What Is Insurance?

Based on the last 126 insurance commercials I’ve watched, I wouldn’t have a clue.

I saw one insurance commercial the other night that did not even include the word “insurance” in the script other than the carrier’s name.

Most people buying insurance don’t really understand what they are buying, especially based on these commercials. So, I began to wonder what services/products I buy where I am ignorant of what I’m buying.

When I buy gasoline, I really haven’t a clue what the difference is from one brand to another. I don’t have a clue what the difference is in the bottled water I drink. But in both cases, I know what I’m buying. I just don’t know the difference between brands.

What do you buy that you really don’t have a clue what it is that you are actually buying? The poor quality of some attorney’s contracts comes to mind as an example of what I see agencies buying without knowing what they really need to be buying. Some of the agency management systems fall into the same category. Agencies do not realize they’re buying a system that only provides for their needs on the surface and immediate purposes, but not their long-term betterment.

These are important investments and yet mistakes are made.

So, it’s easy to understand how and why people buy insurance without really understanding what insurance is. I have met with and interviewed thousands of producers and account managers and agency owners. A large proportion of people selling and servicing insurance do not have a clue what they are actually selling, which only exacerbates the situation. When I ask what insurance does, I get all kinds of answers other than the correct one, which is that it transfers risk. The benefits of this transfer, among many, is that the transfer greatly expands consumers’ and businesses’ balance sheets so that they are able to purchase homes, autos, materials and so forth with much less capital. Otherwise, they would have to increase their down payments to probably at least 50%. Also, if a loss happens, they get their life more or less restored.

Insurance is truly one of the greatest and oldest financial inventions ever! It brings so much good, but only if the policy is a solid policy rather than, “I haven’t a clue what it is I’m buying from a company that advertises without advertising what it is actually selling.”

And the situation is made worse with – I’ll be blunt – the questionable products, advertising and sales pitches I am seeing. I am seeing more outright fraud and questionable insurance companies/products than I’ve seen in 30 years. It is not just big companies doing this. One producer, one that would likely qualify in the top 1% of all producers relative to their sales, recently advised that his success is partially due to all the untruths he tells. When confronted, he replied, “But it works doesn’t it?” Such cavalier attitudes are not uncommon and I’m seeing more people enter the industry with these attitudes, summarized well by a person who told me that by the time the regulators figure out what is happening they’ll be rich.

But does it matter? Few consumers and small business owners have a clue what they are actually buying. All insurance is the same and they are not going to spend the time to learn the differences. They need more advice than big companies, but the legal standard of care for those selling insurance is so low that all the burden is on the buyer. This legal reality is a complete mismatch with human reality.

I cannot blame the marketing companies, either. The advertising companies have a job to do and some of their advertising campaigns are beyond brilliant. I completely admire what they have achieved, but then I liked the old-fashioned cigarette commercials, too.

The key insights the advertising firms identified long ago are that consumers and small business owners do not have a clue what they are buying, they have no interest in distinguishing the quality factors between insurance products, the quality factors between insurance distributors, the financial stability difference, or any differentiators other than price, and the really brilliant insight of trustworthiness established by cartoon characters. (Whether portrayed by animation or real humans dressed in costumes, the common denominator is these are all cartoon characters that generate more trust than advertisements using solid characters and advice.)

What an insight into the human brain, something for humans selling insurance to think through!

Standard of Care

This reality brings me back to the standard of care agents owe their clients because differentiation is the key to success. You must show that you are better, which means differentiation. Consumers do not have a clue between a captive agent and an independent agent, or often even the difference between an insurance company and the agent. (A test: What is the difference in the standard of care between a captive agent and going direct through a carrier?)

This lack of distinction is the absolutely perfect recipe for low-quality players to dominate, per the theory of mediocrity described by the economist Carl Shapiro. He described how, because consumers don’t know the difference between a high-quality product and a marginal product, the producer of the marginal product will undercut the price of the high-quality product and win every time, unless the provider of the high-quality product causes the consumer to recognize the difference.

The only way around this reality is to create and then advertise a higher standard in the insurance world. I don’t know if advertising a higher quality product will work, but advertising a higher standard of care might. A larger percentage of producers, agents and carriers benefit today by pretending they are something they are not, which is that they are providing the coverage clients need when through a combination of their own ignorance, and being lazy by not taking the time to determine their clients’ coverage needs, they are failing their clients. But their clients may not know this until they have a tough claim situation.

For an example, I’ll use ordinance coverage. In my experience auditing agencies, around 95% of all policies sold are sold without a discussion of whether the insured needs increased ordinance coverage. The basic throw-in coverage is very inadequate for a large percentage of properties. Many building codes, especially the green building codes and also the flood-related building codes, have recently changed significantly. Increased ordinance is no longer just for older homes. When the fire burned nearly 1,000 homes in Boulder, Colorado, around two years ago, the local suburbs had to rescind their green building codes because otherwise, virtually not a single homeowner had adequate ordinance coverage to rebuild!

Insureds don’t know what they’re buying when they buy insurance, but they are thinking that if their house burns, they have coverage to rebuild without regard for more expensive building codes, and after a fire is a terrible time to learn this lesson.

If a higher standard of care applied to some class of agents, likely independent agents because they are the ones who already have more responsibilities to insureds than other distributors (who have virtually no responsibility to advise insureds on anything), then it would be easy to distinguish and advertise a quality advantage over cartoons. Around 95% of independent agents seem to dislike this concept because they don’t want the E&O exposure.

The beauty of a higher standard of care as practiced by my real-world clients who don’t hide and don’t try to compete with the incompetents, is they make more money. They have less angst in their lives. They have earned a greater feeling of accomplishment. They sleep better knowing their clients have far better protection in the event of a tragic claim than they would have if they bought insurance directly or from a producer telling untruths.

The sales process is also easier and less stressful because by applying a higher standard to your sales model, you distinguish yourself automatically. My goal with this article is to help all those insurance professionals who really care to see the solution, to beat mediocrity and deception.

You will need to be bold.