of representation provided by the agency.

My agency has housed two operations during the last three decades. One side of the office contained a traditional general agency that provided outsourced underwriting to specialty companies. The other side housed the administrative arm of an agency aggregation. The management of both operations was identical and grounded in the same intense desire to produce positive results for our companies.

The general agency side of our operation, the side that had pricing, classification, and risk selection capabilities, consistently produced award-winning profits for our companies. We were the most profitable agent in the nation for one of our general agency’s companies for two different years and near the top many other times.

The agency aggregation operation produced highly varied loss ratio results despite our diligent efforts to follow our companies’ marketing wishes.

It is my belief that loss ratio is an improper gauge of performance. Profitability is mainly the function of the company and NOT the agency. My five decades in this industry have led me to believe that an agent’s job is to provide an insurance company with a strong flow of business that closely matches that company’s underwriting appetite.

That’s a job description I can accept. It doesn’t frame the agent as a target when an adverse loss ratio is developed. It clearly defines what the agent must do to satisfy the relationship with the carrier. All that is needed is a meeting of the minds on quantifiable goals.

I’ve been an underwriter, the top executive for a small insurance company, and an agent. I believe most insurance programs develop loss problems because of poor execution, or planning, at the company level.

A poor loss ratio might be an indication of a risk characteristics problem within an agency’s book of business, and possibly brought on by faulty marketing. Agents do, from time to time, find company errors. Company actuaries make mistakes and often create soft spots in their company’s underbelly. If agents diligently exploit those weaknesses, they could be developing books of business that are horribly flawed and don’t represent a strong flow of business that closely matches the company’s appetite.

On its own, without looking for supporting reasons, an agency’s poor loss ratio is almost meaningless. Sometimes a poor loss ratio is merely a result of events. Bad things happen, and people buy insurance to protect assets otherwise lost when those incidents occur. Without a certain amount of loss activity, insurance loses its purpose.

Given today’s data-mining capabilities, pruning agency representation based on loss ratio alone is highly unethical. If an agent has selected against his company, placing only those risks that are highly advantages to his customers and detrimental to his company, he should be educated. Then, if necessary, that agency should be reprimanded and remedial actions taken. If he persists in presenting a flow of the wrong kind of business, the agency contract should be terminated, as the agents needs do not match the appetite of the carrier.

As a general agent who specialized in small, commercial, hard-to-place risks, I felt I had a good read on an agency’s principles by the fourth or fifth application we received from them. If their applications were incomplete or seemingly misleading, we would ask for more information. A rogue agent would rarely respond, knowing that we would decline the risk.

It would seem that insurance companies could easily create a matrix for risk characteristics that would allow a much more revealing “ratio” to be calculated. That ratio would compare the percentage of high-profit potential business to the percentage of acceptable business that has much less potential for profit. That ratio would be much more meaningful.

It is a time-honored tradition within insurance companies to review risks that have incurred large losses. The first question is normally, would we have written this risk had our underwriting standards at the time been properly imposed? The second question normally would be, is there anything about this risk that should have alerted us to its large loss potential? Instead of wrongly fixating on loss ratios, companies need to become much better at quantifying desired risk characteristics (prior to loss) and holding agencies responsible for delivering a desired flow.

Prior to the advent of the black box, agency loss ratio was a more accurate measurement of performance. With today’s technology using an agency loss ratio as a litmus test is a sacred cow past its prime that should be shipped to McDonald’s.

James Holm is a five-decade veteran of the insurance industry. Despite the tone of this article, his agency had one of its best years in 2014 in regards to the amount of profit-sharing income received. His remarks are reflective of overall trends in the industry rather than entirely personal circumstances. You can read more of his blogs at

Do People Trust Insurance Agents

People respect insurance agents, but do they trust them?

Do People Trust Insurance Agents

A Gallup poll in 2012 indicated only 15% of those responding stated they rated the honesty and ethical standards of insurance salespeople as either “very high” or “high”. In comparison, 82% rated nurses as either “very high” or “high”.

To give you perspective here are some other professions and the percentage of people who rated them either “very high” or “high”.

Pharmacists 70%
Police Officers 54%
Clergy 47%
Auto Mechanics 29%
Bankers 27%
Local Officeholders 23%
Lawyers 20%
TV Reporters 20%
State Officeholders 14%
Car Salespeople 9%
Members of Congress 8%
Lobbyist 6%

Professions Ranked High

On the bright side only about 10% rated insurance salespeople as either “very high” or “high” for honesty and ethical standards ten and twenty years ago. However, do we really want to be considered less ethical than the average Lawyer?

Polls also show that 80% of all people who buy insurance want an agent involved. So how do we reconcile that with the 36% who state that we have either “very low” or “low” ethical standards?

My guess is that when people answer these polls that have the same dilemma people have when asked about congress. In a recent Rasmussen poll only 8% rated congress as doing a “good” or “excellent” job, yet 29% felt their representative deserved to be reelected.

The low ratings probably have something to do with insurance being an intangible product that breeds mistrust because so few understand it. The other day on the radio I was listening to a show that “warned” people to be careful because home insurance contracts take away coverage for flood and earthquake “in the fine print”.

I’m of the opinion that there are a lot of very, very good people who happen to be insurance agents. Having dealt with thousands of agents during my career I’m sorry to say that there are seemingly more bad ones than good.

Before you toss me into the caricature of the old geezer who is slipping into general nastiness, consider the following.

Many agents are too young to have formed solid ethical standards. In a few years, they will be just fine. At the other end of the spectrum are those who should have retired and have allowed the world to sour them.

About a fourth are just plain bad apples. I’ve been shocked over the years by some who have done things that we all would say were dishonest.

When the public thinks about insurance salespeople, they’re including a lot of people we wouldn’t necessarily think of as selling insurance. They might be including the appliance salesperson who tried to sell them a worthless warranty. They could have just had a bad experience with a pushy counterperson at a car rental agency. They may have encountered a car salesperson who also tried to add on insurance. You can hardly buy anything today without someone trying to sell you some sort of “policy”.

Some of our fellow agents are lazy and incompetent, which could easily be misinterpreted as dishonest.

So, how can you build trust with your customers?

Do what you say you will. Fulfill your promises. Don’t hedge on your promises.
Be honest. Tell the truth. If you do lie (everyone does), own up to it.
Be open. Tell the full truth. Offer information easily. Avoid secrets. Expect others to be honest. Don’t cover up the truth.
Keep Confidences. No gossip.
Wear your integrity proudly. Be fiercely loyal. Know what you’re doing. Always practice fairness.

John Wooden said it best, “Be more concerned with your character than your reputation, because your character is what you really are, while your reputation is merely what others think you are.”

As the NFL is experiencing, even a $45 billion dollar empire can be shaken by bad publicity. On the other hand, Viking’s fans know that one good quarterback covers a lot of ills.

James Holm

Tessa Holm

Are Youth Sports A Lightning Rod for Legal Action?

My daughter played multiple youth sports growing up and eventually played soccer for Coe College. It was a wonderful experience for her, which has taught her a great deal she can call upon her entire life. She is a math teacher in a middle school just outside of Madison WI and has already started coaching.Tessa SportsI’m concerned that she will be targeted for legal action at some point in the future. I’m almost certain that if she continues to coach she will have players who suffer injuries; some of them might be very serious.

1.35 Million ER Visits

The National Underwriter issued a story on September 4, 2014 that focused on youth sports injuries. According to that story 1.35 million young players suffered an injury during 2012 that required an Emergency Room visit. Nearly 164,000 of those visits were diagnosed as concussions.

During her sophomore year my daughter’s roommate was a girl who had played soccer her freshman year, but was unable to continue due to short-term memory problems attributed to concussions. She was a lovely girl who probably will have to deal with this the rest of her life.

A year ago a friend of mine who played for the Minnesota Vikings told me that he was starting to have problems with memory. I wasn’t shocked as he was noted for his play and was named captain of the special teams by Bud Grant.

Today’s Minneapolis Tribune carries a letter to the editor from a mother who wishes that thirty years ago she had refused to allow her son to play football. His concussions have caused long negative impacts.

Players Too Young to Make an Informed Decision

How long will it be before suits start flying that hold schools and other sports authorities responsible for not explaining the probability of injury? Even if the probability of injury is explained in depth the injured person will contend that they were incapable of assessing the gravity of the situation.

Consider that 59% of high school football and college players believe they will receive a college scholarship.  Many of them imagine themselves to be pro material, when the reality is only 1 in 16,000 high school athletes attains a professional career in sports.

Some Do Make It

I’ve coached dozens of youth sports teams. I’ve officiated hundreds of high school and grade school football and basketball games. I coached tennis at the high school level in 1969 when my team took second in the state.  I’m a huge sports advocate.

Yet, I’ve been outspoken about the problems involved in youth sports for the last full decade. During that time I had an ongoing debate with a friend who believed I was being too harsh in my assessment.

I would tell him how seventy percent of those who start in youth sports would drop out by junior high. I would quote numbers like those stated above to show him that young players were self-deluded and that youth coaches were culpable for perpetuating the myths of success.

Who knew his son would grow eleven inches between his sophomore and junior year in high school? Who knew his son would get a scholarship to Wisconsin to play for Bo Ryan? Who knew his son, Jon Leuer, would evidentially go on to play in the NBA?

Yes . . . it does happen. But for every Jon Leuer there are nearly 10,000 high school players who will not achieve what they think is a reasonable goal. There are 10,000 high school kids who are making decisions based on erroneous assumptions. There are 10,000 young kids who will have a plausible argument that they were taking a risk based on incomplete and specious knowledge.

Agents Need to Speak Up

Insurance agents reading this blog should take it upon themselves to discuss youth sports injury figures with sports leaders in their communities.

Don’t assume that only boys playing football are at risk. Actually girls are eight times as likely to have an ACL injury as boys. My daughter had knee surgery. My three boys were relatively injury free although one played college football and one college soccer. They both dropped out of their sports in college, which we now all look at as a blessing.

When someone is being seen every three minutes in the United States for a concussion–related injury, this qualifies as a national epidemic.

There are lawyers licking their lips over class action suits to come. Talk to your customers about the potential for them to be named in the class action, if they serve as a coach or board member for youth or school sports.

Offer to review league practices for risk management or to help them understand their liability issues and the policies they have in place or should have in place.

My experience with school administrations have left me shaking my head at their lack of understanding of what is needed and why. You can help. An outside eye might be just what is needed.