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  • Writer's pictureChris Burand

For such an old product, does anyone understand insurance?




Insurance is an awfully old product. Standalone insurance policies not attached to contracts or loans were sold in Italy in the 1300’s. But reference to insurance dates all the way back to the Hammurabi Code from around 1750 B.C.!

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You might think that after 4,000 years, people selling and buying insurance would know what they’re selling and buying. But they don’t. Not really, only superficially. This is not just my opinion. I’ve surveyed hundreds of people in the insurance world to learn if they know what they are selling, and the vast majority do not. The answers typically range from, “insurance” (duh!), “piece of mind,” “financial security” (undefined, more of an emotion that actual financial security), “protection,” and so forth.


These points touch on some ethereal aspect of what’s being sold, but not the reality of what’s being sold. Insurance is a legal contract transferring risk to another party in exchange for a payment (premium). The risk being transferred is the risk that the policyholder’s assets would otherwise be potentially diminished. In more financial terms, the true function of insurance is to protect one’s balance sheet and extend leverage opportunities. People rarely think about how insurance extends leverage, but this is a primary function today. People could not get loans, i.e., leverage, if not for insurance protecting the lender.


Virtually no buyers understand the value of what they’re buying. As a result, insurance is typically purchased with material resentment attached. This is why sellers purport to be selling “insurance” but in many advertisements, they do not even use the word “insurance” (excluding the name of the advertiser, i.e. ABC Insurance Company). Buyers then buy insurance from someone selling something so toxic that they don’t even mention what they are selling.


For example, consider the commercials and agents focused on selling the lowest price. Apples-to-apples, with 1,000 P&C carriers, prices are going to vary, so sometimes a better price for the same coverages is to be had. But quite often the lower price is correlated to less coverage. I’ve seen situations where certain entities taught their agents to sell homeowners coverage at 80% of replacement cost because insureds don’t “really need the other 20%”. I’ve seen agents who advise business owners they really can save a bunch of money by not purchasing workers’ compensation on themselves. Obviously, you save money if you don’t have any coverage. These agents are simply trying to make sales, not protect anyone’s balance sheet and the buyers do not know what protection they are or are not getting.


And I don’t blame the buyers. The entire concept that insureds should have to read and understand their policies so they know what they are buying might have been applicable in simpler times when buying insurance under the Code of Hammurabi, but not today.


For anyone thinking, “That’s just your own opinion and it’s wrong!” I have the advantage of completing many E&O audits, completing due diligence projects, and teaching coverages over the last 30 years. People selling insurance, by and large, have limited knowledge of what they are selling, and even if the insured could read a 25-page insurance contract, it’s highly unlikely they’d adequately understand it. When I teach coverages to people with 25 years’ experience, they often don’t understand what they’ve been selling, and they’ve been taking insurance education classes every year!


We therefore have ignorant people selling and ignorant people buying. And the dollars are large. This makes for an attractive target for smart people to take advantage of consumers. When a really smart insurance carrier management team, or even specific kinds of distributors, focus on ignorant agents, pretty good frauds and illusory coverages can be created in this environment. In reading a history of insurance fraud recently, these were key ingredients in many such frauds.


With second grade insurance education enabling the puppet master to infuse the right sales pitch, agents will believe they are selling a great insurance product with absolutely no understanding of what they’re actually selling, and consumers will have even less than normal knowledge of what they are buying. I see this possibly happening in selling certain carriers’ policies. When a cat storm hits, or when a group health carrier realizes minimal surplus is inadequate to pay claims, the policyholder is always surprised and angry.


Insurance has another feature enhancing these vulnerabilities. Most people and businesses rarely have claims! They have no idea if what they have purchased is any good. And they won’t until they have a claim or until they obtain high quality professional advice. Most consumers never read their policies (most agents never read the entire policies either), and even if they did, most are not going to recognize the coverage gaps.


These are matter-of-fact realities for which no studies are required. This reality makes the defense basis of E&O claims that insureds must read and understand their policies an obnoxious legal precedent. There are three parties involved. Two parties are licensed by the state. Neither has an obligation to understand what they are selling in most states. It is the third party, the consumer, the one not licensed, that has the greatest responsibility.


“Hey, Attorney, here is everything you should put into the employment contract I give employees because it is my responsibility to read and understand the contract you are selling me more than it is your responsibility even though you are the one with a legal degree and law license!” Insurance is a legal contract.


Study after study shows the vast majority of consumers and businesses are materially under-insured. These studies are not addressing esoteric or truly optional coverages but the base amounts like having enough coverage on a building. The carriers make significant profits, around $50 billion annually per A.M. Best. They are doing okay, but they’d do better if their agents knew what they were doing, because the solution to the property insurance crisis is not higher rates, but greater coverage and better underwriting. Agents need to address the coverage gaps.


Insurance is such an old product. It is arguably the most valuable financial product ever developed and sold today. It is a shame that a product so critical to people and the economy overall is so easily and so often sold ineptly.


Would you like to rise above the rest and take care of your customers more professionally? The key is to change your primary measures of success. Measure how many people whose protection you materially enhanced today.


In January 2022, approximately 1,000 homes and businesses burned outside of Boulder, CO. The state’s study concluded the average home was under-insured by $146,000. The under insurance was a combination of poor replacement cost calculations, applying inadequate replacement cost endorsements, and not having enough ordinance coverage. It was not just one thing. Granted, other factors jacked the cost up because of inept governmental decisions. But focusing on what an agent can control, it was a combination of those three coverages.


Replacement cost estimators are so often wrong that some of those mistakes are at the carrier level. Agents are limited in convincing carriers to use different replacement cost estimators. But a lot of agents don’t use replacement cost estimators correctly and others cut corners to get to the price required to make the sale.


Also, not all replacement cost endorsements are the same and yet, a large proportion of personal lines account managers I meet think they are all the same. Some are fantastic and others, I wouldn’t buy because of all the conditions attached. Ordinance coverage was a huge factor because the municipalities had become environmentally “correct”, and their building codes required that new construction would need to include environmentally correct materials and designs (like solar power). The throw-in ordinance coverage is unlikely to be anywhere near adequate in these situations. In 98% of the files I have reviewed, no one even asks the insured if they want more coverage.


To rise to the professional level, at the very least, do the replacement cost calculations correctly, offer the better replacement cost endorsements, and evaluate the need for additional ordinance coverage. Rising above the cacophony of peddler personal lines agents is pretty easy. Getting heard is the hard part and you do this one client at a time. Advertisements are unlikely to work because insurance is a required word.


Rising above makes life more enjoyable. I’ve been fortunate to know many good agents who have saved their clients from financial ruin. Over time, they no longer need to even sell because their reputation brings plenty of new clients to them. They have made good money and retired multimillionaires.


And, along the way, they took more vacation days. Sounds like a winning plan to 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.

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