Insurance Language – Clear as Mud

On occasion I find myself in a position having to explain insurance language to non-insurance people, particularly attorneys and CPAs. Their responses range from vacant stares to confusion.

For example, think about explaining the term “broker” to a non-insurance person (or your latest hire). A broker may be a wholesaler. A broker may be an agent that works at one of the large publicly traded brokerages. A broker may actually be an insurance broker (vs. an agent). A broker may sell insurance provided by a broker though an agent can’t usually sell insurance provided by another agency. In some states, an agency may be a broker but in other states, even a broker cannot be a broker. However, within the industry, we simply use the term “broker” without an attached descriptive. Within the industry everyone knows what the term means within the context. For a non-insurance person, they might be completely lost.

Another interesting term is the title, “producer.” I’m not sure how such a term came to be for a sales person. “Producer” does not sound any better to me than “salesman.” Either way, the title “producer” means, “to produce.” Ever try to explain to an attorney in a lawsuit why someone has the title “producer” but the person does not have to produce to keep their job?

A lot of producers in this industry haven’t produced in years. The job title does not really follow the job but we pretend it does and inside the industry, we all get it. I’m not sure getting it is all that healthy. Widespread acceptance of mediocrity is rarely healthy.

I have tried to explain to some really smart attorneys how producers do not have to produce. The result each time has been a question of, “If they do not have to produce but their job description and title involves selling – per your opinion Mr. Burand – then why did ABC Agency continue to employ them even though they do not materially sell?” That’s a heck of a good question, isn’t it?

Accounting

Another interesting example is insurance company profitability. Within the industry, the most common measure of profitability is the combined ratio but the combined ratio leaves out investment income (among other factors). Investment income is important, contributing about 11 percent of earned premium annually in revenue. Ever try to explain in court why profitability really is not total profitability? It gets confusing quickly.

Insurance agency accounting takes insurance language to an entirely different orbit. Accrual versus cash accounting conventions are fairly standard in most industries but insurance agencies rightly use both, simultaneously, thereby violating basic accounting standards. Using both simultaneously is so far outside the norm that many CPAs, other industry experts, and tax attorneys cannot believe accounting like this could ever be correct.

Another example of insurance accounting that leaves accountants scratching their heads is the issue of credits. They tend to think credits are credits but obviously we have two kinds of credits. We have credits based on clients paying money ahead of their due date. The agency has the cash and a credit is developed that goes away at the effective date. That credit is very, very different from a credit where the agency has to return money to the client.

In the first scenario, the differences are just timing issues but in the second scenario, the agency has legal obligations to return actual cash dollars within a limited time. These credits have to be treated different (which is a key reason agency owners should look at their aged accounts receivable on a gross basis, not just a net basis). When CPAs are advising clients how much cash to leave in the agency at year-end, they have to understand credits are not all equal if they are to give accurate advice.

Moreover, accrual versus cash does not even address the “earned” factor. Everyone in every industry believes they earn their money but insurance premiums and commissions are literally “earned” differently, with an objective schedule and special rules for certain situations.

This industry gives earning money an entirely different meaning.

Reserves

How many times have you explained claims reserves? Even to insurance people reserves get confusing. Many people in the industry do not understand reserving language. A good example of this are Incurred But Not Reported (IBNR) claims reserves. How can a claim exist that has not been reported? The term, at least on the surface, almost seems oxymoronic and contradictory.

Then you have policy language. The old joke – which is not really a joke, especially to new people and people outside the industry – is how insurance policies grant coverage, then take some (most) of the coverage away, and then maybe give some (or not) back in some other provision leaving many to wonder exactly what coverage they actually have. To insurance geeks this language may be acceptable and even fun because it is a puzzle. To normal people, such language is nothing but excessively complex, frustrating, and designed to rip them off.

Growth & Volume

An interesting pair of terms lately has been tripping up even experienced insurance company people and agency people. The terms are “growth” and “volume.” I’ve noticed people are using the terms synonymously. The terms are absolutely not synonymous.

Growth leads to volume but volume does not lead to growth. Growth is a percentage while volume is a dollar amount. Currently, when many companies ask for more volume, they really mean a higher growth rate. The problem is that agency owners hear volume, they may think that buying another agency or forming a cluster is the solution.

For example, if the buyer has a $1 million book with Company A and they buy an agency with a $1 million book with the same carrier, the buyer can now give the carrier a book of $2 million. That is volume. However, if the company means they want growth but say volume, this strategy completely fails.

Another key point here is that equal growth does not always produce the same volume and companies seem to be struggling to understand this important point.

For example, 10 percent growth on a $1 million book is not the same thing as 10 percent growth on a $10 million book. Language used well with a clear understanding go hand-in-hand. Unfortunately, I do not have confidence that many insurance company people understand or take the time to use the language correctly, to their own detriment.

Language, in every business, is crucial to success. The insurance industry is one of the oldest industries in the world and has developed its own language. (For real nerds you know that some of the policy language originated 100 years ago in industries that for all practical purposes no longer exist, but the insurance policy language serves as an historic legacy.)

Take a little time to be cognizant of these important nuances and points when talking “insurance” to inexperienced people so they clearly understand your message. Some legal issues might clear, new people will be trained faster, clients will be happier, and accountants might grudgingly agree that insurance agency accounting makes a little sense after all.