Is it worth being professional AND ethical?
I am honored to have clients who endeavor to be the most professional and ethical agents and brokers possible. I have noticed that many are tired. They feel like they are pushing a Sisyphean boulder. The playing field is not level, favoring the unethical and stupid. Here are a few examples where carriers and regulators might assist, and in doing so, assist the public.
1. Rebating. "What's in a name? That which we call a rose. By any other name would smell as sweet." --Shakespeare's Romeo and Juliet. Without getting into technicalities and the often huge differences between states' definitions (and how the definition of rebating varies from one line of insurance to another even within the same state), rebating is happening on a material scale in the real world. A legitimate argument is that if an agency wants to rebate for the same commission as an agency playing by the rules, their profit margin will shrink and that is okay.
A shrinking margin versus losing top line revenue resulting in no profit margin is a better comparison. I am all for providing value added services, but not as inducements to insureds for placing or maintaining their insurance policies with a specific agency for multiple reasons.
The agencies offering these inducements, in my experience, do not offer them to all clients, not ever.
Often agencies promise the services but do not deliver.
When offering these services, the agency arguably increases its E&O standard of care but argues it is just an agent.
The rate filing anticipates a commission of X% for the services of an agent. If an agent extends those services, then the commission rate for just being an agent should be less. Otherwise, the agent providing those services should charge a fee for those additional services.
Parties whose main goal is selling service XYZ by offering insurance at a discounted, money losing level. In other words, using insurance as a loss leader. Insurance is not like candy bars on the end caps. That is just wrong at the carrier and agency level.
2. Fees. I personally believe the professional insurance distribution industry needs to move to a fee model. That will take time, but a fee model is critical to separating the amateurs and unethical from the truly professional. Carriers are going to expedite this transition as they cut commissions. They are not stupid, and when they see agencies able to afford rebating, they know they can lower commission rates.
That stated, clarity and leveling the playing field is important so that agencies that want to do the right thing by their clients and regulators can easily do so. Some of the fee regulations are ungainly and complex for no real good reason. Also, from what I see, the enforcement of the existing regulations is a backburner issue for most insurance departments.
State Insurance departments have so much on their plates today that prioritization is required. Some important items will slip in importance. I wish fees and rebating were higher up on the ladder.
3. Capital. I have heard the executives of excellently capitalized insurance carriers lament how it does not seem to matter that they have taken stewardship of their capital for policyholders. Other carriers with much less capital and much lower ratings, in some cases no ratings, are writing business as if both sets of carriers were on the same level.
To some extent this is just part of the cycle, elongated this time, where some carriers are lax and hope to get away with minimal capitalization long enough for certain people to make plenty of money. This cycle has happened previously and will happen again. This time is different though because the number of insolvencies has been so low for so long, excluding the special ACA carriers permitted under the ACA who did not have to meet normal capital requirements and many of which went insolvent.
People have forgotten the pain of dealing with insolvent carriers. Maybe a majority of agents today have never had that experience, so they do not take it seriously.
Another factor is that following a couple of huge natural catastrophes resulting in extremely limited property markets, some states seem to have been pretty desperate to allow just about any carrier to write property. Many people should be saying heavenly "thank you's" for the lack of another truly big hurricane hitting a populated area in the last 20 years.
If the market, agents, regulators, and customers are not going to value carriers making the hard effort to protect their capital, those carriers eventually will return capital or waste it (probably on losing acquisitions). For the insurance industry it seems more prudent to maintain capital rather than rolling the dice on the weather gods. Obviously, others feel differently.
4. Do Carriers Really Care About Quality? I know they all say they do, but when I see an underwriter turn down an honest application from Agency A but accept a questionable application for exactly the same prospective insured from Agency B, I have my doubts. I was an underwriter and if you are halfway aware, an underwriter should easily identify the issues. It is not rocket science to see the problems unless you don't want to see them.
5. Do Customers Even Care? A good friend who takes great comfort in providing clients with the right coverage expressed so much frustration the other day. He was frustrated seeing some competitors sell clients horribly inadequate, even wrong coverage, and sell lots of it. Insurance is very complex when done well and that complexity turns many consumers away. This is a reason why cartoon characters can successfully sell low limit insurance while professional agents trying to sell the limits their customers most likely need, fail.
Selling a complex product to regular people is difficult. Selling a complex product to highly educated people is difficult. Complexity is difficult by definition. The easy way out is to become a warmer version of the cartoon characters -- this choice is attractive and common. You can make a lot of money and it feels so much better than banging one’s head against the wall hoping that someday, somehow, customers will appreciate the true importance of purchasing the right coverages.
Commission rates often do not pay for the extra time required to convey the right coverages either (which is another reason fees make more sense for professional agents).
Customers do care about having adequate coverage, but they do not know what coverages they need. When I take my car to the mechanic, I do not know whether a full brake job is required or just new brake pads. Why is a throw-in cyber policy inadequate compared to a full, high quality cyber form? Customers cannot easily tell the difference. Many agents don't know the difference. I care about being able to brake just like customers care about having adequate coverage. The mechanic needs to help me understand, without me having to go to mechanics school, why a full brake job is required. The only way to overcome competitors who cut corners is by finding ways to communicate when brake pads are required versus a full brake job, in honest and easily understood terms.
Pushing boulders up hills gets old fast. Doing so now is especially difficult. Agents driven to provide high quality advice to clients must continually work on their own sales and listening skills, and not get too discouraged. Still, it would really help if carriers and regulators would lend a helping hand.
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.