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Posts Tagged ‘Auto Insurance’

Is Insurance a Commodity? (6)

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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A “commodity”, then, is a necessary element in the chain of production of a product or service, that is useful to someeone in it’s static state.  A “Commodity” needs additional process or knowledge or processing before it becomes a useful consumer product.   A “Commodity” is a factor in the chain of production.   Thus risk bearing is, perhaps, a commodity.   “Insurance” is a completed user friendly product that is packaged in a way that it is useful and dependable to the consumer. 

To make insurance useful and dependable to the consumer, the consumer needs additional knowledge and services not only at the point of sale but at every transaction point in the chain of use.    It is difficult for an insurance company to provide those services as their function is to provide risk bearing service at a profit.   There is an inherent conflict between what the insured wants and what the company is willing to give. That conflict creates a situation where there are sufficient incentives NOT to do the right thing on behalf of the client.

It is the same problem that surfaces in a Managing General Agent (“MGA”) relationship.  The insurance company gives the underwriting authority to the MGA.   This creates sufficient incentive in the MGA to “bend” the rules.   If the MGA does not actually produce a policy from this insured, they don’t make any MONEY, let alone profit.  The MGA does not have to “pay the claims” and they are incented only to write business.   An insurer is incented to make a profit on underwriting.   The more they can diminish claims experience, the more money everyone makes.   The more the MGA writes, (good or bad business), the more the MGA makes, but if they do not make the sale they make nothing.  The incentives are in the wrong place for optimal performance.  

So “raw” risk bearing is a service for which there MUST  be the value of additional knowledge before it becomes a product.   When it is purchased without the advice of an agent at the time of sale or without the benefit of an independent advocate at the time of the claim, the value of insurance is diminished due to the consumers lack of risk management knowledge, coverage knowledge and pricing knowledge.   The fact that the consumer made an inferior purchase is likely obscured until the time of claim.    The value of the agent is not apparent until the claim occurs.  

So, buying insurance without an agent is like buying an old fire extinguisher at a yard sale and putting it in your kitchen in case there is a fire.   You won’t know if it works until you have a fire. 

I believe I will focus in my next entry on the “Incentive” piece of this puzzle.

Personal Insurance and Foreign Travel

This time of year Insurance Agents get calls, “I am going to “St. John” (or other locale) on vacation. Am I (the client) insured for THIS foreign travel?” If this happens in your agency, the ISO Homeowners territory is worldwide, YOU NEED TO CHECK THE UMBRELLA OR EXCESS COVERAGE TERRITORY, and the ISO auto policy insures in the “US, Territories, possessions and Canada. What ARE the US Possessions? Here is a quick, unverified, list for reference purposes.

The Commonwealth of Puerto Rico

Guam

The U.S. Virgin Islands

American Samoa

The Commonwealth of the Northern Mariana
Islands (CNMI)

The Midway Islands

Wake Island

Kingman Reef

Navassa Island

Johnston Atoll (an atoll is a coral island)

Palmyra Atoll

Baker, Howland and Jarvis Islands

end of list

If you use Insurers who use non ISO forms you will need to check the company’s form.

Doing it for NOTHING?

I was recently in a seminar and the presenter was lamenting that an insured went to an attorney when he could have “done it for nothing“!   Look… you got a commission to do it.   Sometimes it is necessary to be proactive and take a stand for either your insured or for the company you represent.     The degree of conflict between the goals of an insurance company and the goals of an insured assure the existence of insurance agents FOREVER!   But, we have to add value we are getting paid for!    The insurance business is the independent agents business to give away and in many cases we are doing a great job!

If we don’t get in there an play the game then why shouldn’t the insured go to the internet.    Take a stand and resolve conflicts!   The independent agents who stay in the game as larger and larger distribution entities take over will eventually be able to hang a banner over your local sign that says; “Bring your insurance to us.. Our service doesn’t suck any worse than theirs!”