Howard Candage Insurance Blog

This discussion of Commodities centers on recent attempts by insurers to circumvent agents and sell insurance products over the internet.    I am convinced that insurance is not a commodity as it is not a product that can be sold in an unmodified state and be used properly.   It would be like purchasing an unassembled, complicated piece of equipment and having no directions for assembly.  It appears to me that is the case with “unbundled” “risk bearing” or to put it another way, the thing Insurance companies sell is a “risk finance” mechanism.    Agents add value to this product by showing purchasers how to use it and by adding their own body of knowledge to the process!

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In my quest to determine if I think Insurance is a commodity, I am surprised at my opinion.    I think perhaps “Insurance” is a commodity in that it is a raw product used in the chain of “production” for “protection” of your insured (speaking from an agents standpoint.)

“Risk bearing” (an insurer) is risk finance, but as I pointed out earlier, risk bearing without risk management advice is not really an end user product, as much as some insurers would like to think so.   BOTH the Insurer and the Insured need to advice of the agent to write or use the product effectively.

My opinion turns out to be that risk bearing is a commodity but insurance is not.  No bias intended here… the use of insurance without the benefit of risk management advice is rather foolish. Consumers are not trained in how to use risk management tools, how financial decisions in this area do or do not make sense, consumers do not understand relative pricing nor insurer reputation and consumers do not understand the consequences of making inappropriate decisions that cannot be changed AFTER the loss.

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What the consumers  know will not hurt them.

What they do not know will not hurt them, as long as they know they do not know it.

What the consumers do not know, and do not know they don’t know, will create real post loss problems.

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The independent advice of your agent is invaluable, both before and after the loss!

This discussion of Commodities centers around recent attempts by insurers to circumvent agents and sell insurance products over the internet.    I am convinced that insurance is not a commodity as it is not a product that can be sold in an unmodified state and be used properly.   It would be like purchasing an unassembled, complicated piece of equipment and having no directions for assembly.  It appears to me that is the case with “unbundled” “risk bearing” or to put it another way, the thing Insurance companies sell is a “risk finance” mechanism.    Agents add value to this product by showing purchasers how to use it and by adding their own body of knowledge to the process!

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To decide if insurance is a commodity, it is necessary to determine the definition of a “Commodity”.

Source:   Black’s Law Dictionary:

“Commodities”

“Those things that are useful or serviceable, particularly articles of merchandise movable in trade.

Goods, wares, and merchandise of any kind; movables; articles of trade or commerce.  Movable articles of value; things that are bought and sold.   This word is a broader term than merchandise, and, in referring to commerce may include almost any article of of movable or personal property.

Staples such as wool, cotton, etc. which are traded on a Commodity Exchange and on which there is a trading in futures.”

Blacks Law Dictionary end of definition.

My beginning comments to this discussion:

“Rick Bearing” or “Risk Finance” may possibly meet the definition of a Commodity.   But that commodity product is has little value unless accompanied by knowledge of risk management.   Thus, insurance without advice is a recipe for post loss disaster.  Our “value” or “power”, as an insurance agent, rests in the asymmetry of knowledge between the client and the agent.

There will be more to follow this post, but we need to realize the reason we exist is that there are certain things a client does not know about how to USE insurance that WE DO know.

The raw product of risk finance may be “somewhat” of a commodity.   “Risk Bearing” or “Risk Finance” as a product may be able to be traded on a futures exchange (like commodities), but the added value of the “body of knowledge” of risk management” and the “body of knowledge of risk finance” as a “tool” of risk management is the added value a quality insurance agent, broker or consultant brings to the table.

This reminds me of what I have discussed with many of my consulting clients:

“What you know, likely won’t hurt you”

“What you don’t know, likely won’t hurt you, if you know you don’t know it.”

“What you don’t know, and you don’t know you don’t know, will hurt you every time!”

So our Value to our clients lies in what know that our client does not know… The “asymmetry” (our knowledge of risk management v. our clients’ lack of knowledge of risk management) is our value to the client.

We will discuss this “commodity” mentality more extensively in the next few days…

Howard Candage, CPCU, CIC, CRM

I have been working on my business planning and I realize that my primary mission is to help Independent Insurance Agents understand the tremendous value they add to the insurance industry. It has been my experience that Independent Insurance Agents are very valuable.  The way our industry is structured, through independent distribution, we are unable to see our value due to the power if insurers. Insurance is an emotionally oriented sale rather than a functionally oriented sale. The “risk bearing” side of your industry (insurance companies) are constantly under pressure to cut expenses from many sources ( A M Best reinsurers, investors…). The insurance companies do not understand the value of agents. As a strategy, they are attempting to cut expenses by attempting to eliminate agency distribution.

They have been unsuccessful in doing so, although certain insurers are successful at attracting “uninformed” clients who do not understand that an insurance company is not an “altruistic” entity dedicated to “looking out for clients” Insurance companies are “profit oriented entities” who make their profits through “bearing risk”.

So… the insurance company’s  goal is NOT to hold the clients hand…  It is their goal to be profitable. It is the AGENTS job to be the facilitator of each and every contact an Insured has with the insurer.  View the insurance relationship as a long term series of events, participate in each of those events (even claims)  add value and become a valued asset to your clients and to your insurer’s clients.

The automobile industry has struggled with the same criticism of distribution and as David Lamarre pointed out in response to one of my last posts, “Case in point, when the auto industry needed the bailout, it wasn’t the dealer body that was falling  into insolvency; the manufacturer’s have long perceived their dealers as “point of sale distribution network”…In the end, the strength of their dealer network had every bit as much to do with their survival as did the bailout. The parallel in our industry glaring.”

We need to get above this paradigm, as agents, and realize, appreciate, showcase and execute added value for our clients. If Insurers could have gotten rid of agents they would have done so years ago.

Howard Candage, CPCU, CIC, CRM

The Bureau of Insurance is stepping up compliance of certain AGENCY issues!   This happened in Maine but could happen in any state due to the NAIC definitions of Insurance Fraud!

Agents should be aware that the Bureau of Insurance is conducting “compliance audits” on agent’s books of business.

They are checking cars on in force policies against valid registrations to determine that the vehicle is titled to the policyholder and registered to that owner. They compare the State Registry records to see if cars are being insured that are not owned, but are being used to artificially lower premiums through a multi-car discount that should not be on the policy. They are being increasingly aggressive about enforcement of agency compliance issues.

While you should not become alarmed, this would be a good time to review the accuracy of all your policies and procedures relative to compliance with State Insurance Law. Your agency policies should state that no agent is allowed to distort any underwriting or rating information to an insurer. Penalties can include fines, reprimand, censure and possible loss of license as well as other elective enforcement options..

Some of the compliance issues that they are checking include:

Receipts, as used in rating of a policy (Commercial Lines)- Artificial suppression or inflation of receipts to lower or inflate premiums:

A “ghost vehicle” left on a policy to retain a multi car discount:

Drivers: Failure to disclose and rate for drivers:

Rating: Failure to rate vehicles properly for the exposure:

And… many, many other similar situations.

Agents need to have written policies and procedures to assure compliance and those policies must be enforced by the agency.

Just a word to the wise… Howard