Is your business plan based on luck?
Updated: Aug 25, 2020
Most insurance is sold poorly. That is not a judgment or an opinion. It is a provable fact and based on all the E&O audits I've completed and education classes I've taught, the facts are clearly visible. Not much doubt can exist if one looks at the data unemotionally. (Some people confuse an agent’s ability to sell insurance coverage correctly with selling coverage correctly -- two different facets.)
Insurance sold poorly, over and over and over again, is evidence of a business plan founded upon a presumption of perpetual good luck. In Greek, Tyche was the goddess of fortune, chance and fate. The Greeks understood that fortune and luck were intertwined: there's a 50/50 chance that some event would be really good or really bad. The Greeks actually understood luck more accurately than modern humans do who attribute all good luck to their skill and all bad outcomes, luck or otherwise, to anything other than their own attribution.
Insurance sold poorly, is defined as not making much of an effort to determine what specific coverages a client needs. If an agent does not know what coverage they need, odds are about 0% the client will buy what they need. To not make the effort to identify those exposures and sell the applicable coverages means the agent is hoping the insured never has an uncovered claim. Maybe you are a seer and can see accurately into the future which claims clients will not incur. Your ability to see into the future is a huge time saver enabling you to not have to discuss any coverages that will never come into play. With this ability though, you should probably run an insurance company.
Otherwise, the sale is based on the hope the coverage you did not offer is a coverage they will never need. When this happens thousands and thousands of times, one has an entire business based on hoping that thousands and thousands of clients will never need the coverages your people failed to sell them. It is a weird business plan that demands everyone have the same needs because of the failure to learn what customers actually need. In some ways it is the epitome of Henry Ford's statement, "Customers can have any color they want, as long as it is black."
Running a business founded on the premise that inadequate coverage will be sold daily with the hope that coverage gaps will never be triggered by an actual claim is truly bewildering. It is no wonder new insurance players feel so strongly that they can eliminate many agents. Even if it is true that some InsurTech players and direct writers are not selling the right coverages, they are employing a different version of the same strategy except for two important differences.
The first is that their standard of care is probably lower than that of traditional agents. From an E&O perspective this difference matters. The second is they can sell inadequate coverages more cheaply than traditional agents. Even if an agent's standard of care is lowered, their cost structure remains too high. In the race to the bottom, assuming those claims of inadequacy are correct, the low-cost provider will win.
I wonder if any other industries exist where so many strategies are based on offering inadequate services and products hoping clients never notice? I sometimes get the feeling many doctors and attorneys act on this premise. Do you want to do business with or be treated by these kinds of practitioners? Having been treated by quacks with medical licenses, I certainly don't want that experience again.
Technology and money and consolidation are cracking the foundations of agents who operate by hoping their clients never need the coverages they failed to sell. The new technology that the plaintiff bar possesses combined with the ability of private equity to invest in lawsuits is likely a game changer alone. Also, the fact that most insurance policies are written to protect 1960's exposures versus 2020 exposures is a problem in and of itself. It will be interesting to see how Coronavirus claims will impact the industry. I suspect that some suits will develop from clients that needed certain kinds of business income coverage that was available, but their agents failed to offer.
Following the Credit Crisis an important book was written by Nassim Talib. The book, The Black Swan, is based on how no one in the western world ever considered the possibility that a black swan could exist until they discovered Australia. A "Black Swan" event is a rare event with significant consequences that is possibly predictable but unpredictable in detail and timing. The Coronavirus may be a good example of a Black Swan event because experts knew such a virus was likely to occur at any time. They just did not know when, where, or how bad it would be. To some extent, the Coronavirus was inevitable, but could be termed a Black Swan event anyway.
Insurance was designed for Black Swan events. Insurance is designed for highly improbable losses that occur with no predictability. Not being able to predict when an insured will incur a claim and exactly what kind of coverage an insured will need at that moment is why insureds should be offered the coverages they need for the exposures an agent would know exist if they took the time to discover those exposures. To not offer those coverages is in some way a business strategy with a cornerstone based on hopeful good luck and may also be indicative of playing God. One is kind of playing God through omission indicated by silence that insureds should not worry about such and such a claim because it will never happen. The Black Swan event will never happen -- so don't worry about it and don't buy insurance for it.
Not only was insurance designed to help people when bad things happen in bad ways, it was designed purely for bad luck. If all anyone ever has is good luck, they don’t need insurance.
Insurance is designed for bad luck, large bad events, that occur randomly and the exact nature of the eventual claim is not predictable. To counter all that Greek Fortune, a methodical approach to learning clients' coverage needs and offering the applicable coverages is one's best strategy and a great way to build an entire business. Going forward, will the cornerstones of your organization be hopeful luck that your clients never need the insurance you did not sell or offering clients the coverages they may never need but if they do, you will be their hero for helping restore their lives and businesses? It is your choice. What will it be?
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.