Ethics: What's the ROI?
A recent white paper by Chantal Roberts discusses how carriers that understaff, inadequately train, and/or rely excessively on automation create material issues. She makes the case that better management and leadership benefit carriers and insureds. I highly recommend reading her white paper: “The ROI of Claims Staffing and Education: How Skilled Adjusters Make Carriers More Profitable,” by Chantal Roberts.
I believe Ms. Roberts is correct in her conclusions. I do not believe all carriers manage their companies using the same measures, though. Whether they are being penny-wise and pound-foolish is maybe a matter of debate.
Either way, the general thought process is:
A major carrier decided to hire adjusters that were “good enough”. This is similar in some ways to that of a hamburger flipper. As a teenager, I flipped hamburgers. We cooked the meat almost to order, so striking a balance between having hamburgers ready for customers and not having so many ready that they would go to waste was a challenge. Some people were far better than others at estimating and managing this process, which was mostly the teenager’s discretion. One guy in particular was really talented. He almost always had hamburgers ready, and his waste percentage was the lowest.
Was it worth paying him materially more? Management decided it was not worth a few extra dimes per hour. Wastage and customers waiting for their meals cost less than paying him more.
This particular insurance company made the same decision about adjusters pretty much on the same basis as the fast-food franchise. They are applying an economic theory, explained 40 years ago by the economist Carl Shapiro and further detailed by the great, late economist Daniel Kahneman. Mr. Shapiro identified that, at scale, companies will cut corners in ways customers cannot detect until after the purchase. The company will put some of the savings made by cutting corners toward just a low enough price to entice customers to buy from them, and they’ll pocket the rest.
Cutting corners by hiring “good enough” adjusters is a perfect example. The customer will not know about the corner-cutting until well after their purchase. They probably will not even associate their “savings” with their poor claims service. The corner cutting is perfectly hidden.
This same carrier hires good enough agents charged with selling everything from homeowners insurance to commercial insurance to investment products. Technically, it is not impossible for an agent to be competent at selling all these products, but realistically, it is. The result is a person who may be great at selling snake oil but has no real idea whether the product fits the client, and the client will not know until claim time.
This saves quite a bit of money, around five full percentage points based on this company’s financial filings, and the “good enough” is hidden.
And I can verify anecdotally, this particular carrier is writing a lot of new business they otherwise could not afford to write. In other words, they’re saving enough by cutting corners to reduce their prices to the point that customers are moving their accounts.
What is the solution? Mr. Shapiro’s main message is that you must find a way to differentiate your quality from your competitors’ corner-cutting and reduced quality. You must show why your premium pricing is worth it. The airlines have had difficulty achieving this, but Delta seems to have done so, with United in second place. These might be good examples to study because what Delta has achieved is difficult and impressive.
A simpler, though still challenging solution is to build a boutique brand. Get out of selling insurance and get into protecting clients. Protecting clients is a much broader umbrella and valued by clients more. Insurance is only one part. By doing so, you diminish the importance and emphasis on commodity insurance sales. And this approach is far more enjoyable for those with higher ethical standards, though not without the frustration of trying to change perspectives.
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