The Federal Insurance Office (FIO)

Word came out of Washington this week that the Federal Insurance Office (FIO) is looking to establish the government’s definition of “affordability” of private passenger auto insurance. The Dodd-Frank Law gave the government authority to bark up this tree.

When I hear “government” and “insurance” in the same sentence my warning bells go off.

I don’t have a firm position on whether the federal government would be a better regulator than individual states. It would seem the opportunity for stupidity would be just as pervasive on either level.

The FIO stated that auto liability is mandatory in all states except New Hampshire, and that owning an automobile is likely associated with a higher probability of employment and other factors associated with economic wellbeing.

They went on to say that, “personal auto insurance may be interpreted as affordable if it is actually purchased by individuals and/or families.”

It might be that the FIO is looking for an issue in order to assert that there’s “trouble, trouble, trouble” that only federal regulation can fix.

Or, even worse, it could be the FIO is looking to start down the road toward a federal private passenger auto insurance program.

They have a ready partner in consumer lobbyist Bob Hunter who has made a career out of misinterpreting numbers in order to be the Professor Harold Hill of our industry. His latest quote is a gem.

“With millions of low- and moderate-income Americans struggling to afford state-required auto insurance and insurers constantly adding new highly questionable factors like education, occupation and elasticity of demand that drive up the cost to those least able to afford coverage, FIO’s interest is not only necessary, it is urgent.”

It’s safe to say that Mr. Hunter has yet to meet a free enterprise driven market that he likes. “Insurance” might not rhyme with “T” but our nation’s capitol is looking for “trouble” and Mr. Hunter would seemingly like to be at the front of that parade.

I’ll agree that education might not be the strongest proxy variable for a responsible insured, but I’ll defend forever an insurance company’s right to decide under what circumstances they will establish their rates and underwriting criteria.

I would love to ask Mr. Hunter, at one of those hearings he loves to populate, what percentage of the current 14% uninsured autos would buy insurance if their rate were cut in half. My guess would be under 25% would buy the reduced-cost coverage, leaving the uninsured number still north of 10%.

I would love to ask him if he thought maybe stronger enforcement of the laws requiring auto insurance might not be a better first step?

Did you ever have an upset stomach sending you the false message that if you would just eat more your pains would go away? I wonder if D.C. isn’t going through something like that. Could it be they think the answer to the Obamacare-rollout cramps is another hardy meal of boondoogle?

James Holm

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How to Prevent Your Small Business from Becoming Insurance Poor

During my career I have started several businesses. One of them became an overnight success and grew to be worth over $35 million. Another demanded much more capital to create than I originally thought. I originally budgeted $300,000, and it eventually required a total investment of $3 million before it started to turn a profit.

Small Business Insurance

One of the earliest decisions an entrepreneur needs to make is the type of insurance to purchase and how much. This is a complex question and there really is no “right” answer.

Early on in my insurance career (over forty years ago), I told a man he really didn’t need flood insurance because he was at least fifty feet above the level reached by any past floods. A year later, a downpour sent water from above above his business location, flooding his storeroom. The water never got more than eight inches deep, but it ruined all the paper in his storage area that he had for his printing business.

That taught me a very good lesson about telling people what insurance coverage they don’t need: The minute you state what a person needs Murphy’s Law will prove you wrong.

The Small Business Administration site states, “Insurance coverage is available for every conceivable risk your business might face.”  That’s exactly the kind of claim that makes great fodder for a professional liability loss for an insurance agent, because it simply is not true.

Kennel FireSeveral years ago, a dog kennel burned to the ground. The owner lost about twenty dogs. I was sued as a general agent under the legal theory that I should have taught the retail agent enough about insuring a dog kennel to make sure he had animal mortality coverage on the dogs. That coverage is available through a select number of companies, but is rarely carried by kennel owners because of the cost and restrictive coverage. The court quickly dismissed me from the case. No one buys insurance to protect against a highly improbable loss, but they all wish they had once that one in a billion occurrence happens.

Insurance is only really available if it is affordable. I’ve been a Lloyd’s of London correspondent for over three decades and have delivered quotes for many unique and unusual risks. Many of those quotes seemed ridiculous, even to me, but some were purchased.

The lesson to be earned from my experience with the dog kennel owner is that if you’re starting an insurance agency, an insurance coverage you must have is professional liability (Errors & Omissions Insurance). It is important because it is a primary exposure of the business. Any small business owner should try to determine what their primary exposure is, and then make sure that it’s covered.

Actually, a good rule of thumb for a new business would be to start with the coverage you are required to carry by law. After satisfying your statutory requirements, you should then consider that coverage you’re required to carry by your lease(s) or by mortgagees or lenders.

  • Your coverage options might include:
  • Businessowner’s Policy
  • Commercial Package Policy
  • Professional Liability
  • Comprehensive General Liability
  • Business Income Insurance
  • Commercial Property Insurance
  • Commercial Auto Insurance
  • Crime Insurance
  • Disability Insurance
  • Group Health Insurance
  • Long-Term Care Insurance
  • Surety Bonds
  • Workers Compensation
  • Umbrella/Excess Liability Insurance
  • Flood Insurance
  • Earthquake Insurance
  • Pollution Liability Insurance
  • Director’s and Officer’s Liability Insurance
  • Fire Legal Liability Insurance
  • Data Breach Insurance
  • Inland Marine Insurance

The good news is some of the above are redundant. The bad news is that this list is far from comprehensive. The really bad news is that you can never purchase “enough” insurance. Consider the Texas anhydrous ammonia distribution plant that reportedly had $1 million in liability coverage to cover the estimated $100 million in damage done by their fire and explosion.

In many states it is extremely hard to “pierce the corporate veil”: to hold shareholders responsible for awards beyond the corporate assets. After satisfying statutes and written agreements, what you actually “need” and what you should carry becomes largely personal preference.

Start Your Insurance Program with Workers Compensation

Since workers compensation is a required coverage by statute, it is a good place to start. Your state might allow you to exclude officers of the corporation from coverage, which could save you money.  Be very careful to document that decision.

Next, give your rental-space lease a thorough review to make sure what insurance you’re required to carry. You should review this before signing the lease, to be in a position to negotiate terms.  You probably will be required to carry Fire Legal Liability, which protects the building owner’s interest in the even that you are responsible for starting a fire that damages his property. You most likely will be required to carry general liability insurance and name your landlord as an additional insured.

Copier Insurance

If you lease a copier or other office equipment, that lease will require certain insurance. They will more than likely require a policy to cover the equipment for fire and other perils.

If you have a loan and have pledged assets, you need to meet the requirements in the loan document and provide certificates of insurance to the lending institution.

If you have a company-owned vehicle and have a bank loan, you will need to meet the insurance requirements of the loss payee.

Should you not meet the requirements of a loss payee, or other lender, the lienholder has the right to purchase “forced placed” insurance to cover those requirements and bill you for the premium. Those premiums are normally quite expensive.

Commercial auto insurance is required by statute to carry bodily injury and property damage liability insurance and by your loss payee to carry physical damage coverage. If you have a loss payee, Collision and Other Than Collision coverage are normally both required, in addition to a set limit of liability insurance.

Save Money by Buying an Insurance Package

Insurance companies offer discounts for placing multiple lines of insurance through them. Some insurance companies will even provide a discount on your auto and general liability should you place a life policy through their life subsidiary.

Your insurance agent might recommend a BOP (Businessowner’s Policy) or a Comprehensive Business Policy. The difference is in how many lines of coverage are included. Both of these policies include a range of automatic coverage for such things as general liability, products liability, profit insurance, extra expense insurance, mechanical breakdown, personal injury, valuable papers, accounts receivables restitution, crime, inland marine, and electronic data processing equipment. These polices normally do NOT include flood or earthquake.

Professional Liability Might Be Your Most Important Coverage

For many small business start-ups, a good professional liability coverage is important. This coverage not only covers improperly performed professional tasks, but also covers failure to perform necessary acts. Over the years I have had several of these actions brought against my agency. I sell millions of dollars of annual premiums per year, and with hundreds of thousands of transactions it is almost inevitable I will be sued. The suits have never resulted in a paid loss, but because the coverage includes legal defense, I have saved many thousands of dollars. General liability normally excludes professional acts.

Stand Alone Liability Coverage

There are many kinds of liability coverage that are normally excluded from a General Liability policy. These might include: pollution liability, aircraft liability, liquor liability, watercraft liability, product recall liability, and director’s and officer’s liability, as well as others.

Start-ups might not consider director’s and officer’s liability as essential. If you’re a certain kind of start-up you might find yourself the target of patent trolls. Patent trolls aggressively misuse the patent law as a business strategy. There are director’s and officer’s policies that will respond on your behalf to this kind of attack. In many instances this could be your most important coverage.

Employee Benefits

Health Insurance is important, but is becoming less and less of an issue for small start-ups because individuals can purchase reasonably priced insurance and it is portable.

Your business will have a value right from the start, based on the employees you have put together. A key-man life policy should be considered for those people within your organization that are irreplaceable. A good agent can help you construct a split-dollar Life policy that will allow you to keep good employees through “golden handcuffs” by allowing them to have the cash value if they stay with you a set amount of time (vesting), while your company enjoys the protection of the death benefit.

My business has fluctuated and survived at times because of the loan value of our Life policies. It has been a source of capital during times when credit has been highly volatile.

Dental insurance is an option that I’ve never thought extremely important although it is a large industry and quite popular coverage for some.

Although I’ve carried Disability Insurance for my employees for three decades I think it is an extremely weak coverage that might be one of the last things you can afford. Proving disability appears problematic to me.

I have also carried Long Term Care insurance for my key employees for three decades and believe it has been an important coverage although none of my employees have ever used it.

Limits of Liability

You need to decide what asset level you need to protect and the kind of catastrophic exposure your business represents. In hindsight, having an anhydrous ammonia facility represents a huge risk that should have several million dollars in coverage for liability. On the other hand, a shoe store might not have apparent potential for huge liability losses.

In general, every company should consider an excess liability policy of at least $1 million. This kind of policy is often called an “umbrella” policy, but it is quite rare that excess policies today are true umbrellas because insurance companies want to know what their exposure is for high limit policies. Excess liability policies are normally following form, in that the coverage mirrors the primary policy. A lot of insurance companies are willing to provide $1,000,000 per person and $2,000,000 per occurrence. The cost to purchase larger primary limits is normally relatively small. This is not an area to look to rely on for cost savings. Even a shoe store can have a trip and fall loss that results in paralysis and long-term injuries.

A true umbrella has coverage that is much broader than most primary policies in that it will have fewer exclusions of coverage.

Once you decide what level of liability limits you want, you should logically carry that limit through your various insurance policies. For example, it is illogical to carry much lower limits on auto insurance liability than on your general liability. It is also illogical to carry minimum limits on uninsured and underinsured motorists coverage when you carry higher limits on the liability. About 14% of all vehicles in the United States are uninsured so the potential for loss under uninsured motorist is quite high. A large percentage of insured vehicles carry statutory minimums, which are woefully inadequate in catastrophic claims.

Crime Insurance

In my personal experience, I have been involved in more large-employee dishonesty losses than large fire losses. The circumstances are always tragic and devastating. In one loss that I insured, the bookkeeper of a ready-mix concrete operation took over $400,000 from company that had a net worth of far less than that. In another loss, a deliveryman took over $100,000 from a laundry in increments of less than $35 over a twenty-year period.

The largest employee dishonesty loss I was involved in was in a bank and cost over $2 million. I had another bank loss of over $1.5 million.

Many employers have told me over the years, “Carrying insurance for employee dishonesty would be like telling my employees I don’t trust them.” That isn’t the cast. Rough Notes indicates that the American Management Association estimates 20% of business failures are due to employee dishonesty. The most honest person will succumb to temptation if the circumstances force the issue. People and circumstances change.

One pattern seems to hold true in most employee dishonesty losses. The person is highly trusted, rarely takes a vacation, and handles a portion of the business’ transactions exclusively. It is simply good business to have multiple signatures required on company checks and to rotate duties in sensitive positions.

Other crime coverages that should be considered are: Forgery, Theft of Money and Securities, Theft and Robbery Outside the Premises, Robbery and Safe Burglary, and Computer Fraud.

Computer Privacy Issues

The government can quickly put almost any company out of business with fines related to data breach. This coverage is almost mandatory if you’re handling private data.

In October 2013, a Missouri Federal Court proposed the following settlement of a data breach case for a large supermarket chain that involved 2.4 million customers. It included the following:

  • Pay up to $10.00 to each customers for every card that was compromised and had fraudulent charges posted to it;

  • Pay customers for certain unreimbursed out of pocket expenses such as bank overdrafts and late fees;

  • Pay for up to 3 hours for documented time spent at the rate of $10.00 an hour for customer’s time spent on the data breach;

  • A cap of $1.6 million would exist on all of these customer reimbursement expenses, up to $170.00 per class member.

  • Pay up to $10,000 for each related identity theft loss with the total capped at $300,000;

  • Pay up to $635,000 for plaintiffs’ attorney fees;

  • Pay $500.00 to each of the nine main plaintiffs in the lawsuit.

This chain had data breach insurance and adequate assets.

Surety Bonds

For many businesses, many bonds are a statutory requirement. For many others, they need surety bonds to qualify for contract bids. Court mandated bonds are, of course, a top priority.

Inland Marine

This coverage might be required by your lender. For example, if you own a wind farm, you probably will want inland marine coverage on your wind turbines to protect against physical loss.

Contractors will want inland marine on their equipment and tools because theft of tools is quite common.

Like with all physical damage insurance, you can reduce your insurance bill with higher deductibles, but usually it is hard to justify large deductibles for start-ups.

If you have customers’ goods in your care, custody and control, like a dry cleaners, you will want an inland marine policy to cover that exposure.

I have not covered every possible kind of insurance and may have left out the very coverage your small business needs.

Most insurance agencies either specialize in certain kinds of businesses, or will consult a Coverage Applicable book.

Many insurance companies have helpful guides for their licensed agents to help them work through your needs. My agency works with a number of national carriers that provide excellence assistance on their websites for deciding what coverage is needed. They also have specialty coverage endorsements for specific businesses.

Selecting what is best for you is a tough job. A good agent will show you your alternatives and discuss your options within those alternatives. The agent’s comments will help you make your ultimate decision.

James Holm

Lyft, Uber, Sidecar, and Airbnb Present Challenges for Insurance Industry

Have you heard about Lyft, Sidecar, Uber, or Airbnb? If not, you will. Lyft’s Wikipedia entry states they’ve started operating in St. Paul and quite a number of other major cities. Uber’s website indicates they’re in Minneapolis and a handful of other major cities. I realize many of the readers of these blogs are located outside of Minnesota, and in outstate Minnesota. But this is a national concern, and most Minnesota outstate agents have customers in the Twin Cities.

If you’re an agent, make sure you know what these entities are before the following happens to you.

***

It’s 8:37 in the evening and Mike and Frank are in the middle of searching for rusted gold on American Pickers on the History Channel. Your phone rings. Since it’s your smartphone, which you use for business, and not your landline, you answer.

“Jake Sumner,” you say.

“Jake, I’m glad I caught you. This is Bill Fairly. Do you have a minute?”

Bill is one of your biggest clients. You have all of his personal and business accounts, which have grown over the years into a large revenue source for your agency. “Sure, Bill, what can I help you with?”

“We’ve got a problem,” he says. “My son, Johnny, had an accident.”

“Just give me the specifics. I’ll get an adjuster right on it.”

“There’s no need for that. Johnny had the insurance company’s app on his phone and turned the report in from the scene of the accident.”

“How’s Johnny? Was he hurt?”

“No, he’s okay, but he hit a pedestrian and she was pregnant and it’s not good.”

“That’s awful. How’d it happen?”

“Johnny was checking his GPS. He was in a part of town he didn’t know too well and was feeling lost, so his attention was on that damned phone of his instead of on the road.”

“It happens all the time. It’s a different world now than it was when you and I were Johnny’s age. What is he now? He must be about twenty-four?”

You hear a female’s voice in the background say, “Tell him what that insurance company is trying to pull.”

“Is that Suzanne? Say ‘Hi’ to her for me,” you say.

“She’s a little upset right now and you’re sort of in her gun sights.”

“Really?” The hair on the back of your neck stands up. This doesn’t sound good. You think. “What’s the problem?”

“You’ve taken care of my family’s insurance for years. When Johnny moved out after college, I sent him in to your agency for auto insurance.”

“Uh huh. I put him with a very good company.”

“You think? I think they’re a bunch of crooks.”

“Why would you say that? They’re rated number one in the nation for claims handling by J D Powers.”

“Then they must pay that Powers group a bunch of money under the table, because they stink.”

“Take it easy. If there’s a problem with the way they’ve handled Johnny’s claim, I can straighten it out. I just got back from a national company meeting and, if need be, I’ll take it to the top.”

“You might just have to do that. Like I said, the pregnant woman Johnny hit is probably going to lose her child and she isn’t doing so well either. At best she’s going to need care for the rest of her life. That’s going to cost a bundle.”

Thank goodness I talked Johnny into that $5 million umbrella, you think. “The company will take care of things.”

“That’s just it,” Bill says. “They told Johnny that they’re going to deny coverage.”

“What? Why would they do that?”

“Johnny had trouble finding a job when he got out of college. He took several part time jobs and signed up for a ride-sharing program.”

“Okay . . . I don’t see a problem.”

“Well . . . you should. Do you remember when Johnny called you and asked you if his company allowed ride-sharing?”

“I do recall that.”

“It’s that ride-sharing program that’s causing the problem.”

“You can rest easy, I know for a fact that particular company allows ride-sharing. In fact, I think it might even be required by law.”

“That’s what Kevin Sharky said.”

Geez I hate that Sharky guy. He’s a barracuda lawyer who stops at nothing to win for his client, you think.

“Your insurance company says that the company that arranges rides for Johnny is a “public and livery conveyance”. They say there’s an exclusion in the policy and they won’t be covering the loss.”

“Is Johnny working for a taxi company, or driving a limousine?” you ask.

“No. I told you. He’s driving his own car for this ride-sharing service. They arrange the rides and he gets paid through some sort of donation process. Aren’t you listening? Maybe that’s your problem.”

“Bill . . . have I ever steered you wrong?”

“You’ve got some nerve! Johnny’s facing a lifetime of paying off a court award of several million dollars and you’re asking me for a critique of your job performance!”

“Settle down, Bill. If Johnny is liable, surely the company that arranges his rides is primary. They must have insurance.”

“They’ve got what’s called an “Excess Auto Liability Policy”.

“That could mean a lot of things.” A lot of bad things, if Johnny’s company denies coverage as the primary coverage.

“Besides, Johnny agreed contractually to hold them harmless, AND to provide adequate coverage, AND to even provide them legal defense if something like this happens.”

“Why would Johnny agree to that?”

“It was done over the internet and all that was in the Terms of Service. Do you ever read those things before you accept them?”

“What does Sharky say?” At least we’ve got that animal on our side!

“Sharky says the company has damned good attorneys and we’re up the creek. He says you have an insurance policy that will take care of everything.”

“I’m not sure what that means, Bill.”

“Sharky said you have Errors and Omissions insurance. You do, don’t you?”

You drop the phone and stare at the television. Perhaps Frank and Mike will buy some of the furniture and fixtures at your office when you have your going-out-of-business sale.

***

Our world is changing. Many, many new companies have sprung up that claim to make use of “excess capacity in your boats, cars and homes”. This phenomenon is called the “sharing economy”. These companies use internet technology to connect people who have a need with other people who want to rent space in their home or provide a ride in their car.

These companies have already handled millions of transactions. They’re a industry in its infancy that could very soon be second nature for us. At least that’s what some very smart people think. Venture capitalists have provided hundreds of millions of dollars to these companies. They aren’t going to go away simply because the insurance situation is a little dicey.

Twenty-somethings are very willing to wink at what you know will be a huge problem if the claim is serious.

AIRbnb is an international operation and helps people rent out a couch or a back room to “perfect” strangers. As the “bnb” part of their name suggests, this is “bed and breakfast” on marketing steroids.

There are dozens of companies springing up like Lyft, Uber, and Sidecar that connect riders with people who are looking to make a little extra money; poeple who probably are just like the people you insure.

These ride-sharing companies no doubt have paid huge amounts of money for legal advice as suggested by their Terms of Service. They obviously believe they’re running a legitimate business and have found deep-pocketed investors who agree. They expect the insurance world to adjust to them.

Your clients expect you to keep up on what is happening in the world and to watch out for them.

Think about the late night taxi users and imagine how perilous it is for your “Johnny” customers to drive these people around in a pseudo-taxi arrangement. Distracted driving causes a lot of carnage. How distracted would Johnny be trying to drive inebriated riders throughout a part of the city Johnny doesn’t know? One company encourages the driver and rider to fist-bump when they meet, so how does that “friend” driver get the partying drunk to turn down the radio, or his personal device?

I’ve checked with several companies and general agents. Liability for this kind of risk can be covered, but they’ll pay the same as a taxi. I think that’s generous. If I were the underwriter, I would want more premium because of the distractions. A taxi pays somewhere between ten and twenty times for liability coverage as what a private passenger auto would pay.

There is a lot of misleading information on the internet about insurance companies covering this kind of risk. There’s a lot of misleading information about what these companies do and don’t do. Encourage your customers to read the Terms of Service carefully. Here is an example http://www.lyft.me/terms

Many insurance companies have Bed and Breakfast endorsements for homeowner’s policies.  You can also purchase standalone coverage through many general agents and companies, but you have to know about your customer exposure and have handled it.

If you have a means of communicating with your customers, such as a newsletter, and have not alerted them, you need to consider it. Your customers might be “sharing” their boats, cars, or homes.

American Pickers is a great television show. It would be terrible to have it interrupted — and end up across the table from Sharky.

James Holm

Industry Value

Often our industry doesn’t get the credit it deserves. Some of us have been put on the defensive over Obamacare. At times Minnesota’s Insurance Exchange has treated us as an after-thought.  Then there’s usage-based auto, which seems to be an effort to make us redundant. It’s scary that they think a smartphone application might be next for gathering underwriting data. Then along came the recent McKinsey report stating that agents have no future, which is simply wrong, in that it’s what they seemingly think is inevitable is totally avoidable.

Our industry does serve a purpose and independent agents are a vital part of it.

In the early 1990’s, Bob Comeau, an independent insurance agent in Coon Rapids, Minnesota made me aware of the problems involved in distracted driving.

His son and my second son were just getting their licenses and we were both keenly interested in teen driver safety. They both went on to graduate from St. Olaf’s and can give you a rough translation of “um-ya-ya”.

At that time, several companies, including Chubb, worked to produce and distribute a video to back the graduated licensing program in the United States. It was aptly named, “Young Drivers: The High Risk Years” and was produced by the Insurance Institute for Highway Safety.

My wife and I watched the video. Our oldest son had already had two car crashes in which his vehicles were totaled. No one was injured in either crash, but we were badly shaken. The InterAgency decided to purchase several hundred tapes and give them to independent agents throughout North Dakota and Minnesota.

An updated version is at http://auto.erieinsurance.com/young-drivers-video.html

I recently checked. Every state in the union except one has some form of graduated licensing. I’m pleased to have had some small part in making that happen. Insurance agents in our two states stepped to the plate and spread the word of what needed to be done.

I’m even more pleased to think how this is just one example of the insurance industry having a positive impact on our society.

For years our industry has served as a policing mechanism for reducing the number of speeders and other traffic violators by our methods of increasing premiums to reflect improper driving. We are quicker and more effective than the courts.

Constant fire inspections have reduced the number of industrial fires. (Mea Culpa for having made some fifteen MPH “drive-by” inspections as a special agent for The Continental Insurance Company. I tried to keep my company car’s rearview mirror out of the pictures. The vast majority of the time I took the time to do a thorough inspection and make proper recommendations.) Without the follow through by agents with their clients on recommendations fire inspections are an exercise in futility.

How many of us were given a plastic Hartford helmet as a school-aged child? The “Junior Fire Marshal” program had to have been a significant influence in home safety. That program succeeded because local agents volunteered their time.

Where would product safety be without the influence of our industry? Who fills out the applications with their clients to make sure all the info and labels are attached.

How clogged would our court system be without our adjusters working tirelessly to keep claims and lawsuits out of court? Agents have a positive  influence on these proceedings.

How many insurance agencies haven’t sponsored several youth sports teams, often coached by the agent?

How would commerce happen without performance bonds? Any agent involved in bond accounts understands how hard everyone works to safeguard the construction industry. (Wouldn’t it be great if the bonding industry extended to computer programmers. I wonder how many of those cowboys could convince an underwriter to give them a bond?)

Along those lines, our industry does a great job of policing professional standards through E&O and Malpractice insurance underwriting. Insurance agents spend a huge percentage of their time learning to better serve their clients to avoid E&O claims against them.

Without homeowner’s insurance how many individuals could stand the risk of owning such a huge asset that’s so susceptible to tornados and fires? The basic H.O. policy is the backbone of our financial industry.

In the early eighties I cancelled the insurance on four bars in Grand Forks when they refused to cancel an “Irishmen’s Run”. The event featured several hundred people running a ten-kilometer race with stops in each of ten bars for a 12 oz. glass of beer. The bar owners were livid because the TV show called “That’s Incredible” was coming to town to film the event; and I was being a killjoy. A.) Underwriters are killjoys, and B.) When you qualify to be on a show called “That’s Incredible” you should really rethink what you’re doing.

I wouldn’t have known about that event had the agent not been honest.

Our industry, through our profit motive makes decisions that are usually beneficial for all.

The only way we, agents and companies, can make a profit is to sell a policy. You can’t sell a lot of policies if you make decisions, or work with companies who make decisions, simply to be overbearing.

Some underwriters would be champion nitpickers, but most are Solomon-like in their decision-making. In a world where 25% of the applications for insurance rise to the level of material misrepresentation, keeping a positive attitude isn’t easy.

Back when I was an underwriter I would find myself doing some belt and suspenders thing, like hiding my parking ticket so a would-be thieve wouldn’t see the time printed on it, and make a judgment as to when he could best steal my car, and say to myself, “I’ve GOT to get out of underwriting.”

Underwriters and agents tend to be pretty nice people. The industry has a way of shaking out those who aren’t.

Our industry’s desire to reduce risk is good. Profit greases the wheels of the entire industry.

Insurance is capitalism at its best.

Government computers and smartphone data-gathering won’t easily replace us.

We really aren’t that bad.

James Holm

Will The Property & Casualty Industry Survive?

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.

WAKE UP!

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.

James Holm