Insurance: Feed the beast but ignore the elephant
Thursday, 12 May, 2011 3 Comments
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”!