What If Tech Companies, Carriers Conspire to Denigrate Consumer Protections and Agency Value?

Here’s to ruffling feathers: Indeed, entities do exist in the insurance industry that do not look after their customers adequately. Carriers also exist that scrimp on claims, and some take shortcuts in underwriting, capitalization and accounting. One can complete an internet search or a search of A.M. Best’s site to find examples of companies taking shortcuts. I want to get this out of the way for the PollyAnnas out there who get upset every time I point out the obvious that is not positive: These are obvious and public realities. I would argue these realities are not the norm (maybe some readers would argue I’m wearing rose-colored glasses, but I think most players try to take the high road.) Also, I am not suggesting these shortcuts are undertaken from a cognitively unethical perspective so much as they are trying to achieve a goal while taking shortcuts. They are not thinking about the ethical aspects.

The following are real examples of what is happening.

Legislative Troubles Ahead?

Example one: At least one legislative proposal with a high probability of passing, according to my sources, has been written to differentiate between an agent/broker who is a “natural” person and an agent/broker who is not a “natural” person. The definition of “natural” person goes way back legally, and in this case, it means a live human being. Such human beings will be required to possess an insurance agent/broker license. They will be required to meet specific criteria if they wish to maintain that license (some criteria is expensive, including licenses.) Entities selling insurance that are not “natural” persons need not possess a license nor meet any of the criteria of humans. The latter is, in theory, nothing more than a machine – a computer.

The cost differences are significant. A computer need not purchase and continually renew a license. One-to-one, this may not seem to be a large cost difference, but when one employs dozens, hundreds or thousands of people requiring a license, it adds up. The cost of continuing education required to maintain the licenses goes up, too. Then, there is the cost of E&O insurance. The law is still developing, but if an entity need not possess a license, I think it is fair to assume that entity’s standard of care is so low that the odds it will be sued will be small. Therefore, the cost of its E&O insurance will be less.

Other cost savings exist. How are consumers served better by an entity that does not require a license (therefore, I suspect no background checks for the programmers either) and has virtually no standard of care? I personally do not see it. The consumer may get a lower price, but a lower price for inaccurate coverage has what value?

Example two: Legislation has been passed that requires insureds to “understand” their policies. How unfair is that? It appears to me an insurance company wrote the legislation and got a representative to carry the bill, hopefully out of ignorance rather than nefarious behavior.

Insurance agents in many states do not have to understand the policies they sell, so how can a legislature require the insured “understand” their policy? An insurance policy is a legal contract. Is one not supposed to have a law degree or a level of higher training to be required to “understand” a contract at a legally binding level?

Since the days where many people could not read but signed contracts with an “X,” people have signed contracts they did not understand. But a regulation or law requiring understanding? Nothing good for consumers, agents or insurance companies that care will result from these two legislative items.

More selfishly for traditional insurance distributors, Shapiro’s Theory of Mediocrity dictates that as quality standards decline, the less ethical gain more traction. I will likely fail to do justice to Mr. Shapiro’s work, but his theory states quality providers will incur more difficulty getting consumers to believe, and therefore purchase, quality products/services when the initial quality of a product is difficult to determine beyond price. The shysters will promote “high quality apples” for 20 percent less than what a conscientious apple farmer would consider high quality. That farmer knows high-quality apples cannot be sold at profit for a 20 percent discount. The consumer does not know the difference. With legislation like this, and other regulatory issues, the parties pushing the edges, even past ethical, gain an edge as consumers will not know the difference until it is too late. With a complicated product like insurance, reading the contracts is not a reality, much less completely understanding them. Since the burden is virtually completely on the consumer, they will likely have limited-to-no recourse.

If insurance carriers can take advantage of these factors, traditional agents will become less important to the carriers but more important to consumers.

In fact, traditional agents will become hindrances to companies as companies will have the ability to get more past consumers.

Now What?

So, what is a good company or a good agent to do? I recommend starting with effective lobbying. To allow these laws and regulations to pass uncontested (I don’t see evidence either was contested, though they might be behind the scenes) makes no sense.

Second, branding will become more important. This means stepping up to higher standards of care.

Third, understand your market.

Fourth, track your data. I continue to be amazed how few carriers and almost no agencies track how quickly claims are settled. Casualty claims have inherent factors making fair representation of the average number of days required to settle difficult. Most property claims do not have those hairy factors. How many days does it take to settle hail claims? We have a storm. We have a cat code attached to the claim filed. We have a close date in the computers.

Insurance, when done right, is one of the industries that does the most for society. Why allow it to be sunk? Rise up against moves to decrease standards to the lowest common denominator and build your brands to protect yourself against the results predicted by Shapiro’s Theory of Mediocrity.