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!
______________________________________________________________
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.
