Outgunned

Around 10 years ago, I told an audience of insurance distributor associations that their lobbying efforts were poor to complete failures.

The industry had failed, completely, not partially, to prevent banks from entering the industry (which did nothing but mess up the industry further because of their incompetence in running agencies). They failed to prevent the ACA (which definitely decreased commissions and created a concentration of risk for a large proportion of agencies). Their focus on issues that were not important was only accelerating the concentration of business among a few distributors, along with a failure to develop new agencies, which would be their demise.

Today, those organizations are a shadow of what they were because around 40% of all premiums are written with admitted carriers by 20 agents/brokers. And those agents and brokers do not need most of those organizations. The remaining tiny agencies are too small to pay the bills, or they join networks that want to pay one bill.

The same events are happening again. On the lobbying front, lobbying hasn’t improved, but the problem has moved to the state level, and that is more dangerous. The plaintiffs’ bar is years ahead of the industry’s lobbying actions. They recognized they could make a lot of money by changing courts and laws. They spent a ton of money to do so, and they are succeeding. Forget nuclear verdicts because that is a red herring argument. The issue is an increase in frequency and higher settlements that do not approach the nuclear level.

The plaintiffs’ bar has invested significant sums in technology, AI in some cases, that is already having an enormous impact on the lawsuits they bring. First, they have technology that can reduce the cost of discovery by 50% and as much as 75%, according to some white papers I’ve read. This is just like anything else. If I can reduce my cost substantially, I can offer my services/products at much lower prices, which expands my market. In this situation, I can lower my cost so that I can afford to bring more suits targeting lower settlements. This increases the frequency of suits.

Their AI tools, which significantly decrease their cost of evaluating which cases to take, further lowers their cost. The AI tools enable them to consider combinations of variables to maximize their odds of winning while also cutting the cost of preparing their cases. Again, lower costs create expansion opportunities to lower price points. If this were the insurance world, it would be akin to previously not wanting to write an account generating less than $50,000 but now being quite willing to write accounts at $20,000 because now, those accounts are as profitable as the $50,000 accounts used to be.

I don’t see defense counsels investing the same amount of money in their lobbying or technology. Several surveys have noted that defense counsels feel hamstrung by the tight budgets carriers impose upon them.

Private equity has seen the combination of forces applied against a weaker defense to begin investing heavily in litigation. They’ve invested billions to fund trial attorneys. And the insurance industry is aiding and abetting with products like verdict preservation insurance. It’s really a bit hypocritical.

In some situations, the trial attorneys seem so giddy, they are truly at risk of killing the golden goose because insurance companies will eventually pull out of states and lines after enough pain has been inflicted upon them. The plaintiffs’ bar would be wise to consider a strategy where they take just enough, but not too much.

The insurance industry has a great case to make, excluding some bad actors. Yet not since around 1990 have I seen positive advertisements regarding what the industry does for society. Those advertisements should not be designed to generate business like animated advertisements do. These are image branding advertisements that carriers, agents, and vendors should all join to fund.

Why hasn’t this happened? One reason might be the Achilles' heel of this industry. Everyone makes more money the higher rates go. It’s one of the last remaining cost-plus industries. The answer to losses is not better risk management and loss control, as it should be, but we’ll adjust our pricing. That’s sure to make the populace happy and reduce the populists’ messaging of politicians and trial attorneys.

And one of the reasons, coming back to my opening, I don’t believe the right messaging exists, is because the messengers don’t know enough about the industry’s mechanics. I have read one prominent industry expert’s articles/opinions for 40 years, and he totally misses the mark as often as not in his analytics, especially with regard to the rate of return due to insurance companies. I read association executives’ positions, and I sometimes, literally, not figuratively, have no clue what they’re trying to say because their points are nonsensical. A funny one is that a particular company they don’t like will go broke because they spend too much on advertising. But not once have they read that company's financial statements, or if they have, they don’t know how to read financial statements.

Or talking about nuclear verdicts. Someone, please, share your database of true nuclear verdicts paid for by insurance companies. The NAIC does not even have a common definition of what constitutes a claim, so that kind of data does not exist, at least at that common publicly available level.

The plaintiffs’ bar and lobby seem smarter, more focused, and better funded. In other words, they value winning more than this industry values losing. When I gave my presentation 10 years ago, audience members complained, “But we tried really, really, hard.” Awesome. “A” for effort. But what would the outcome have been had smarter and better funded lobbyists been employed? On so many levels, this industry is staffed by people trying to make everyone happy. That’s a silly goal in this environment. The goal should be to win. To make losers of the other side. This means hiring better people and letting go of others. It means investing more money.

This industry has a great story and is the least expensive form of finance, economic expansion, decreasing the cost of home ownership, and helping people climb the social ladder.

The states themselves should be careful of allowing the plaintiffs’ bar too much success because insurance regulation is one of the highest profit margin parts of state budgets. The fewer insurance companies, especially admitted carriers, the less money states make.

We need better image branding and a willingness among all parties to join together to improve the industry’s image. And working with the NAIC on claims ethics would benefit the best carriers, the public, and the industry overall. I don’t know who will lead such an effort, but I hope someone in a powerful position will. Otherwise, ten years from now, I’ll be writing about another demise and dilution of this industry because in the end, if insurance is not affordable and if carriers are unwilling to write products/areas, no one needs insurance.

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