After writing articles for Enhance Insurance for the last eighteen months I’ve come to be frustrated by the need to keep my views within the editorial scope of that website.
Enhance Insurance is aimed toward the general public. This blog will be pointed toward the insurance industry, so I can speak plainly in the language and jargon I’ve spoken during my 43 years in the industry.
I’m quite concerned about the property and casualty insurance industry. The industry is facing not one, but two potentially fatal crisis.
1.) Weather patterns have changed making property insurance extremely hard to underwrite to a profit.
2.) Insurance is being commoditized at an alarming rate.
The insurance industry has faced many, many challenges over the years. Shortly after I started as a management trainee for The Continental Insurance Companies the courts changed the nature of products liability. After a landmark ruling in California, court after court across the United States during the 1970’s ruled that manufacturers, distributors, and sellers could all be held strictly liable for defective products. Many in our industry thought the P&C industry was doomed because of the years of product liability policies that had been grossly underpriced that would now have to respond to new claims.
Shortly after that it was the asbestos claims that surfaced that seemingly would bankrupt our industry.
Hardly a year goes by that a new crisis doesn’t arise. That is in addition to the cycles that create havoc for all of us.
Now were facing a change in weather that has the potential of making the entire concept of property insurance unsustainable. A few years back a friend of mine who was the general manager of a P&C company in North Dakota told me that in one year his company had sustained more windstorm losses than they had in the entire fifty years before . . . combined. Minnesota has gone from a state that was for years had an average to low occurrence of windstorm losses to number three in the nation. We are now having more windstorm losses than all of the coastal states except for two.
Insurance companies are not keeping up with rate changes that match the indications needed. It would appear that they lack the stomach to watch their written premium numbers dwindle in a market that worships the lowest dollar premium.
One of our carriers just came out with a 1% deductible for H.O. My guess is the mortgage companies, who have long asserted their “right” to have 100% insurance to the amount of the mortgage on a replacement cost basis, will not stand still for property that isn’t properly maintained due to inadequate insurance. Will people in a country where the average person has just over $5,000 in savings be able to work with high deductible policies.
If we don’t kill ourselves with inadequate rate structure on property insurance, we will certainly euthanize our industry as we know it when the American Agency System disappears. And, I agree with those that say we’re on that path.
Agents have blithely gone along with too many changes that have eroded their ability to compete. Companies have reduced agents’ abilities to properly advertise their services by paying commissions that are below expense levels for their agencies.
Moves in the market to gather data through “usage-based insurance” are less lethal, but add to the overall impression that agents are expendable.
Insurance company executives have proven to be unable to support the American Agency System with effective advertising because it doesn’t provide them with a direct and immediate rate of return. Just a few years ago insurance companies spoke about the bigger pie theory, allowing that if the agency grows, their share will ultimately grow as well. You don’t hear that anymore.
I don’t blame those executives. Insurance agents have lashed themselves to comparative raters and are selling the lowest price 83% of the time. Given how diverse policies are today is it really possible that the lowest price represents the best value for the customer 83% of the time? I doubt it.
Further, not many insurance company executives have the freedom of Warren Buffett to view their company MAINLY as a vehicle to amass investment capital. He is looking long-term and no one is going to tell him he’s wrong as long Berkshire Hathaway continues to rule. In my time we’ve had Hank Greenberg, Warren Buffett, George Joseph, and Peter Lewis show how much easier it is to run a company when you have a high degree of long-term stability at the top.
About three months after we started work developing Enhance Insurance we became aware of Project CAP. The more I learned about what they were doing, the more I shook my head. It didn’t seem possible that so many agents and companies could be supporting a mega-comparative rater just when agents needed to sell value and not price. I watched in shocked amazement at the $millions being pumped into this program.
I asked myself why on earth so many agents and companies support a program that does so much to further the commoditization of auto insurance?
Now that I’ve spent many, many months working with Enhance Insurance I realize that almost no one in our business understands the internet. It would appear that Project CAP was an effort by a lot of people to check off a box, rather than really develop a product that addresses agents’ needs. I think the companies know they have to do “something” and Project CAP, was and is “something”.
There are parts of Project CAP that I think are well-grounded, but the comparative rater part is an absolute turkey, as is the beauty contest for the public to select an agent once they have a quote they like.
A recent report from McKinsey paints a dim picture for the future of independent agencies. It is especially bad when you couple it with the January 2013 McKinsey report in which they spoke of the auto insurance industry spending $6 billion a year chasing that 30% of the market who are least loyal and most price-sensitive.
Those guys spending that money aren’t dumb! They’re not wasting money on the wrong segment; they’re buying an industry. Every dollar they spend convincing the public that insurance is a commodity brings the end of the American Agency System that much closer.
It’s too bad the Big “I” can’t rally the industry behind the Trusted Choice campaign. It is exactly what is needed. It won’t happen because the industry execs can’t draw a straight line between saving the American Agency System and making a profit. And that’s the biggest threat to our industry yet.
All those new Insurance Exchanges can easily be revamped to write all kinds of insurance. You executives who think you can play ball with people in Washington if that happens better understand that “pay-at-the-pump” is a logical extension of usage-based insurance. The government might soon decide it can easily fill its coffers by going into the property and casualty “insurance” business.
People love agents because they provide value through their good advice. When agents sell mainly on price they aren’t delivering on that value proposition. When you don’t deliver on your value proposition you fail.
Over eighty percent of people want the advice of an agent. That is human nature.
Big deal. Things change.
People used to like quality products. For years top brands could charge premium prices for quality. That was human nature. But, a certain big box store has shown that quality doesn’t matter at all. They’ve shown that through economic muscle they can dictate to the general public what they “should” think.
Okay! That felt good.