Agents and Attorneys
An insurance agent went to an attorney and asked him to draft a producer contract. A month later the attorney sent back a contract accompanied by an invoice for $4,500.
The agent got what she requested. The attorney had fulfilled his duty. The agent did not know what clauses and conditions should be included in a producer contract (that is why she went to an attorney!). Ignorance was bliss for the agent until one of her producers left, with clients, and the judge held the contract's protective provisions were invalid.
Did the attorney fail his client?
A small business owner went to an agent and asked for a workers' compensation policy, and liability, and property policies. The agent asked how much liability coverage they wanted, and the prospect said his own contracts required $1 million in liability coverage. When asked how much property coverage the prospect wanted, he was not sure. The agent offered $100,000 and the prospect thought aloud that with depreciation, $100,000 would be adequate.
A few months went by, then the insured's building caught fire and the fire spread to the rest of the $20 million building in which their office was located. They tried to replace their equipment only to discover the replacement cost was $500,000. They slept very little once they found out they had no material coverage. $1 million versus a $20 million liability claim and $100,000 property coverage when $500,000 is required. The policy limits were completely insufficient.
Did the agent do her job? She provided what the client requested. The standard of care of an order taker is to provide what is requested. Tough luck to the insured.
The insurance industry has a serious contradiction of purpose that has existed since the industry began and has always been an issue. But now, due to the increasing complexity of business and technology, ever more complex insurance needs, regulations and aggressive competition, this contradiction is creating more branding issues, sales choke points, and compensation problems, not to mention growing legal issues.
The purpose of insurance is to protect the insured’s assets, or more precisely, reinstate the insured’s balance sheet to the same numbers as immediately preceding their loss. If an insured loses $20 million, they have a $20 million liability on their balance sheet. If they have adequate insurance, their balance sheet will not change value. Without adequate insurance, their balance sheet value decreases by $20 million. Even if they win the lawsuit, their balance sheet, without adequate insurance, still deteriorates because the legal fees will be substantial. With a good insurance policy, the insurance carrier pays all the legal fees and the balance sheet remains unaffected.
If the property is replaced, the asset value on the balance sheet remains unchanged. This is day one, basic insurance. I find, based on the emails even some "insurance" professors (that's what their title is on their university emails) send to me, a sizable percentage of people in this industry must have missed day one of their insurance education. Their ignorance contributes greatly to the awful reputation this industry has for not being there in an insured's time of need. Their ignorance results in their offering inadequate coverages.
Protecting, not in a risk management sense, but from a financial perspective, assets and asset values is the fundamental foundation and purpose of insurance.
Yet agents depend upon a standard of care, a legal standard of care, whereby they often cannot be held accountable for deficiencies in coverage (coverage is the protection offered, the coverages afforded the insured's assets) of their insured's assets. However, most insureds do not know the value of their assets or enough about insurance to know about the diverse ways in which their assets need to be covered – hence their reason for asking an insurance agent to place an order for $X property and $Y liability. If the agent lives by the above standard of care it is impossible for any insured to have substantiated confidence they have ordered adequate coverage.
Why am I so confident nearly 100% of insureds, commercial clients too, do not know what coverages they need? Because virtually 95% of agents do not know enough about coverages to adequately cover their clients' needs and a very large percentage are almost proactively practicing ignorance. If people with licenses do not have a clue about coverages, why should any expectation exist that John Q. Public has an adequate working knowledge?
No one needs an attorney who offers agencies useless contracts. Their fee is a complete waste. An insurance policy that fails to provide coverages is a wasted premium.
Carriers have done a decent to excellent job providing coverage options. Agents exist to offer those options to people who do not understand insurance. If the agents are ignorant, they are not going to offer those options. The agent does not help the carrier or the insured. The agent becomes too expensive and is also expendable.
New insurance distributors have figured out that traditional distributors, including many large brokers, have failed. A few of these new players have identified that most producers are superfluous because they do not bring adequate coverage knowledge (or sales) and yet using producers to sell their products is quite expensive. They are cutting out the charade and benefitting from the cost savings. They have eliminated the pretense and by being more honest about the level of service provided, they save a considerable sum without the client's interest being damaged. Clients get the same inadequate coverage either way. Honesty can be amazing.
Independent agents in particular are paid higher commission rates because the sales brand and cost of building the brand lies with the agent. Direct writers depend on their carrier to build the brand. If the independent agents do not actually provide quality advice, their brand is worth less. This means carriers do not need to pay as much. The plethora of silly insurance advertisements funded with billions of dollars is still cheaper than paying independent agents who peddle inadequate coverages (it is a complete myth spread by people hoping to believe and accepted as gospel by people wanting to believe that heavy advertising is more expensive than agents' commissions, but GEICO's expense load is about 11%, including advertising, which is less than the commission rate paid by most carriers to their independent agents. Go look up the numbers in the NAIC filings if you don't believe me.) The ads are geared to confirm to the uneducated public that all insurance is equal, a commodity, differentiated by price and animated advertising characters. It works.
It works so well that two such carriers are writing about $10 billion in new premium annually, combined. These two carriers are eating away at other companies' market shares and their low expense ratios are a key reason for their success. The easiest savings for other carriers is the reduction of commissions for ineffective agents failing to build a differentiated brand.
Think of a NASCAR driver. Their cars and fire suits have all kinds of sponsor logos because they are helping to build a brand. They help sell the brand, several help sell insurance. How is an agent who does not know coverages representing a carrier's brand? Especially with all the social media available for when claims go bad, claims that would not have gone bad had the agent offered adequate coverages?
This is the new reality. Some new, mostly private equity backed, distributors have figured out that pretending to be a professional is expensive. Discarding the pretension and the producers who do not know their coverages saves a ton of money. Carriers need to find expense savings to survive. Carriers do not need to pay extra commissions to ignorant agents and absolutely no consumer, not one, needs agents who do not offer adequate coverages. Customers can buy inadequate coverages all by themselves over the internet. No one needs an attorney who cannot write a quality and business specific contract. No one needs a foot doctor pretending to be a brain doctor. No one needs incompetent and ignorant advisors on any subject. Agents want a double standard where professional standards apply to their advisors and they want to be seen as professional by carriers and consumers, but they want amateur standards (the opposite of a professional is an amateur) applied to their work product.
The time has long since passed for establishing a two-tier licensing system. One license for basic insurance sold by ignorant agents and one for professional agents. Too many forces exist at every level -- carriers, agent associations, regulators -- protecting the status quo so differentiated licenses will probably never happen.
So what can true professional agents do to show they are not like the attorney and other agents who are just order takers? What can these agents due to justify their current compensation paid by carriers? The opportunity now is to focus on providing real value and being paid accordingly. If you are interested in building a true professional agency, contact me!
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.