With complete and all due respect to David Bowie’s song, “Changes,” it is time, if the reader wants to thrive in the future, to accept the wisdom of his lyric, “Ch-ch-ch-ch-changes. Turn and face the strange.”
The insurance world is changing, changing quickly, and changing strangely. A few strange, but undeniable changes:
Upfront Underwriting R.I.P.
It has been obvious for several years that most national carriers are not interested in upfront underwriting on personal lines and main street commercial business. More and more regionals, probably most by net written premium, are not nearly as interested as they used to be, although they are in a bind because they cannot openly discuss this reality. They are in a strange bind because personal agency relationships remain valuable to them, and key to those relationships is the importance they place on agents’ underwriting risks upfront. For them to tell agents how much they are really using predictive modeling rather than agents for underwriting would drive a stake through agents’ hearts and relationships.
Actions do speak louder than words, and if agents in denial will remove their veils and see the light, they will see reality for what it is. Carrier analytics are better at upfront underwriting than most agents’ abilities. Being old school and maybe in a bit of denial myself, I still believe the best agents can outperform algorithms in upfront underwriting, but few agents are the best agents.
Another nail was driven into the coffin of agency upfront underwriting with a J.D. Powers study reported in the June 19, 2017 Insurance Journal. The study, specific to private passenger auto (PPA), shows a strong correlation between advertising and underwriting profitability. Several companies that spend the most on advertising, and do not have agents, have the best underwriting profits. Furthermore, they have some of the highest growth rates. If then, underwriting profit is high, and growth is higher, with more advertising and less agents, at least in PPA, why should companies focus on agents? What is upfront agency underwriting delivering to companies that is more valuable than what automated systems foregoing agents are delivering?
Big data is more powerful than agency upfront underwriting according to this study, at least in this line, and this is one of the largest lines by net premiums written. It accounts for 35 percent to 40 percent of all NWP. Big data then is negating the value of agents in the upfront underwriting process. This development is absolutely one of the biggest and maybe strangest changes in at least 100 years.
Have certain companies discovered a method, using different data, to hoodwink regulators, agencies, consumers and rating companies?
I wonder, because when companies pay themselves 20 percent of premiums written as a management fee off the top, which is a de facto dividend and a model more common to running an investment fund than an insurance company, building surplus is much more difficult. It is interesting how established companies cannot figure out how to distribute 20 percent of revenue to dividends while remaining competitive and building surplus, but these new players can. This 20 percent is a lot. The average expense ratio is 27 percent of net written premiums, therefore, 20 percent plus 27 percent is a 47 percent expense ratio. Add in loss adjustment expense (LAE) of 12 percent, and the maximum loss ratio is 41 percent. Industry average loss ratio is 59 percent over the last five years.
The idea of using more surplus notes, insureds insuring each other (thereby negating the need to add surplus and enabling a 20 percent upfront dividend) without insureds maybe truly understanding they’re insuring other people and are themselves the reinsurance policy, circular reinsurance programs and the reality that in some markets, some carriers are just not capitalized adequately by most any traditional measure (a widely but quietly discussed issue in many circles), are important examples – but not the only ones – of how maybe the playing field is no longer level when measuring companies’ claims paying stability.
Maybe one factor definitely alluded to by at least one carrier is that they have algorithms so good they do not need to charge as much, and therefore don’t need as much surplus, because they know who will and who won’t have losses. Talk about a strange change.
Another factor is that maybe agents and consumers just do not care any longer. Evidence of this in the real, day-to-day sales world is abundant.
Insurance is now about risk management and loss control rather than upfront underwriting and insurance. This is true for companies and agencies. Whether this means:
- Boiler temperature monitoring;
- Dining/eating style;
- Security assessments;
- Pipe leak monitoring;
- Immediate mileage accounting;
- Lifestyle assessment and social media monitoring;
- Roadside services;
- Workers’ compensation safety;
- Health data assessment;
- Driving cameras; or
- Many others.
The insurance industry is about the bigger picture, not just the small picture of insurance. If all that is involved is insurance, adverse selection will be a problem because those risks will be the only risks not working proactively to become safer.
The ‘Experience’ of Insurance
The idea that a consumer could have a good, or even a great, experience buying insurance and that anyone would even discuss the consumer “experience” is possibly the strangest change. But this is a really important progression.
One example is a carrier giving back X-percent of profits to charity. Buyers, especially younger ones, like this idea even if the company never gives any material money to charity because they don’t make a profit. The buying experience of the consumer thinking that if I buy insurance from this entity, I’m simultaneously doing good for the world, is a better experience than giving money to a money grubbing insurance company.
David Bowie’s lyrics to “Changes” also dealt with generational change, and some of this is indeed generational. I find some veterans cannot relate to any of these points while less experienced people get them, especially the last one, completely. They are in fact drawn to this last point like iron filings to a magnet. They are trying to change the world, and they may win because their careers have a longer life span than the veterans. They also just may have a point that it is time to change and focus on what the consumer wants rather than what we want to sell.
These strange changes, each quite different, common only in their strangeness and importance, will remodel this industry dramatically. You have the choice of working with the changes or being buried in the process. Which will it be?