A Quality Free-fall?
This is a difficult article for me to write for two reasons. The first is that I really love how insurance, when done well, can make peoples' lives so much better. The second is that by writing this article I am taking the chance that some people might consider this article libelous or a violation of the much-outdated anti-disparagement laws.
A number of parties within the industry, not always the best players either, take advantage of anti-disparagement and libel laws knowing how difficult the laws make it for others to counter what they do. In effect, these laws protect the bad actors far more than the public. For those unfamiliar with insurance anti-disparagement laws, in a nutshell, these laws dictate that one cannot disparage an insurance company. You cannot say negative things about insurance companies.
For example, during the credit crisis an agency advertised that they did not represent a specific bankrupt company. Technically, as it turned out, the company mentioned in the billboard was not technically insolvent because the U.S. government had bailed them out and therefore, the carrier was not, technically speaking, insolvent at that time (at least a portion of that company has since declared bankruptcy). The agency was fined for disparagement. The law's purpose was to prevent competitors from making insurance companies appear weak or unfair to their customers without having absolute, definitive proof that the company is financially weak or unfair.
That makes sense in general, but when these laws are used to suppress the obvious or to suppress data simply through technicalities it results in unfair protection. It may not technically be unfair, but it is practically unfair. Take two highly rated insurance companies. One is a pure traditional mutual carrier and the other is an assessable reciprocal. One has actual money in the bank with which to support its surplus and the other’s surplus is generated by assessing its policyholders who, though they may have signed a power of attorney relative to the assessment potential, have no real understanding of what they signed.
One pays with its own money and the other pays with its clients' monies. The companies' high ratings do not show this material difference because the odds of going insolvent might be the same even though one of the companies will not go insolvent due to the requirement that their policyholders pay for the claims. What is the difference, other than the dollars and timing, between a policyholder having to rely on a guarantee fund to have their claim paid and having to pay their own claims through a reciprocal agreement?
Agents must be extremely careful how they explain this crucial point to clients or risk violating the anti-disparagement rules. It is even more important now since many reciprocals are being created.
Another example is how insurance is now sold. Commercials that cost billions of dollars are produced that have absolutely nothing to do with protecting people or their assets. The legal contract sold could be for anything because the commercials barely mention insurance and when they do, the reference is either the price or the company's name. How regulators allow carriers to sell price without reference to asset protection and protecting consumers is beyond me. I read a politician's comments about high homeowner insurance prices and the need for correction. Great, but if homeowners insurance prices are not high in that state, there will be no private insurance. A trade-off always exists. The lower the price, the higher the odds that either coverage or quality of coverage will be less.
Regulators who allow companies to exist even though they cannot make money in non-catastrophe years in catastrophe prone states and then pretend those carriers have a winning strategy are a joke. The New Orleans Times-Picayune newspaper had an excellent article on this point in November 2022. If a property carrier in a high catastrophe risk area does not make money in years when catastrophes do not happen, then the probability their rates are actuarially sound are about zero. Filed rates are supposed to be tested.
The ruse is successful in the short run but when a failure happens, the public readily believes it is the greedy insurance company's fault. The politician mentioned above griped about how insurance companies created special subsidiaries just for that state and then shipped millions of dollars of profits out of the state back to the parent company and then tightened their stranglehold on that state's market. It is a readily believable claim and around 80% of the population probably accept it as the truth. The reality, in my experience, is that carriers create such subsidiaries only in states where their contingency planning requires an easy exit from a state with bad regulations and/or bad regulators. The carriers need a way to clearly separate their results in that state from their results in other states. It is not as if carriers dream up ways to create greater demands upon their IT systems, accounting departments, legal departments, or that they enjoy the headaches resulting from having extra subsidiaries hanging around.
This is an industry selling a product no one wants to buy. It is an industry selling a complex product that few people, including those selling it, fully understand. It is an industry selling legal contracts but the sellers do not have law degrees. In fact, the license to sell this complex product requires fewer hours of training than many states' requirements for manicurists and hair stylists (not that cutting hair is simple, but a failure does not cause a person to go bankrupt). So, we have unknowledgeable consumers buying a product they do not want to buy, sold by people who do not understand what they are selling, overseen by politicians who are clueless, and regulators who are probably so tired and have so much pressure to focus on fairness that they let much of the rest slip.
This is the perfect environment to ignore quality and true asset protection.
Many agents care deeply about protecting their clients. I meet both carrier and agency employees who care and even take the time to learn their coverages well. How do these people succeed in this toxic environment? They succeed one client at a time. These agents succeed by educating customers about the coverage they need. They succeed by educating their employees. They succeed by talking to people. Analogue service works and it works extremely well when a person knows their coverages and then convinces people, through conversation, to purchase the coverages they truly need. The ROI is phenomenal.
The opportunity created by poor quality and the protections offered by anti-disparagement rules (which would be more fair with better regulation) is significant because it makes it easier to stand out in the crowd. When you have a claim would you rather talk to someone living in your town or a call center? You are putting your entire home and all your assets on the line for $500 in savings. You are buying asset and liability protection from an entity whose standard of care is minimal because they do not represent you, ever. Therefore, you are responsible for knowing what coverage you need and understanding the coverage you are buying by reading and comprehending your insurance policy. Is this how you want to spend your time? Are you that expert? Would you (the consumer) go to Las Vegas and bet your home with $500?
Are you (the agent) enough of a true quality professional to ask those questions of your clients?
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.