Insurance as a Commodity

Earlier in my blog I theorized that “Risk Bearing”may be a “Commodity”.  Recent events have led me to believe this is not a true statement.   Different insurers, even in Personal Lines, are deviating from standard forms and coverage.  Only an experienced professional is going to know this.   Product differentiation between insurers renders “Risk Bearing” a risky purchase.

Consumers NEED advice as well as insurance.

Food Trucks and GL

January 27, 2014
Mealey’s Insurance – Panel: Court Erred In Ruling Food Truck Was ‘Auto’ And Not ‘Mobile Equipment’

LOS ANGELES – A California appellate court on Jan. 27 ruled that a commercial general liability insurer has a duty to defend and indemnify a food truck lessor insured against a products liability lawsuit, further finding that, contrary to the lower court’s ruling, the insured’s auto insurer is not liable because its policy’s completed operations provision bars coverage for products liability claims (American States Insurance Co. v. Travelers Property Casualty Company of America, et al., No. B243003, Calif. App., 2nd Dist., Div. 5; 2014 Cal. App. LEXIS 74).

Court Decides Food Truck Was “Mobile Equipment” Covered by CGL Policy

Conflict = Commerce

If you are negotiating an outcome among different parties, Trust is a paramount factor in the negotiations. Try too choose an independent,fair facilitator,rather than entrenching in a position and fighting it out with attorneys. It is not to their advantage to resolve your issue without considerable conflict. This is a lot of the work I do for people. Find a trustworthy facilitator,air both sides of the issue, and FIX IT! Don’t let a whole tribe of people charge you an arm and a leg to do what is (and was) right in the first place. Remember Conflict = Commerce!

Commission Compensation

Commission Compensation

One of my colleagues recently postulated to me, “Maybe a homeowner’s product should be more like life insurance and pay a higher up front commission with a lower renewal commission. Perhaps that would provide an effective incentive for agents to do a better job of initial placement.” My response, “I do not think that will work. Most agents will just take the higher up front commission and still not do the work properly.”

I still remember one of my early consulting projects. This occurred many years ago. A competitor came to me with a non-profit entity and asked me to do a risk assessment and to recommend changes. I said, “Why don’t you do it yourself?” He said, “There is not enough commission to make it worth the time and effort.” If I remember correctly, the risk assessment cost about $ 7,500.00. In the initial part of the process, the agent asked for my hourly rate and I said $ 100 .00 per hour. He raised his eyebrows and said… “Hmmmmmm a hundred dollars an hour?????… Guess I am in the wrong business!” I did a professional risk assessment and generated a comprehensive report, and the agent restructured the program. If I remember correctly, the agent made about $ 12 ,000 .00 in COMMISSIONS, EVERY YEAR! And HE’S in the wrong business??????

In my mind, simpleton though I may be, commission compensation makes almost as much sense as hourly pay! You and I both know that we have employees that we could pay
$ 3.00 an hour and they would be overpaid, we have other employees that we could pay
$ 100.00 an hour and they would still make money for BOTH OF US!

Likewise, we write policies for $ 5,000.00 in PREMIUM and have to issue 300 certificates of insurance. We write other polices where we get $ 50,000.00 in COMMISSION for just submitting an application. I am not so sure this is an appropriate use of a consumer’s premium dollars, or reflects proper compensation for a distribution entity.

If we go to a fee based structure, commissions and fees would likely shrink as we would only get paid for our true effort. It would also force each of us to add value AND make it apparent to the client we are adding value AND illustrate the types of value we add (not so easy)! In fact the commission incentive is often contrary to the interest of the agent, the client, or the insurer. In one case, over a six year period I took a large marine account, who had considerable resources at their disposal, from a fully insured plan to a reasonable retention program saving the client over $ 300,000.00 in annual premium. The process of reducing the client’s overall cost of risk by this amount, reduced my commission income as an agent from over $ 55,000.00 to less than $ 17,000.00 in annual commission. What kind of perverse incentive is that??? Most of us would not endure a fee based structure. We would fold under the increased fee/commission scrutiny by the client.

The real reason most insurance carriers would like to nuke agents (and they would nuke agents If they could figure out a way to do it) is that in the macroeconomic analysis, insurance is an expensive way to finance risk, and agents commissions are a big slice of that expense. Commission compensation is, however, the only way we can find that is efficient and manageable.

I am a zealous proponent of agents. I feel risk bearing is a commodity. However, risk bearing without the benefit of competent, trustworthy and CARING risk management advice, is nearly useless.

I am of the opinion that insurance is one if the few products you can purchase where it is impossible to evaluate your purchase decision until it is too late to do anything to modify your previous decisions. One of my mantras is, “Buying insurance over the internet is like buying an old fire extinguisher at a yard sale and putting it in your kitchen in case you have a fire. You never know if it is going to work until it is too late to re-evaluate.” Flood insurance is the only line of business I have experienced that allows a post-loss evaluation of any of the pre-loss work done on behalf of the client.

So… I think commission compensation is necessary, but the underlying problem is, commissions are in no way linked to agent performance except as to the volume of premium dollars generated by the agent. Contingent commissions are nearly the only form of incentive influencing performance, and contingent commissions have been attacked as creating unfair bias. The inverse relationship of commission compensation to the goal of reducing the cost of risk to consumers generates a clear conflict of interest among the parties… consumer, agent and insurer.

Am I wrong or am I disillusioned?

The Power of a Plan

Insurance Agents work spontaneously. We never know what will come through the door tomorrow and each day is a new adventure.

Insurance companies greet each day with thousands of policies to issue correctly, thousands of claims to settle and about a million other priorities that are ALL important and must be performed on a timely basis. Plus, they may have similar spontaneous events as the agent.

Insurance companies MUST engage in strategic planning to survive. Agents can survive day to day without a plan, but everyone will be more successful if the Insurer AND the Agent plan in concert with one another. PLAN for success and thrive rather than just survive.