Darwin Award for Carriers
Insurance is becoming obsolete on many levels. One measure is how many claim dollars and even claims per GDP are being paid. The number of claims dollars per GDP dollars has been declining steadily, excluding Auto PD, for the last fifteen years and is now about 15% less. Claims per $1,000 of NPW have decreased too. The average claim per $1 million dollars of GDP has decreased by about 30%. Insurance is just not as important if claims are not incurred or covered.
The best way to go out of business is to quit providing a product that people need just like the horse and buggy people did.
Many reasons exist for the declining importance of insurance. These Darwin Awards exemplify how carriers are making insurance obsolete by refusing to act as insurance companies. The following is in no particular order of importance.
1. A carrier notifies its agents that their predictive modeling software is so accurate that just like in the movie "The Matrix," they know which properties will incur a claim in the foreseeable future even though they cannot point to any particular underwriting factors that show that a property is at an elevated risk. Because no particular underwriting factors seem to exist that show that a property is at an elevated risk, the carrier cannot non-renew it. Instead, they are asking agents to move the accounts.
Let's assume their predictive modeling is correct. In that case, insurance has become 100% obsolete. Insurance is designed to provide coverage for large, unexpected, and unpredictable events. If the events are completely predictable, then those parties who will not incur a loss do not need to buy insurance!
Those parties who are going to incur a claim are now uninsurable. They need to pray. Insurance is about the law of large numbers. Traditional underwriting is about applying multiple factors and judging the probability of making money--not incurring a claim--on a book of business. This new model is about the probability of making money account by account by account, or if by eliminating all the accounts THAT WILL incur a claim, cutting premiums by 25%-50%. I have not seen those rate filings though.
No one needs insurance if they have no probability of incurring a claim.
2. A carrier refuses to send notifications of a major reduction in coverage. Instead, they ask the agent to do their job for them even though the contract is between the insured and the carrier. The agent is not a party to an insurance contract unless by accident or through lack of understanding insurance contracts, they insert themselves.
No one, and I do mean no one, needs a carrier that massively reduces liability coverage and then refuses to tell their insureds.
3. A premium of $50,000 for $100,000 in liability coverage. This was the quote for an absolute maximum liability exposure (to the carrier). Maybe this was just a nice way for the carrier to say "No," but again, no one needs insurance that carries effectively a 50% deductible. Coverage here is $50,000 in premium for $50,000 of coverage. It is nonsensical. The carrier should not have embarrassed itself unless it enjoys being ridiculed because carriers doing stupid things make the rounds among agents quickly.
High deductible policies are a critical reason why insurance claims relative to GDP have decreased. Insurance is not designed, when designed properly, to be a maintenance policy so higher deductibles make sense. However, some deductibles have increased so much that regular people may not be able to afford the deductible when they incur a claim. Many regular people do not have $5,000 or $10,000 or more sitting in a bank account ready for a deductible on their roof.
An insurance policy becomes considerably less important when deductibles exceed an insured’s ability to pay the deductible.
4. Being a little too clever in policy wording. I am seeing this most often, but not exclusively by any means, in the cyber world where the complexity of the exposure creates an opportunity whereby an insured (and agents) infer coverage exists when it does not exist. Why buy insurance in these situations?
In many cases, I am not convinced the carriers' actions are purposeful. I am not sure they actually understand what they are doing.
5. Those carriers who told their agents to tell insureds they did not have any coverage for COVID-19 related claims. I am sure they did not mean harm when someone internally decided to send these instructions. The carriers probably researched and analyzed their forms in detail and determined no coverage could possibly exist under any circumstances. They then decided the most efficient solution for their company, their agents, and even the insureds, would be to just straight up advise, "You have no coverage. Don't file a claim. Don't waste your time--or ours."
These carriers simply forgot, or did not know, that agents can't deny claims. It is like reducing coverage without notifying the insureds. The contract is between the carrier and the insured and therefore, claims cannot be denied by agents.
6. To all those independent agency carriers who do not want to be treated like a number on a spreadsheet and who want their agents to sell coverage--I applaud your goals. However, unless you insist on your agents obtaining real insurance education throughout their organization, and carriers should also include improved education for their underwriters, you'll only be a number, a price because otherwise agents largely do not understand the differences.
I know that this is a huge broadside but after decades of teaching coverage classes and conducting E&O audits, it is the reality. If you want insureds to see that your coverages are really good, you need agents selling your product who know the difference between a replacement cost estimator and O&L replacement cost.
7. A critical reason the industry is now less important is because on the commercial side, the most important assets are not insurable because carriers still think a company's assets are the same as they were in 1970. In 1970, intangible assets were a tiny part of most commercial clients' balance sheets. Today, intangible assets can constitute 90% of a companies' assets. Think about an agents' assets -- 90% of its most important assets are intangible. The agents are likely to have zero coverage for those assets and most likely could not find coverage if they spent 24/7 for twelve months trying to find it.
The assets this industry is focused on insuring often date back to the horse and buggy. Every carrier wants manufacturers, but this is a service-based economy. The U.S. economy is now knowledge based. Offering insurance for a small part of the economy but not the larger part of the economy is a great way to become obsolete.
Running an insurance company requires balancing risk and reward but refusing to accept risk and insure the assets that really matter involves no balance. The industry is clearly on the path to become extinct, very slowly just as most species become extinct and just like people who go bankrupt. It is slow at first and then sudden. Insurance carriers, at least the carriers earning these awards, need to get back into the business of being insurance companies. The industry has far too many insurance companies (around 900 P&C) and the bottom 50% are so small and mostly so pedantic that if they disappeared tomorrow, almost no one would notice. They are already extraneous, and the more carriers focus on not providing insurance that really matters, the worse the industry's future.
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