Professional insurance agencies had better explain their value...
Updated: Aug 25, 2020
Or else better marketers will convince consumers they are more ethical than you. A recent story caught my attention and ire. The story was a press release from an Insurtech start-up. What first caught my eye was how the start-up measured success in coverage placed, i.e., total policy limits rather than premiums or commissions, to make themselves look successful.
For people who don't know the difference, it was impressive that a 12-person start-up agency could place $2 billion in coverage in four years! The average 12-person agency only has $1.2 to $1.6 million in revenue. This Insurtech is outperforming the average agency by 1,430 times!
$2 billion in coverage at $1 million in liability only, is just 2,000 policies. Assuming there is some auto and comp and whatever else in there, let's say 1.5 policies per customer, that is only 1,333 customers or in other words they basically wrote one account per day over four years. Those kinds of policies average around $500 commission each which may be generous but I'll use that figure. That amounts to $667,000 in revenue. Divide that by 12 people and the result is $55,000 revenue per person.
Insurtech is supposed to be about scale. The definition of scale, in all directness, is doing more with fewer people. Scale is nothing else. $55,000 in revenue per person is not scale.
What next caught my attention was their statement that the traditional insurance model incentivizes agents to sell customers policies they don't need or contain inflated coverage limits. I'd really like to see solid proof that this regularly occurs. I don't know the captive agent world well so maybe it happens there, but I doubt it. I know the independent agency world extremely well and I have rarely seen this happen.
The system actually works the opposite of their statement. In the traditional agency model, for many complex and intertwined reasons, agents actually have more incentive to sell clients less coverage than they need even though they are threatened with E&O suits for doing so! I have seen a large number of agents sued for not selling adequate limits or the right coverages. In the COVID-19 world, has anyone seen an agent sued for selling too much Business Income?
For 25 years I have been cajoling, arguing, demanding, yelling and screaming at agents to use coverage checklists, and yet agents are no more likely to use coverage checklists today than 25 years ago (I'm a failure!). It has been proven over and over in E&O studies that using coverage checklists to ensure clients are offered adequate coverages is the best solution for both clients and agents!
I have only seen one suit brought in the independent agency world for selling too much insurance and the suit was aimed at the carrier because it was the carrier's practices, not the agencies' practices, that allegedly resulted in excessive and unnecessary limits. I've never even heard of an agent being sued for selling clients too much insurance.
This Insurtech advised that their model works because they make up the difference with finance fees. Their story sounds great to a large proportion of consumers. Consumers do not know how much insurance they need because no agent has ever educated them on how much insurance they need. I teach a lot of insurance classes and have conducted a lot of E&O audits; few people ever discuss the importance of drop down UM coverage on an umbrella policy (in fact many agents and CSRs don't even talk about the importance of an umbrella policy). Selling unnecessary coverage is really, I mean really, really hard when most agents do not even offer necessary coverage. I was with a retired family member who had paid off his mortgage and wanted to drop his homeowners’ insurance. I explained he would lose his liability coverage. This is an extremely smart person and yet not one single agent in 40 years had ever explained the importance of liability coverage to him!
Professional agents will lose if they don't educate their clients as to why they need more coverage. They will lose to agents who actually advise those same clients, who do not have enough insurance, that their incumbent agent has actually sold them too much coverage! Pay for what you need they say, but the consumer has no idea what they need!
A huge proportion of producers exacerbate this problem when their client asks, "How much liability should I purchase?" The producer frequently answers, "As much as you can afford." What is the difference between this "professional" advice and Insurtechs' advertising, "Buy as much as you can afford." It's the same advice! The correct response is to help your customer figure out what they can afford to lose and then recommend that they buy an appropriate limit.
The Insurtech's press release articulates so much of what I see as wrong and unfair in this industry. Yet, the failure of agents to educate their clients, offer the right coverages and their own lack of knowledge about coverages has opened the door wide for this kind of upside down and sideways marketing pitch to actually make sense to consumers. A low down payment with significant finance fees has been a successful business model for a long, long time.
One other possibly dubious claim is that insureds will still save 35% because carriers are willing to reduce their price because the Insurtech agent is so efficient. This claim may be true in some instances because reducing acquisition cost is a huge goal for carriers today. However, a 35% savings? Let's do the math on this:
The industry average loss ratio has been 61% over the last five years. The average profit margin is around 10% including investment income. Independent agents are paid an average of around 13% including comp. So, no matter what an agent does, the most carriers can save is 13% by eliminating agency compensation. An argument may exist relative to some additional savings relative to frictional costs but not enough. The carriers' average total expense ratio is around 28% excluding LAE. If I remove the commission of 13%, that only leaves 15%. A 35% reduction in expenses is impossible.
Additionally, using a 61% loss ratio and if the rate is 35% less, the loss ratio would be 96%, all else being equal. Even if all commissions are eliminated, the loss ratio is still 83%. An 83% loss ratio is not sustainable.
Now, maybe the quoted 35% savings is meant to mirror other disingenuous price saving advertising such as, "The average customer who switched saved $350!" That is an entirely pointless, but quite effective ploy. Let's say 1,000 people shopped that carrier's site and 990 stayed with their existing carrier. The remaining ten saved an average of $350. The people who did not switch may have saved an average of $350 by not switching so they did not switch! Only counting one side of a ledger is illegal in finance and perhaps advertising rules should be revised along the same lines. Either way, advertising that carriers are offering lower rates when it is just a math gimmick is mixing and matching in a manner that is highly questionable.
A true 35% savings from the same carrier requires special filings by that carrier or the use of a special purpose PUP company with previously filed deviated rates. That is an awful lot of work for a start-up agency that has so little commission they announce sales in total policy limits.
As has been scarily evident throughout the COVID-19 pandemic, journalists may be journalists because they seem incompetent at math. Always check the math on stories like this one. More importantly, sell the right coverages, educate your clients on how much coverage they actually need, and show them you won't sell coverages they do not need. Don't let firms like this Insurtech beat you.
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.