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Flood Coverage, Broker-Direct Balance, Stampede Breakfast, IBAC (CAIB) Volunteers, Orlando Massacre

Posted By Thom Young, June 21, 2016

Flood Coverage

In my discussion of federal political advocacy last issue, I mentioned that the politicians all seem to be very aware of and interested in our industry’s response to the need for flood coverage. I’m always quick to mention the terms “overland water” and “sewer backup” in the discussion because people need to know that the changing dynamics of these coverages seem to be merging them into one. In order to drive flood coverage towards premium adequacy, you can’t have one without the other in some markets. It’s a saleable perspective: if you are in an area where you should be concerned about a sewer backup, you should be also concerned about overland water. Most people will agree that the proximate cause of most sewer backup is actually overland water. Combining the two coverages eliminates “the chicken and the egg” claims discussion that generates public confusion and protest when one side of the street is covered. This random coverage is an ongoing issue because many companies are still not providing any coverage for “overland water” perils and are offering only the old “sewer backup” endorsement. This competing coverage is now both a public issue and a broker E&O nightmare.

The failure of the insurers to develop a standard of coverage that is set out in common wording and is used by all companies referencing this protection will likely be a major issue for our business. No company or insurance adviser is immune from the confusion that will arise with the next catastrophic loss in a major urban centre. If we as brokers are advising clients to take coverage with one company or another but are confused by the variances in the wording and the special limits for “overland water” or “flood” coverage, we will not be able to describe the differences sufficiently for the client to understand the coverage and make an informed choice. Consequently, we will be held responsible for any shortfall in the coverage that causes the client an uninsured loss. Of course, the insurers will suffer the same challenges and may even be found liable to the public for failure to set a standard of coverage, but any liability charges would be years after the headlines sullying our reputations have long passed.

The political perspective on disaster relief programs may further jeopardize public good will. Some provincial and federal politicians have suggested that the programs in place for uninsured losses from flood can now be reviewed and the budgets for them limited so that these funds can be freed up for other needed programs. Well, the reduction may not be that simple. As most brokers will tell you, “overland water” coverage is excluded for those living within 300 meters of running water and the new forms won’t likely even cover “sewer backup” for these folks. When these exclusions become apparent after the next weird weather event, don’t be surprised if you’re asked to explain what happened. I can’t help but note that, as I write, the community of Dawson Creek is suffering from just this kind of thing. I know everyone’s tired of hearing me quip that we are just three days of rain away from a repeat of the 2013 flooding that devastated Calgary and High River. I recently toured some of the work underway to mitigate the Highwood River’s potential to create havoc again. While mitigation is happening, we’re far from prepared to deal with the kind of flood we saw just three years ago.

Nature Abhors a Vacuum—Eventually Everything Finds a Balance

The issue of “broker” companies entering into the direct-writing business is always foremost in discussions between brokers. Of particular concern is the manner in which the competition takes place and the use of the data accumulated from the customers for further sales and marketing by both the brokers and the company. The other main concern remains the name by which the competition takes place. It should be clear to anyone that competing with your brokers by using the same name as that used to write the business the broker sends the company is seen as a breach of trust, a violation of the exclusivity anticipated in the contract between the broker and the company and just downright wrong! To further belabour the point, the public is also very confused when they see the same name on the insurance contract that is on the broker’s wall and advertising. They expect to receive service and advice from the broker. Well, this confusion will of course sort itself out, eventually. If a “broker” company wants to be a “direct writer” under the same name as it is a “broker” company, then it will damage the relationship. Their support from brokers may wane to their detriment. All things being equal, I believe they will either have to commit fully to participating in the marketplace one way or the other.

With more competition in the direct-writing market, the direct writers may well be gearing up to hold their market share by offering their products at the same price through the brokerage market. According to Canadian Underwriter, “CAA Insurance Company announced on Thursday (June 16, 2016) that it has appointed 17 ‘well-known and experienced brokerage firms across Ontario’ to provide its customers with more choice.”

This is quite a move for an affinity-group insurance company. Would a membership in the Automobile Association come as part and parcel with an insurance application? I wonder as well if the agent will get a fee for this part of the transaction. Auto clubs have affected the insurance industry before. The roadside assistance endorsement SEF 35 was created to provide a direct competitive response by the insurance industry to the entry of automobile clubs into the automobile insurance markets. An actual Auto Club package that provided some of the auto club services such as mapping and hotel planning used to be sold by brokers for one market. Now most that has gone by the wayside—no need to spend an hour talking about a road trip with someone when you can simply Google a route (complete with turning directions) and immediately get a whole bunch of information on all the amenities you might need on your trip. As in most of the travel industry, technology has taken over the heavy lifting, leaving little money for the service providers, but the affinity group of auto-club members continues to survive. In Alberta, their operations seem quite healthy, and they compete actively in the insurance and travel marketplace. I wonder if they will be appointing Alberta brokers to represent them. If not, I’m pretty sure they’ll be watching the success of the Ontario efforts closely. I know I will be.

Stampede Breakfast in Calgary, Wednesday, July 13, 7:00–11:00 a.m.

9705 Horton Rd. SW, CGY, Southland parking lotCome and join around 1500 of our closest friends for a regular old-fashioned western whoop up. There’ll be lots to eat, world famous chuck-wagon drivers, line dancers, and a live band. It’s our 23rd time, and I think we’re starting to get it right. This has turned into an “all industry” event that you don’t want to miss. It starts early enough that even the 15 people in Calgary who do any work that week can get in on the fun before they get to the office.  

IBAC Volunteer Work—CAIB Review

I’m working my way through the chapters of CAIB 2 covering business interruption and crime coverage and reviewing their content for relevancy and accuracy in our ever-changing marketplace. Reacquainting myself with the material is interesting: I find I learn more by teaching than I ever did by studying. As I’m plodding along with this project, the thought crossed my mind that those of you far more in tune with the current market than I am might have helpful contributions to these topics. If you, do I’d be happy to include them in my overview of the suggested changes to the instruction program. For example, we’ve come a long way from the old 3D wording as the basics for crime coverage, but all the new package stuff just builds on the old foundation. I wonder if tossing out the basics might hinder comprehension of the reasons the new package works the way it does. Many of you are far wiser on this topic than I, so I’d welcome your ideas. The email address below is my personal one. Feel free to drop me a note.

In Closing

Real life is stranger than fiction—watching the news these days sure hammers that saying home. The events unfolding to the south of us make me pause and reflect. The aberration that occurred in Orlando leaves me simply overwhelmed with grief for the people killed and injured and their families. I can make no comment that makes any sense of this. It is just so sad. Something has to be done. While I can hope for change, the lack of it after the massacre at Sandy Hook leaves me with a fatalistic view, believing that it will continue to get worse before it gets better. Pray I’m wrong!

The opinions expressed in this blog are not necessarily those of IBAA.
Comment on this post below or email Thom Young privately. Thom also encourages suggestions for topics.


Tags:  broker channel  CAA  CAIB  competition  direct writer channel  disaster relief  Hill Day  insurance industry reputation  mitigation  Orlando massacre  overland flood insurance  sewer backup insurance  Stampede breakfast 

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Claims Regulation Needed, UBI Technology

Posted By Thom. C. Young (Full first name: Thomas Clifford John), March 15, 2016

Ethical Regulation Needed for Adjusters

Diamonds and gold are valuable, but reputation is priceless. We invest much time and effort into promoting our business. We stand on the ethical values of professionalism and proclaim that the manner in which we honour the promises made to our customers, along with our attention to their legal obligations, uphold the principles of justice and fairness. With those proclamations comes the legal truth that those who provide insurance contracts are held to a higher standard than the norm in their dealings with the public and that those who sell them are expected to represent customers’ interests ahead of their own. All the good work that is done 99.9% of the time can be set aside by the actions of one representative of our business who takes a tact in the process that is found to be unfair. Even worse than the personal shame of being found unfair due to an error, the perception that preconceived maleficence led to unfair practices leaves us all standing accused in public eye.

I’ve ranted before about the need to license adjusters who adjudicate the claims process just like we license the insurance agents and brokers who arrange the contracts. Such a license could subject adjusters to a code of conduct and ensure the regulatory oversight that would enforce accountability to the public and the industry. No directive of an irresponsible corporation could override that accountability or excuse the failing of it. Accountability to peers accompanied by the need to accept personal responsibility for our actions sets us apart from the warranty claim manager at the auto dealership or the customer-service manager at the bank. The public gains a degree of confidence that exceeds the norm when this process is demonstrated to be in action as customer complaints arise. While our business holds itself to high ideals, human nature doesn’t always meet the bar we’ve set for fairness in our actions.

Recently, the actions of ICBC (the B.C. government insurer) failed on all the points of fairness in its dealings with an insured. According to Insurance Business, the court found ICBC culpable in the groundless malicious prosecution of a 69-year-old immigrant woman. In her decision, Justice Susan Griffin wrote, “Mr. Gould’s handling of the file reveals that, rather than operate from a presumption of innocence, Mr. Gould operated from a presumption of guilt in respect of Mrs. Arsenovski.” The court was so appalled by the manner in which this person was treated that the unusual award of punitive damages were assessed against the insurer.

Our industry press was quick to report on this event. Some have criticized that this legal decision will make it harder to deter fraudulent claims and that the costs of insurance will continue to sky rocket on account of it. While the case may affect the industry’s attempts to limit fraud in claims settlement, the evidence presented in the case was unchallenged. The individual was subjected to a serious disservice by the insurer. The fraud here was the adjuster representing himself as a fair player in our business. Others may take a different perspective, but I see this judgement as a fair outcome against unfair actions by the insurer.

Technology Marches On

UBI continues to evolve. The original intent of a simple device that measures a couple of significant factors against the driving habits of insureds to allow better underwriting selection of better drivers continues to be dwarfed by the technological advancements in the equipment used to do the monitoring.

The other day, Costco wheeled out a pallet of Cobra dash cameras to the front entrance of the electronics department. The cameras were on sale for $99 US, and I couldn’t pass up a new tech toy at that price. This unit has all the of the gadgets employed in the popular GoPro camera rig but coupled with a GPS location program and sensors that measure acceleration, deceleration, turning speeds, and distance travelled. All this is recorded on a 2.1 GB mini-card (an 8.5 GB card is available) that loops the last 2 ½ hours of driving time in the visual, audio, and data record. All I could say about it was “wow.” I took more time getting it out of the package than I did to install the unit in my SUV. Plug and play and away we go with that tingly feeling all men get with new electronic toys.

Twenty five years ago, I had a client who was instrumental in the development of GPS tracking technology and was part of a pilot program installing the company’s equipment in a number of auto and equipment fleets. At the same time, the company was testing the use of video recording in conjunction with GPS tracking. I had a great deal of difficulty finding anyone to insure this equipment. I remember it was about the size of a large piece of luggage weighing nearly 20 kilos and recorded nearly three hours’ use of the vehicles in which it was installed. The cost of this sophisticated piece of technology was around $15,000, and it didn’t really work that well. As I recall, the recordings were in black and white because of the expense and power needs of colour cameras at the time. Overall, it was pretty archaic compared to this little thing I just acquired that sits in the palm of my hand and can record up to 8 ½ hours of 1080 dpi quality video and sound.

If you’ve received any of the little automobile accident video clips that are always circulating, you’ll recognize the quality and utility of these devices. Here’s one that is current. Certainly from a claims perspective, determining who’s at fault and evaluating all the contributing and limiting factors in the liability assessment is a no-brainer when you have a real-time high-resolution digital record of the incident you are investigating. The recordings can limit fraudulent claims as well. A European insurance executive friend of mine with operations in Russia indicated that his company won’t insure any vehicles operating there that aren’t equipped with one of these units. Accidents are most often reviewed from the perspectives of those involved because both drivers have these camera. As I’ve indicated in previous comments on this topic, your new vehicle will soon come with this equipment installed. The benefits of it should be obvious to everyone, except perhaps the people whom we shouldn’t be insuring anyway.

The thought occurs to me that perhaps I ought to be getting some kind of a discount on my insurance for installing this device in my SUV. I have this vehicle insured with Progressive, which lets me be my own service representative with the help of a local agent. To clarify, that just means I do all the work on my policy changes, handle all the communication with the insurer, and he gets the commission for it. He’s a nice guy, and the price I pay is the same whether or not I deal with him, so I don’t mind that he gets a commission for my work. I chose Progressive (with this agent’s help) when I first insured a car in the U.S. because it was the only insurer that would give me credit for my Alberta driving record and didn’t care that my driver’s license wasn’t from the state in which I’m insured. While I’m looking into this discount, I should also find out about the regular UBI device that Flo goes on about all the time. We’ll see if this vehicle that sits in a hot garage for six months of the year will get a better rate than the one I use full time. We’ll see what their underwriters say. Maybe I should call Flo.

In Conclusion

I began this essay complaining about the lack of integrity in an insurer’s claims adjudication process that makes us all look bad. I also took issue with the industry’s somewhat disingenuous fear that the court ruling would impact the industry’s struggle to limit fraud. While I don’t disagree with that assessment, I would rather that the emphasis be focused on the actions of the insurer in this circumstance than upon the plaintiff who was found to be blameless.

If you want to discuss the costs of fraud in the insurance business, you need not look any further than the settlement of section B auto insurance claims. You can determine immediately who’s coaching the insureds when they produce invoices and certificates of a course of treatment that match exactly the benefits provided in the coverage. In Alberta we’ve limited the amounts somewhat with legislation, but in Ontario the no-fault provisions of the insurance provided and the prepayment allowances that came about through the auto insurance reforms over the past 10 years show where the fraud money is going. I saw a preview of an interesting show scheduled to air on CTV on March 12th. The episode of W5 called “The Claim Game” explores the rampant graft and waste that has come about through the manipulation of the claim process by care providers and the absolute lack of regulatory review and correction by the government to limit it. The reporters correctly connect the dots between the amounts paid in claims and the amounts paid in insurance premiums and put the blame for escalating auto insurance costs on the real culprit. While the mantra of insurance corporate greed is often chanted in the political arena, the reality is becoming clear. As a friend of mine often used to say, you can have whatever kind of insurance scheme you want so long as you are willing to pay for it. If you didn't get to see this episode of W5, you can view it on CTV’s website.

It’s strange being in Alberta at this time of year and the only snow I can see is on the mountains. Nice not to have to plow the drive way though.

The opinions expressed in this blog are not necessarily those of IBAA.
Comment on this post below or email Thom Young privately. Thom also encourages suggestions for topics.


Tags:  adjuster  Cobra dash camera  customer service  ethics  fraud  GoPro  ICBC  insurance industry reputation  insurance regulation  IT  Progressive Insurance  risk management  telematics  The Claim Game  UBI 

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12-Storey Bonfires, Insurance Reputation, Uber Regulation, UBI Costs and Benefits

Posted By Thom Young, September 22, 2015
Updated: September 28, 2015

12-Storey Bonfires?

The issue of risk management for wooden buildings has arisen again with the Quebec government’s endorsement of safe practices for the construction of mass timber buildings up to 12 storeys.

Risk management and assessment is one of the most important parts of the broker’s role in the underwriting process. In order to price the exposure to loss properly, the necessary information must be collected to determine the chance of loss and to categorize the class of risk. On the commercial side, we often extrapolate this data from the design and architectural plans prepared for the project. These are frequently used in underwriting and rating Course of Construction coverage, and rating, as with all buildings, is determined by the type of construction and the materials used. Imagine being presented with plans for a 12-storey building of frame construction. Logically, your first thought might be that these people are nuts. You might be right.

For a very long time, the logic that you couldn’t safely build a building out of wood more than three storeys high went unquestioned. Engineering limitations of the materials and construction techniques were simply inadequate to build safely beyond this height, though many tried and often with disastrous results—disastrous in the construction phase and deadly in the completed stage. The history of many communities is peppered with stories about this or that great fire and its resulting loss of life. Building codes and regulations were developed and have limited the devastation caused by fire damage in frame structures, but they have in no way eliminated the losses. In particular, several large communal structures such as nursing homes and row-housing units have suffered total-loss situations from lightening and the ensuing fire, as well as from wind storm. The damage to these structures has also often caused loss of life. We can still go a long way to improve the safety of these types of structures, and I believe we should.

tall apartmentFrom our perspective as insurance advisers, we are concerned about the availability of coverage and the impact of large losses on the pricing our customers face. We should also, however, be concerned with providing them good advice about the exposures they might now face. Ultimately, the cost of any loss works its way through to rating for that type of risk, and we know what damage catastrophic losses can do to the marketplace. Today, six-storey frame structures—the regulated height allowed by building codes in most Canadian jurisdictions—are commonly built. Building codes have no national standards but, for the most part, the various provincial regulations are much the same. Engineering quirks in the building codes play with the definition of storeys in some jurisdictions, transferring the first floor into a part of the basement so what looks like seven storeys may be defined as six by that province’s building codes. Still, a whole lot of wood is going into these structures. As we’ve seen in B.C., Alberta, and Ontario, they can and do make for spectacular total losses during their course of construction. After completion, we’ve also seen how a small fire originating on a balcony can transfer to a multi-million-dollar loss in just a few minutes. While political pundits are quick to argue about the costs of insurance imposed upon their constituents, few seem to understand the function that insured losses play in the development of a fair price for an insurance policy covering varied risks. If a condo owner or tenant has a $100,000 unit loss in this type of dwelling, it takes a very long time to recover the costs of such claims through minor rate adjustments, especially if 20 or more people are impacted in the same loss for similar amounts. I’ll leave the math to you, but one fire in a condo complex could produce a 25% increase in the cost of insurance for all condo-unit owners in the territory and a like adjustment to the condo corporation’s costs for insurance too. These costs are simply passed on to the occupants through assessment or rent. This risk is something to consider when asked by your clients why their rates have increased once again.

The Quebec endorsement of twelve storeys also raises the issue of special interest groups, such as the forest-product producers and the construction associations, who come to the political pundits with requests for changes in building codes. While politicians regularly question the insurance industry about the high cost of insurance, the ramifications for their constituents of approving these code changes is often ignored. Great proposals that extol the benefits of increased jobs and lower housing costs are often on the song sheet of building associations when making the case for a building-code review. They are convincing tales in persuasive language but include little discussion of the potential down side and review of the actual experience. I think only four to five years ago (or so) the first six-storey frame condo complex in B.C. was approved for development. While still in the framing stage, a fire completely destroyed the building. Fire departments in Surrey and surrounding towns were overwhelmed by the intensity of the blaze and could do nothing to limit the loss except to keep it from spreading. The loss was insured but had an immediate impact on the course-of-construction coverage rate that is still felt today.

Oh, Those Damned Insurance Companies!

While holidaying in southern B.C., we were once again exposed to that seemingly more common natural disaster of forest fires. Fires to the south in the U.S.A. were producing copious amounts of smoke and ash, making breathing and seeing difficult for some. The usual sunny and warm late August afternoons and evenings were very unpleasant in many areas. The usual spectacular sunsets were replaced by the sinking sun looking more like a moon glowing through the haze, while the mountains in the distance would periodically flare up in bright red eruptions, sending plumes of smoke into the upper atmosphere. The results were apparent through much of Alberta, and relatives as far to the east as Winnipeg were complaining about the air quality.

Driving on the southern route took us through the community of Rock Creek, which used to be like so many other rural B.C. Interior communities, a hodgepodge of modular homes, very old mobile homes, and newer mansion-like retirement homes built along the riverside where the land is cheap and the ambiance is superb. The town of Rock Creek on the southwest side of the river is now, for the most part, leveled. The fire showed no preference for either the old shacks and mobile homes or the new million-dollar mansions, reducing them to piles of white ash. The heat was so intense that even the concrete foundations were reduced to soft sand. Total losses are both the easiest and hardest claims adjustments to make. The comment that “at least there was no loss of life” does little to diminish the tragedy for those who have lost everything.

Discussing the event, a local businessman in a nearby community indicated that a number of his clients had suffered losses. Without knowing my involvement in insurance, he began to rag on about the insurers who he’d been told were already “short changing” their insureds. He reported one of his clients had already been told by his insurer that he’d have to downsize after the fire. I began asking for more details as I was confused by this position. “Was it a new home?” “Yes.” “Was it his primary residence?” “Yes.” “So why wouldn’t the guaranteed replacement cost clause put it back the way it was?” “What’s a replacement cost clause?” he asked. The fellow soon realized I was in the insurance business and changed his tone about the bad insurance company taking advantage of their mutual customer. Some friendly discussion revealed that this fellow had rented some scaffolding to the customer, and the home, along with an addition he was building, was a total loss. I began to wonder if the customer had advised his insurers about the addition. Conclusions are difficult without all the facts, but it struck me as odd. Insurance companies are collectively responding with extraordinary measures to meet the needs of their clients in the face of an insurable and, for most part, insured catastrophe. Nonetheless, the public perception remains twisted and maintains the notion that insurers try to take advantage of their customers by not living up to the terms of the contract with them. This lack of faith has become a common theme in my writing. I seem to run into it too often. We have much work to do to improve the public’s perception of the industry.

Uber Again

Well, it seems I’m not the only one calling for amendments to the regulations regarding Uber. Edmonton City Council is considering new legislation governing vehicles for hire. While most changes in this kind of legislation tend to annoy most everyone equally, we can hope that any adjustments will provide oversight to the unregulated activities of Uber. On the product side, Intact has taken a lead with its new offering, determining that the risk is in need of coverage and that the risk is insurable. It has announced an initiative in consultation with provincial regulators and Uber to develop a product to meet the needs of both parties. This initiative will likely put competitive pressure on other insurers to get involved as well. Personal-lines auto underwriters seem quite agitated when discussing exposures in the Uber business model. Perhaps they will get an endorsement to offer our clients. Time will tell.

UBI Again

This topic never seems to go away. Those who follow the industry press may have seen me quoted in a recent article. I was approached for my thoughts on Allstate’s new patented approach and to provide some commentary as to how I see UBI “turning the industry on end.” Well, I don’t see any real significant changes to what we do coming about through the introduction of UBI in the Canadian market. Our neighbours to the south have been using UBI for about five years now and have not seen any real disruption in their marketplace. Where it’s been introduced, we’ve seen the competitive offering of a group of major insurers match any gains in market share through it by offering their own versions. Loyalty to brokers and companies hasn’t been negatively impacted. Further, the inference that the data gathered affronts clients’ privacy has not been supported. No privacy complaints regarding UBI have been brought against any insurer. I suspect our Canadian experience will not be dissimilar.

About the savings provided through UBI, I say the product just allows for selective underwriting and disrupts the classes of risk by introducing new classes. The amount of money that is needed in the pool of auto insurance in any province is not reduced by UBI, so, where its take up is substantial, the cost of the claims in these new classes will be shifted to the old. This transfer introduces a political reality that will attract the regulators’ attention. A 25% reduction for one group will net a 25% increase for another group. That won’t get good press anywhere. While some will say that the “new” group should fairly pay its actual costs based on the losses, remember that the premiums paid by the many should cover the losses of the few. Disrupting this principle with a business model based on new technology will not be considered fair by those paying the extra premium required to maintain the financial reserve needed to pay claims. Wow, heavy philosophical insurance stuff here!

Costs aside, any technological changes that reduce losses have a positive impact on the insurance marketplace. UBI fails to deliver on this principle as well, with one exception—young drivers. Where young driver’s behaviour is monitored and corrected through the use of UBI, claims decrease by as much as 40%. The real savings to these drivers class don’t have to be absorbed by other classes. While these savings are a big plus, the most important part of the story is that UBI monitoring of these drivers results in a 70% reduction in bodily injury and death. If we can get our kids through their learning-to-drive years without serious accidents, then we’re really onto something good. In a perfect world, we’d make this mandatory, wouldn’t we?

In Closing

Fall is in the air. Thankfully, early snow in the foothills didn’t last very long. The forecasts for some very warm weather in the coming weeks seem overly optimistic, but those excellent weather prognosticators are calling for a warm winter on account of El Nino. We’ll see.

The opinions expressed in this blog are not necessarily those of IBAA.
Comment on this post below or email Thom Young privately. Thom also encourages suggestions for topics.

Tags:  building codes  construction associations  forest producers  insurance industry reputation  Intact  Quebec regulations  special interest groups  timber-frame buildings  Uber  UBI 

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Using Both Direct-Online and Broker-Channel Distribution Impacts Consumers and Industry

Posted By Thom Young, July 2, 2015

How about the Weather?

Typical for an Alberta summer, the weather this week has been stiflingly hot and dry up to Canada Day—difficult to endure in an RV without power—and then the predicted thunderstorms created a general turn to semi-constant rain and much cooler temperatures. Huddling around the propane campfire in the Ponoka Legion parking lot last night was a much different experience from what we’d expected according to the weather reports. There’s a profession for those who like a challenge—no credit for whatever good happens but all the blame for whatever unexpected turns out. Even better, try being a climatologist who attempts to make sense of the overall picture based on the weather details extrapolated from archaeological records. Are they, like us, looking to the past to predict the future?

“We’ve seen the enemy and it is us”

Variations of this comment have been used to describe the process whereby in many endeavours we seem to be the authors of our own misfortune. If I had to give direct credit for it to anyone from memory, I would attribute it to the character named Pogo in and old newspaper comic called Alley Oop. In the historical cycle of a changing insurance marketplace, we’ve seen this process operating more than once and seem to be about to go through it again in Canada.

A decade ago in England, insurance companies rushed to offer their automobile insurance products over the telephone, and the brokerage ranks suffered tremendously from lost market share. Insurers that traditionally had been great supporters of the brokerage distribution model indirectly undermined brokers with telephone solicitation schemes that allowed the consumer to deal directly with the insurers. The presumption of doom came down upon the English insurance brokers who feared greatly for their future.

The effect of this change in market approach caused severe market disruption in England. While some brokers didn’t survive, most did. The real losers in the process were as usual the consumers. The average price of an automobile policy didn’t really change that much, but the price differential sure did. Straightforward accounts that were easy to deal with received the most benefit in price discounts, leaving the more complicated ones to pay increased premiums into the pools. Slicing up the pie into smaller pieces doesn’t create any more pie as anyone who’s had unexpected guests arrive for dinner well know. Consumers were eventually treated to the reality of discounted service and the loss of an advocate to add value to the claims process. Pricing realities in a competitive market also led consumers to seek assistance from a broker or “agent” who could make sense of the complicated product they were buying. Ultimately, the purchase of reliable insurance (any kind of insurance) is not a do-it-yourself project accomplished by pressing numbers on a telephone in response to robot-generated questions, nor is it any easier to accomplish by clicking boxes on an internet website. Doubtless, the process of obtaining the quote can be done in this manner, but understanding and analyzing the risk is a much different story.

The universal capital marketplace continues to believe that the builders of better mousetraps can arrange for the world to beat a path to their door. While the newest “door” is the internet, what we’ve seen so far is a landscape filled with much communication but little in the way of service. Insurers in Europe, the U.S.A. and Canada, as we know, have been flirting with attempts to improve their market share through this new communication device, yet those who are making the best use of it and having the most success with it are using it, not to change the process, but to streamline and improve it. Much like the call centres that now seem to add to the client’s experience and reinforce the broker’s or agents’ efforts, the internet markets that seem most successful are those that integrate the adviser process. Agents or brokers remain the key contact point, while routine service issues are dealt with by service centres. Rating and quoting is subject to the broker’s or agent’s review of the client’s interaction and the underwriting issues that always seem to arise in the process. This is the experience of Progressive in the U.S., and other U.S. companies who have tried the direct approach are losing ground to them in the market. Safeco, as an example, had a direct-writing internet arm and ended up assigning the client-service issues by zip code to its agents. Safeco could neither provide the proper expertise in the market nor give timely, effective service to its clients using the direct approach. Further evidence suggests that using brokers in this manner is much more cost effective than the direct approach, but some companies believe they will have different results. I don’t think they will.

Insurance company executives have much to juggle. They are surrounded with all kinds of advice givers and people extolling the benefits of every new gizmo or gadget that is said to improve the company’s competitive position and to preserve it from others who might effectively use the gadget. The newer the technology, the harder it is to decide. The digital marketplace is exploding companies, and brokers are actively using it to compete with each other, get the customers, and give the service. Digital technology will improve the process, but it won’t change the manner in which the product is sold or delivered. Any insurance executive who believes it will, is losing sight of the process and will, ultimately, pay the price in lost market share. Insurance executives who betray the loyalty of their business partners, be they brokers or employees, by competing directly with them in the marketplace will suffer a worse fate than having to regroup and respond to the market changes. They will be bypassed by those who have taken the time to understand the dynamics of this new communication device called the internet and who have effectively changed their communication strategy to enhance the process of customer service. Their “new” direct approach will fail horribly, and the impact on the clients will put our industry in disrepute again.

All of us are well aware that one of our major markets in Canada has determined to go down this path of competitive realignment in the Canadian market. Of particular concern is the branding. Any business would find difficulty explaining to its customers the difference in price and service of the products sold out of its shop versus those sold directly by its suppliers. A client who walks into a broker’s office with a quote bearing the name of this market will be very confused as to why the broker can’t match that quote when that company’s plaque is on the broker’s wall. Once again, our industry will be confusing our market and doing a real disservice. This company may well find itself bumping up against regulatory obligations in several provincial jurisdictions and will certainly see itself under regulatory review. If a company provides a quote to a consumer, it had better stand behind it at whichever location bears its name. It’s only logical.

One might hope that the company involved will have another look at its business plan. If the company is determined to compete directly with its broker representatives, then fine, but at least it should brand its product differently so that brokers are not confusing the public. The superior service that I, for example, provide my clients under its name needs to be distinguished from the slip-shod, second-rate direct internet approach the company is going to give them. Additionally, when that company’s clients come back to me disappointed with the company’s direct internet service, they won’t be looking for a quote from that company. Caveat emptor!

wagon wheel

Stampede Me

Lundgren & Young is holding its annual stampede breakfast on July 8th, 7:00–10:00 a.m., 9705 Horton Road SW in Calgary. Come on out to this all-industry event, enjoy a good pancake and sausage breakfast, and listen to live country music. While reveling in the stampede show, mingle with the insurance industry folks in the know. If you know the right people, you can get a glass of the good orange juice.

While on the topic, don’t be afraid to stampede me with emails sharing your thoughts. They provide good fodder for future articles.

The opinions expressed in this blog are not necessarily those of IBAA.
Comment on this post below or email Thom Young privately. Thom also encourages suggestions for topics.

Tags:  branding  broker channel  consumer confidence  direct writer channel  insurance industry reputation  online channel 

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