Howard Candage Insurance Blog

Have you recommended earthquake coverage to your clients?    Today we even felt a slight tremor right here on the dear old Portland Fish Pier!     Earthquakes happen, they happen on fault lines, and WE ARE ON A FAULT LINE!

We need to point out to our clients that they need to at least think about buying earthquake coverage.    When they are trying to hang you out to dry for NOT RECOMMENDING earthquake coverage, they are going to call me and ask me, as an expert witness, “Mr. Candage, do you consider it “state of the art insurance practice” to recommend earthquake insurance?”

Before today I would have had to say “yes, we are on a known fault line.”    After today I am patting myself on the back because I am correct!    Put earthquake on your checklists, on your renewal questionnaires, put earthquake on the big screen for everyone in your agency!  It is important for you NOT to deprive the client of the knowledge they could buy it FROM YOU!

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 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.

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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As promised in my last post, I want to share how an agent involved at the time of claim adds value, and, in fact, may even provide coverage where there appears to be none.

I insured a manufacturer who had a diesel generating plant on his premises.  I wrote a machinery breakdown policy on his equipment. He called me one day and told me he had blown the head gasket on his generating plant.  ”Is it covered?” he asked.   I said let’s turn in a claim and receive a determination made by the insurer.   They denied the claim as leakage around a “valve, seal or gasket”.

A couple of months later he called me again; “I blew the head gasket on the engine again”, he said.   “I don’t suppose there is any coverage.”

“No,” I said, “I don’t suppose there is, but I will come down.” We had the ‘no coverage’ discussion and then went to his generator shed.  I looked at the torn-down engine.

“Where is the head?” I asked.

“They took it to Portland”, he said…

“Why” I asked…

“They had to plane it, it’s warped.”

By showing up and looking at what happened, I managed to find coverage for a claim that would have otherwise been denied.

You NEED “boots on the ground” interaction with the insured at the time of claim to make sure coverage is not overlooked just as much as you need it to make sure you do not overlook loss exposures at the time of sale!

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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Agents add value for insurers as well as for consumers as agents are the “front line underwriters” for the insurer. Living locally, the agent can actually interview the insured and get a “feel” of the risk.    This is a necessary element of an insurance transaction.   It is necessary for someone with a “trained eye” toward risk management to actually “visit” a risk.   As much as we would like to say that is not necessary, it is, and the need for the visit can even be obscured from the agent until the actual visit.  This visit needs to occur at the time of exposure identification and at the time of claim.  Please allow me to illustrate:

When I was first an agent, too many years ago than I care to think about, I was given a home insurance lead by a local real estate broker who was selling a property to a Boston consultant who was moving to Maine to retire.   Long story short, I wrote their home and arranged for a visit to meet them and go over the insurance in a few days.   When I arrived they were in the process of moving in.  The Insured, his wife and I visited over coffee and then the Insured asked me if I would like to “see” the house. (Meaning an interior tour).

Being the “Young” insurance producer I was, my first reaction was “I don’t need to take the time to “see” the inside of this house“.  BUT… One of the tenets I teach beginning insurance students comes from a Zig Ziglar quote that I love.  “People don’t care how much you know until they know how much you care”.   I was viewing my job purely from a technical perspective and thinking there was no need for a tour of the house.  That was such an obtuse attitude!

However, I simply said “Sure”, as he wanted to show me his new home.  When I entered the living room, what do you suppose I noticed?  Two oil paintings hanging on the wall. I looked more closely and being the art expert I am (not), I asked him “Do you know anything about the paintings”?

He replied, “No, They belonged to my Grand Dad and he gave them to my Dad.   My Dad gave them to me.”

I said, “You should have them appraised.”

He asked, “Why?”

I said, “Because who knows what they might be worth?   They are obviously original oil paintings and they may be worth nothing or they may be worth a lot.   The time to find that out is BEFORE the fire!”

He questioned me, “Where would I get them appraised?”

Wanting to recommend a reputable appraiser, I replied, “Take them to F. O. Bailey in Portland. If they do not have the expertise to appraise them I suspect they will know who does.”

We ended our meeting with my expecting he would ignore my advice, as most people tend to do.

Approximately a month later he called me and we talked for a few moments. He then said to me, “I took your advice.”

Being the astute young insurance practitioner I was, I asked, “What advice…?”   I had even forgotten what I had told him.

“I took my paintings down to Bailey’s,” he said.

I responded, “Oh, really?”

“Yes”, he said, “The first thing they told me is that they are not experts in “Hartley’s”, but they gave me a letter and said the little one may be worth $ 125,000.00 and the big one may be worth $ 175,000.00. So, I guess we should get some insurance on them.  I am taking them to the Portland Museum of Art where they have a collection of them and they will give me an estimate of value.”

Link to Marsden Hartley history

He did take them to the art museum and it turned out that the little one was worth $225,000.00 and the big one was worth $275,000.00!   There were a half million dollars worth of paintings hanging in this guy’s living room and he did not even know it!   And I was not even thinking it necessary to walk through the house!

He said to me in a subsequent meeting, “Howard, because of our conversation, those have gone from just being two paintings my Grand Dad owned, to being a significant portion of my estate!  Thank You!”

So even when we think it is not important to inspect a risk, it is!  And an insurance company will not expend the resources to protect your client like you will!

“People don’t care how much you know, until they know how much you care.” Zig Ziglar

In the next post I will illustrate the added value of an agent showing up at the time of the claim and by “showing up” was able to cover a claim we all thought was not covered!