I recently wrote an article describing my horrendous experience purchasing a new life insurance policy. I criticized the industry for employing incompetent people and egregious renewal offers. Several readers rose to defend the industry and carriers. I love that passion.
When passion reaches the point of causing people to defend unconscionable behavior, incompetency or just plain bad actions (and my experience could not be absolutely the only such experience), a person is usually well served to check their emotions. Defending incompetency and defending disingenuous sales activities never makes sense.
As I encouraged those who responded, take a step back. See the forest for the trees, and instead of defending incompetency, work to eradicate it.
Quite often, people who respond to my articles in defense of whatever they feel I am attacking are people who actually operate at higher levels than most of their peers. They feel injured by my article, but really they are tarnished by their poorer competitors. Where one company or agency does a lousy job, the industry in its entirety is tarnished.
One of the criticisms of my article referenced an expiring life carrier’s offer to renew my policy for four-times the expiring rate. Not only was it a 400 percent increase over what I was paying, but it was four-times the rate new carriers were offering me. They used scare tactics in an attempt to convince me to not shop and to just renew at quadruple the rate. No matter how one slices it, looks at it or analyzes it, assuming honest and thoughtful consideration is employed, this is egregious.
Industry’s Reputation
Actions such as this are one reason why the insurance industry’s reputation is poor, and every time it happens, we give consumers and regulators one more reason to not trust us. The industry is built on trust. Insurance is about the purchaser giving the carrier thousands of dollars every year, trusting they will eventually pay in the event of a claim.
The relationship between buyer and seller, excluding sophisticated buyers, is not close to an evenly matched relationship. The seller knows a lot more than the buyer. The seller writes the contract. The buyer quite often does not know enough about insurance to truly understand the contract, especially when they do not read it. Given the lengths of insurance contracts, we’re not far from all the ridiculous software contracts everyone agrees to with a click of a button. The seller is far larger with far more resources than the buyer.
When the seller is more knowledgeable, writes the contract, is orders of magnitude larger and controls the money in the event of a claim, the buyer reasonably feels disadvantaged. They are truly acting on trust, but it is a tenuous trust. When the actions of a carrier or agent cause a normal person to wonder if they’re being taken advantage of, the entire industry suffers.
Agents wrote me advising that a renewal offer at four-times was not egregious because if I had had stage 4 cancer (knock on wood), the renewal offer would be great for me. The insurance company would be doing me a favor. Thank goodness I did not have stage 4 cancer, and therefore the logic of their argument is completely missing. However, even if they were willing to renew me at four-times taking the risk I had stage 4 cancer, this is an absolutely stupid underwriting model.
This is the problem with the ACA’s exchanges. Healthy people who are not persuaded by the carrier’s scare tactics to renew at an increase of 400 percent go elsewhere or let the coverage drop. Unhealthy people likely to die soon pay the extra money. That 400 percent extra is not going to cover the loss. So, either the company successfully scares enough healthy people to pay far more than is likely actuarially supportable or the company is run by morons. How does either scenario improve the trust the public has in the industry?
This is the role high-quality agents play to ameliorate such situations. A high-quality agent will intervene and move the conversation to a better outcome for the client (as my agent did for me). High-quality agents are honest in a professional manner, admitting that 400 percent more makes no sense and you should go to Company ABC, which will rate you and provide the coverages you need for a much more reasonable sum.
Predictive Modeling
I love numbers and statistics, and I really appreciate the value high-quality predictive modeling algorithms bring to the marketplace. Predictive modeling is most often thought about as a way to get the right rate for any given client. This means everyone can be insured—for a price—and predictive modeling will be so accurate that the price offered will be the “right” price.
Maybe I’m too old school, but Week 1 of underwriting used to be, “You can’t charge enough for a bad risk.” I don’t see how that reality has changed. When I listen to company people, analysts and regulators, it seems a religion has developed that such pinpoint accuracy exists or is possible. They have become passionate, and misguided passion eventually damages the industry’s reputation regardless of the passion’s aim.
Predictive modeling is about maximizing a company’s growth rate relative to a chosen loss ratio. In other words, if the chosen loss ratio is 55 percent, the company wants to maximize its growth rate using predictive modeling while achieving whatever its profit margin is at a 55 percent loss ratio.
Understand what this really means. It means maximizing what a company can charge a client while still enticing the customer to buy a policy from that company while maintaining, hopefully, a 55 percent loss ratio. On renewal, it means maximizing what the company can charge without causing the client to leave. Some companies believe that by using this model, they boost their rate increases upon renewal, further improving their growth rate and maybe their profit margin. But to do so, they need agents to not shop the clients’ renewals.
Make no bones about it, this is all part and parcel of some predictive models. What does it do for the industry’s reputation if customers learn that companies are treating their insurance like a magazine subscription? It is one thing to pay $14.99 the first year for a magazine and $29.99 upon renewal. Magazines cost much less and are usually discretionary. When one is paying thousands and the purchase is not discretionary, but the renewal goes way up, the industry is again cutting off its nose to spite its face.
Passion is great at the agency level, but please be rational. Take the steps you can to see insurance from the consumer’s perspective, and then take actions that protect your customers—sometimes from your own carriers. Then work hard to align yourself with the carriers that are better for the consumer and that listen when you explain the importance of reputation.
Somehow, I do not think the actuaries, software developers and name brand consulting firms have built into their models the value of a good reputation. This creates opportunity for agents, but will you take advantage?