During the past few months, regulations have been proposed that would require agents and brokers to provide clients coverage with the “best available insurer.” To comply with such regulations, agents and brokers would have to be able to provide tangible proof that they’re placing clients with the “best available insurer.” Chris Burand believes that the problem with these regulations is not that agents must do the best they can for their customers, but that they must be able to prove that they’re doing the best they can do.
Insurance is a relationship business; that’s why agents depend so much on earning a customer’s trust. Too much of this industry is intangible and these intangible aspects are usually too complex for agencies to do a much better job explaining it than they already do.
Currently the most tangible evidence we have, from the customer’s perspective, is price. I believe that insurance is already sold too much based on price to the point of not necessarily giving clients the best coverage/price combination. The issues involved in providing coverage are simply too complex for most people to explain adequately. Price stands out as tangible and easy to compare, while coverage is vastly more complex and intangible.
How complex is insurance coverage? Consider this: A few years ago, I analyzed all the possible combinations of coverage that a homeowner could consider. The total? More than 30 million possible combinations!
Claims service provides another example. The insurance industry doesn’t have an equivalent of a J.D. Powers survey for claims service — although it would be nice to have one. As a result, this aspect remains quite intangible. Based on my personal experience, I know how frustrating it is to have trouble settling a legitimate claim quickly.
I believe that most good agents steer clients toward companies with better claims service, even if the price is slightly higher. Everyone in the industry knows that there are a few companies that are great at paying legitimate claims, and a few that are lousy. Yet, because of our laws and the lack of an official claims survey, agents can’t just tell clients that company ABC is lousy at paying claims. An agent’s only alternative is to steer clients subtly in the right direction. Sometimes they make more commission and sometimes they don’t; but even in those situations where they make a higher commission, this is a side benefit. The major benefits are providing clients with a better company and knowing that the likelihood of having to fight a claim on the customer’s behalf has diminished significantly.
When I worked for a company years ago, I was calling on an agency trying to get them to place more business in a particular line with us. I explained our product carefully, showing that our coverages matched those of their key company. We had a few better coverages and they had a few better coverages, but the coverages were pretty evenly matched. The agency said, “Thanks, but no thanks.” I showed that our pricing was better. The agency said, “Thanks, but no thanks.” I kept showing our advantages and the agency kept saying, “Thanks, but no thanks.” When I finally gave up and asked why they wouldn’t place more of their new business with us, they told me that the claims service with the other company was more trusted — not necessarily better, but more trusted. That to me is a legitimate reason. However, imagine trying to explain this to a regulator:
Regulator: “Did you offer both companies’ quotes to the insured?”
Answer: “No.”
Regulator: “Why not?”
Answer: “We just trust the claims service of XYZ company more.”
Regulator: “Do you have proof that their claims service is better?”
Answer: “No, but we ...”
[Interrupted by Regulator], “I asked if you had proof their claims service was better. Do you have proof?”
Answer: “No.”
Regulator: “And is it true that XYZ company also paid more?”
Answer: “Yes.”
Regulator: “No further questions, your honor.”
Another example is ease of doing business. Agents very often simply know the logical market for an account. However, if they’re under the burden of proving that they’re offering the “best available insurer,” they would probably have to go through the exercise of getting quotes from a lot of other markets anyway. Can you imagine what that would do to your agency’s costs — and to the costs of the companies?
Given the complexity and intangible nature of so much of this industry, it’s easy to paint a picture of wrongdoing when in reality the agency is trying to do the best it can for its customers.
Some 30,000 to 40,000 independent agencies are fighting for 39% of the market (according to The Economist, 10/23/04, p.14, “Marsh, AON & Willis together account for 61% of brokerage revenue worldwide.”). This 30,000 to 40,000 estimate doesn’t even include the direct writers or companies that completely eschew any kind of agency. The competition is tough; and because so many agents are fighting for that 39% of the market, an agency’s best interest aligns fairly closely with that of their customers, more so than with that of the agencies’ companies. This highly competitive environment is also one reason why new P/C producers in independent agencies have such a high failure rate. Agencies can’t take advantage of their clients and remain competitive.
Given this highly competitive environment that forces most agents to take very good care of their clients, it’s no wonder so many agents were upset that anyone would accuse them of taking unfair advantage of their clients. But given all these intangibles, the complexity of our products, the industry’s huge profits in 2004, and all the investigations, I can see why some headlines were written in the way that they were. Our industry faces such a huge perception problem that each of us must work to change this perception.
NOTE: None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.