Insurance: Feed the beast but ignore the elephant

Insurers are so desperate to maintain GWP that they will forego underwriting profit in its pursuit!

Every time the premium bar rises it benefits them but hurts individuals, households and businesses…in short the whole economy! This is how skewed the “logic” of the prevailing culture in financial services has become. And, believe me, they are comforted by the fact that Politicians, FSA and the general public concern themselves with “effect” rather than dealing with “cause”:

A morally corrupt corporate culture.   

The secondary industries that have sprung up around insurance claims – in particular motor accidents – bear testimony to this culture. Massive costs come back around to policyholders in the form of increased premiums. No surprise there then but did you know that much the costs come about as a result of insurers’ desire to secure income from lawyers who are happy to pay for details of claimants. Still not too shocking!?

How about if the insurer who may end up making payments is the same one that  is selling the details of a third party intent upon pursuing a claim, (for damages, personal injury) against them??? That’s right. Read it again if you need to but that is how it is!

An interesting article in a recent issue of Scotland on Sunday: Scottish drivers pay price for English law, touched upon the wider issues but contained this “alarming” quote from one company spokesman:

“someone is going to make money out of this referral. If there is going to be a claim anyway, it might as well be us.”

If a successful personal injury claim is pursued it is now the case that, legal costs can add almost 90% to any compensation! It is such a lucrative business for lawyers and claimants that claims for personal injuries now appear at a rate of 200 per day (according to ABI) and up to 3 years after an accident…even if mention of personal injury was conspicuous by its absence at the time. Well, go figure!!!

The article reported the cost of pay-outs and legal fees at £80 per annum to each motor policy!

Apart from highlighting the amounts involved the article also points to the fact that Scots are paying more than we should due to the cost of “success fees” that are permitted under English Law but curtailed by Scots Law.

I covered elements of this topic in another recent blog: Last “gravy-train” to Clarkes-ville

MY point is that, whilst steps are now being taken to tackle this problem the fact remains that, as usual, it is the “customer” who foots the bill.

Sadly, it is a similar story when it comes to dealing with household and commercial property claims, except that the lawyers have been replaced by Loss Adjusters, insurer-sponsored or Adjuster-owned Repairer Networks and nationwide franchise operations. Their interest is in recovering the margin (and more) – squeezed out of them by insurers in return for “approved repairer” status – by cutting corners or inflating reinstatement or repair costs on multiple claims.

Both of these scenarios are “extensions” of the practice – that has exploded in the commercial insurance market in recent years – of paying brokers excessive and unsustainable commissions to sell and service their products.

Insurers are bankers’ poor relations and they have learnt one lesson well:

how to strip customer and shareholder value to feed itself.

That is why TRANSPARENCY is their enemy!

I fear that change is not imminent. Here’s why…

Shareholders swallow a version of the truth about the volatile state of the economy or the market…but it is the internal culture that is rotten and that has rendered the structure fragile.

Those charged with running major financial institutions justify their continuing stewardship, escalating remuneration and bonuses by “measuring their package” against that of other C-level Executives! There is a greater incentive to maintain the status quo and recycle the same tired products, through the same tried-and-tested distribution channels and take a one dimensional view of agility in a changing business landscape: sell more spend less.

Insurer culture: an innovation killer

I understood that the role of the C-level Executive was to set a compliant agenda but it looks increasingly like the agenda has been determined and maintaining the status quo is the priority. Don’t look too closely at the operation.  Run it as it is, until something “breaks”, in which case, deal with it in the manner prescribed by PR people – which is something akin to the 5 stages of grief – commencing with “deny everything and try to “spin” your way out of the spotlight”.

If that doesn’t have the desired effect the “promise” of an investigation will buy some breathing space. Alternatively, if the offence is really blatant: some internal re-structuring; withdrawal of offending contract/service; a senior casualty – only if that suits the wider agenda – otherwise, select some low-level scapegoats. Use terms like “we have found no evidence…” or “will vigorously defend..” to convey an impression of righteous indignation, EVEN when totally unfounded. Concoct a plausible explanation for shareholders/market and, if the heat is still on (as a last resort) prepare a lightweight apology.

If you’ve been terribly naughty then an (eminently manageable) fine from FSA – whose recent handling of the HBOS mortgage farce involving overcharging customers to the tune of £.5bn suggests they are open to negotiated settlements – even when an organisation, apparently, fails to notice an extra £500,000,000 in the accounts!!!

Never waste a good crisis…it may be the ideal smokescreen for change!

It is something akin to a Turkey looking forward to Christmas but many UK insurers, major brokers and their investors NEED another major catastrophe to help them secure the pay-off from the high leverage (debt-driven), high growth (premium over underwriting profit) strategies that they have pursued in recent years.

GIVE A MAN A FISH SELLING RISK PROTECTION: According to their surprisingly naive view of probability they determined that, with improved efficiency and product commoditisation, came greater spread/diversification of risk and the ability to market based upon reduced pricing. But it is a results-driven approach that has turned insurance from a grudge purchase into a wholly unsatisfactory experience from start to finish.

Overcharge the customer to overpay the salesmen for volume business.

TEACH A MAN HOW TO FISH PROMOTING RISK PREVENTION: IF insurance is about achieving a profit from underwriting business with the best risk profile, surely a “strategy” would focus upon educating and rewarding those businesses that demonstrated a proactive approach to risk management, an improving risk profile and fewer claims?

The UK insurance industry has been criticised by Regulators, customers, industry and on behalf of institutional investors but, whilst all the rhetoric has been about change and professionalism, there isn’t much evidence of any meaningful improvement…here’s why:

Financial Services Growth Model: Goal – Secure market-share so as to (1) benefit in a rising market (2) “close out” smaller competitors in flat/stable market: Overpay brokers to accelerate delivery and so they focus on sales at the expense of service (leads to customer dissatisfaction and churning); sell on price leads to downward spiral, de-skilling of staff; little scope for underwriting profit without compromising cover, service, training, investment, reputation (increase customer/staff dissatisfaction. pacify shareholders with short term results); more protracted, disputed, repudiated claims (more dissatisfaction); less time and staff to deal with claims requires outsourcing or similar means to curtail costs secure referral fees (as much as possible prior to April 2013) to “massage” spiralling claims costs as a result of failure to engage independent loss adjusters preferring “approved repairer” network approach determined by lowest hourly rate; fail to manage or over-engineer the claims process, leading to unbearable pressure on repair industry, compromising standards of work/materials leading to  safety concerns and customer dissatisfaction; of course the increasing trend of cash settlements (household) has wider societal implications, not just for individuals/families but local business and, ultimately, DWP costs or HMRC revenues. ALL “BAD” EXCEPT THAT IT CREATES AN UPWARD PREMIUM SPIRAL [see (1) above] AND FERTILE ENVIRONMENT TO PERPETUATE WHAT EXEC’S ARE FAMILIAR WITH…BECAUSE IT IS THEIR MASTERY OF WHAT HAS BEEN CREATED THAT GIVES THEM THEIR POSITION AND WEALTH!

Physician heal thyself

A culture that does not embrace TRANSPARENCY is adding complexity to its operation, in the process, increasing its own risk exposure and impacting its profitability. It should no longer be adequate that an insurer or it’s clients be ‘risk assessed’ on metrics that fail to reflect the business’ ability to withstand unforeseen and unforeseeable events [RESILIENCE].

WE should be wary of ANY business that prefers ambiguity to transparency!!!

The industry MUST consider the impact of new business acquisition costs, in particular broker commissions, customer satisfaction feedback, cancellation/retention rates and, such as, The Annual Edelman Trust Barometer. The obvious conclusion is that both,  prevailing broker distribution and claims management models NEED to prove they can adapt to treat customers as stakeholders and meet their DEMANDS, IF the industry is to [re]build TRUST.

If that is not incentive enough, a stream of negative analysis of the industry from PwC, Citi and IBM, growing Political and Regulatory concerns, should emphasise the extent to which, TRANSFORMATIONAL or ‘deep’ CHANGE is urgently required.

Firms become trapped in this cycle and don’t know how to change without exposing themselves, and what they have presided-over, for scrutiny. BUT THE FAILURE TO PREPARE FOR UNCERTAINTY, IN ITSELF, CREATES FRAGILITY.

Facing up to reality and building resilience is a more prudent strategy than ignoring the “elephant in the City”! 

3 Responses to Insurance: Feed the beast but ignore the elephant

  1. Reblogged this on Get "fit for randomness" [with Ontonix UK] and commented:

    MY point is that, whilst steps are now being taken to tackle this problem the fact remains that, as usual, it is the “customer” who foots the bill.
    Sadly, it is a similar story when it comes to dealing with household claims, except that the lawyers have been replaced by insurer-sponsored Repairer Networks and nationwide franchise operations. Their interest is in recovering the margin (and more) – squeezed out of them by insurers in return for “approved repairer” status – by cutting corners or inflating reinstatement or repair costs on multiple claims.
    Both of these scenarios are “extensions” of the practice – that has exploded in the commercial insurance market in recent years – of paying brokers excessive and unsustainable commissions to sell and service their products.

  2. Erik Trelfer FCII says:

    Insurance companies have a long track record of ‘shooting themselves in the foot’. In the 1960-70’s accountants ruled and urged underwriters to pile in the premium – sky high interest rates on invested premiums would earn a handsome profit and off-set underwriting losses. Lack of understandingof the Accountants of the long tail nature of much of the insurance business and the fact that when interest rates fell, the underwriting losses would continue and could no longer be met from investment income led to horrendous losses and some insurance company collapses. Next came the rule of the Marketing Men – offer the widest possible cover, do away with indemnity and replace everything as new, fast track smaller claims without investigation and ‘simplyfy’ policy wordings abandoning all the legally tried and tested phrases. Yes – they lost money again. And the policy documents doubled in size because the ‘simplyfied’ wordings had to define and explain everything in detail – sometimes ridiculous detail such as ‘You = the Policyholder’ and We = the Insurance Company!

    Little has changed today because the people at the top of the insurance companies are rarely insurance professionals. There – I have said it. Despite all the trumpeting about Chartered Status, the major decision makers and shapers rarely understand the business. Does that remind anyone of the Banking Scandal?

    One daythough, someone will start up an insurance company that will go back to the basics. What does the customer want? – security that when he has paid his premium his insurer will be there to help if misfortune strikes him. His insurance policy will set out clearly the cover provided. It will have been underwritten by an expert. His claim will be efficiently handled from start to finish by an expert. He will receive a fair settlement – no more no less. The Back to Basics insurance company management will have ensured that they have adequate and trained professional staff to handle everything so that a really good service and customer experience will always result. The insurer will build up goodwill with the customer and not charge existing customers much more than a new customer. Why? Because it is good business sense to keep the good and loyal customer especially when underwriting and policy issue costs for new business are greater than for renewing an existing policy. Not for this Insurer the cynical rip-off attitde of the main-stream insurers who reckon most of the ‘suckers’ just can’t be bothered to shop around every year. No, the Back to Basics insurer values the customer he knows over the greed to grab new business (even if the new customers are potential fraudsters). The Back to Basics insurance company so values its customers that it would not think of out-sourcing anything so important as the claim process to some other firm to undertake on their behalf. That would be abrogating responsibility to their customer for the premium they have taken. This new insurer will be so successful that customers will flock to them recognizing good value for money and a policy that does what it says in the Inusrance Promise printed in it. They will rest easy knowing they have the strength and security of the insurer around them. I may start up such a company with some like minded insurance professionals – we will call it The Utopian Insurance Company Ltd.

    • Erik,
      You are a man after my own heart! You want like-minded professionals? I am proud to declare myself as one and (although there have been many times when I wondered if the rest of the industry was content to grump and gripe whilst changing nothing) have had my faith restored as a result of a growing number of “interactions” with others who recognise that CHANGE is a must.

      You are correct that a major part of the problem is that there isn’t a credible alternative to the status quo but I am involved in several inter-connected projects that are focused upon providing the type of product and service solutions that deliver the demonstrable value so badly lacking.

      Watch this space.

      Thanks for taking the time to stop by and comment.


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