Burand's Insurance Agency Adviser
Resources and Information for the P&C Insurance Industry
"If you would win a man to your cause, first convince him that you are his sincere friend, [otherwise the man] will retreat within himself, close all the avenues to his head and his heart; and tho' your cause be naked truth itself, transformed to the heaviest lance, harder than steel, and sharper than steel can be made, and tho' you throw it with more than Herculean force and precision, you shall no more be able to pierce him, than to penetrate the hard shall of a tortoise with a rye straw."
What is that Insurtech?
All kinds of "Insurtechs" exist from claims Insurtechs to sales Insurtechs to data consolidation/analytics Insurtechs to certificate issuance Insurtechs to agency/broker Insurtechs to carrier Insurtechs. The problem, and this is a major risk factor not to be taken lightly, is that transparency is severely lacking with many Insurtechs relative to what they really are.
An agency using an Insurtech had better know if the "Insurtech" is a carrier, a broker, a legitimate broker, an agency, or some other kind of pass-through organization. If an agency makes a mistake, their E&O is at risk and don't expect the Insurtech to bail you out.
An example is a new market that is advertising hard to entice agents to sell their niche property form. They are advertising that they are a carrier in the form of, "ABC's new ... form is better and less expensive than any on the market." However, they are the broker. They are not the carrier.
These are single entity brokers in the sense that they sell one carrier's products. These are not the traditional MGA's that sell multi-carrier offerings. I am not sure the people running these single purpose MGA's even understand the critical differences. In this case, the carrier behind the MGA only had $25 million in total surplus and was basically brand new. Does it really make sense to place business with a carrier that only has $25 million in surplus when far larger carriers exist who have better ratings?
I have great regard for A.M. Best's ratings. There is a particular carrier that was rated "A-" by A.M. Best and I am not questioning the rating in any way whatsoever. However, agents would be smart to look at the carrier's surplus in addition to the rating because $25 million in surplus is not much money as far as surplus goes. The average home value is around $500,000 so that is only 50 houses (if Coverages B and C are included, much less additional living expenses, it really is maybe 30 homes).
When a broker is selling a carrier's products, the broker has an obligation to disclose the carrier's identity from whom they are providing the quote. I do not see that is always happening although it is not necessarily nefarious. I have talked to many Insurtech executives and quite a few do not know the difference between a carrier and a broker.
From an E&O perspective at the most basic level, agents should list the actual carrier on the application. One cannot list a broker as a carrier. In the example above, the broker had four different carriers that were all tiny and their results, i.e., their surplus was not the same. Which of the four carriers is actually writing the policy? The agent must know this, and should disclose it to the insured, before submitting the application.
I see this situation often with various cyber forms. The cyber forms are marketed as "ABC's cyber form". An MGA cannot own a form unless they are also the carrier (within the same entity and not different entities) or they have a specialized program with a market like Lloyds whereby they have a form that Lloyds supports and usually the broker must have the pen. They don't file the forms or provide the surplus specific to the form.
The form is the carrier's form, not the broker's form. For E&O purposes, putting the broker's name on the application as the carrier is problematic because for one, it is a misrepresentation, and for another the entity named is not a rated entity or even a licensed carrier meaning the agency may have no E&O coverage in the event insolvency becomes an issue.
Another example that exhibits the lack of transparency is how some Insurtech carriers do not understand reinsurance (It is actually the brokers who usually don't know the difference between their broker status and a carrier status, but also some carriers do not know this either). One Insurtech recently advertised they were completely reinsured. They were not really reinsured. They had a cut-through agreement. With whom they had made the cut-through agreement was not documented anywhere that I could find it.
First, cut-through agreements are not commodities. These agreements vary materially from one to another. Second, they do not work like reinsurance. Third, cut-through agreements often indicate there are significant financial issues. In the past, cut-through agreements were often the last resort for a company that could not obtain capital or reinsurance in sufficient quantities. Some cut-through agreements provide quite limited coverage.
An agent truly needs to know whether an Insurtech has reinsurance or a cut-through agreement. If it is a cut-through agreement, they MUST know the other carrier and at least have some semblance of knowledge regarding what is covered by the agreement. Otherwise, it is irresponsible to place business with that carrier.
I have seen these Insurtech entities make the opposite mistake too. They thought they had a cut-through agreement when they really had reinsurance.
Another example of the lack of transparency is when an InsurTech is double brokering. They are advertising they have a product, but it is really a carrier's product they are accessing through another broker. As with many examples, the founder of this InsurTech most likely had no idea what they were doing was potentially illegal or in violation of contracts.
Many Insurtech leaders do not understand and have not taken the time or made the effort to understand how insurance distribution and regulation work. I talked to one who thought that if they had a wholesale license, they automatically got a retail license. They were selling insurance on a retail basis without a license. Some are not so innocent. I had one leader advise me that he understood and simply was not going to respect the contracts or regulations because contracts and regulations got in the way of his achieving his goals.
I read an article recently debating whether these new Insurtech carriers needed to be profitable to be valuable. Insurance is not like other industries in the sense that companies do need to be profitable at some level, so they have the money with which to pay claims. Initially, losing money is to be expected but the probability of always losing money and somehow continuing to maintain adequate surplus with which to pay claims is improbable. For a couple of Insurtech entities, my hat is off to them for convincing investors to continue supplying surplus for as long as they have. They should get awards for being the best salespeople on earth, but probably not an award for building a sustainable insurance company. At the end of the day, what matters is whether an insurance company has the money to pay claims for years into the future. If this factor does not exist, the rest does not really matter.
When a market has no idea what they really are, agents should be wary about doing business with them. I see agents, particularly younger agents, attracted to these fresh entities. I can see why too because they do have a fresh approach that is very enticing. Would they have a fresh approach if they were fully transparent? If the agents understood what the market actually was and the risks attendant to using such a market?
In some cases, the situation reminds me of the biblical and old folklore stories in so many cultures of a demon that appears as a beautiful woman. I believe there is another technology now applicable called "catfishing" where software can make people look far better only to create quite a surprise on the first date. It pays to know who you are kissing. Transparency is important. Do not write insurance with a market where you do not know the exact carrier backing the policy. If you think this is too much work, then write with standard carriers who have long histories and high ratings.
Insurance Distribution: Sloppy vs Professional
The future of insurance distribution is becoming extremely clear to me. A huge push is being made to generate as much in sales as possible with literally zero regard for insureds' actual coverage needs. I am seeing this push with specific carriers within and outside of the independent agency channel. I can easily see this within the Insurtech distribution models, and it is absolutely crystal clear some agencies are planning to grow larger quickly, both with and without Insurtech connections/branding, without regard to insureds' true coverage needs.
I do not believe anything in the first paragraph should be news to anyone who is paying attention. When an agency advertises, "This is the quote for you..." and the carrier is having to lay off policies to avoid the insurance department taking them over, or an agent who has not read a policy recommends that a client buy a policy that has so many corners cut off that it is now a circle (you cannot use four-corner logic to determine whether coverage exists in a circular policy), or when you see a "quote machine" where literally no one asks the client questions, the result is slop which should be obvious to anyone who cares enough to look.
Or, when a carrier hires a well-known consulting firm to help them minimize claims payments (this is pretty well documented in some public articles), or a carrier removes coverage without informing their agents or clients because they found a loophole in state law, or, in a situation I personally witnessed, when an adjuster willfully misread the coverage to conclude an absurd denial, the result is slop.
The concept that Insurtech has brought about a consumer revolution because it makes it easier to do business is shallow. Making it easier for consumers to choose the wrong and inadequate coverages does not constitute a consumer revolution.
Or consider the model whereby a direct writer usually, but some independent agency carriers too, appoints or prefers agents who do not know what they are doing because ignorance makes the agents seem more trustworthy. I watched a movie about a Cold War spy case where the British chose a salesman as a secret message courier because he was "not bright". In one of the best lines, he was called a "Great Amateur". The salesman turned out to be amazingly courageous and honorable and I hope he received a medal and award from his government.
In the movie, after his arrest by the Soviets, he described himself as, "I'm a salesman. I want my customers to like me." From many perspectives, if a carrier can get an insured to believe they are the greatest and have salespeople who are ignorant and primarily focused only on getting clients to like them, sales can be increased. This phenomenon is based on the salesperson's genuine, if unwarranted, belief that what they are doing is great. They are a straw horse, and the strategy often works for the carrier, sometimes the agency (assuming they are not hit with E&O claims) and, provided the insured does not really need their insurance, i.e., they don't have a claim, it works for the insured too.
Insurtech and carriers are using the same strategy when advertising by using animals and idiots to trumpet their products. It's an innocent, if incompetent from an application of correct coverages, strategy. Humans are not afraid of incompetent people and time after time do business with them even if they know they should not do so. This goes for doctors, attorneys, and politicians too.
Some people might be upset reading this depiction. I am upset too, so I am writing about it. Insurance is one of the greatest tools ever invented to help people rebuild their businesses, homes, and lives in times of crisis. The slop described above greatly dilutes the value and damages the images of those carriers and agents trying to do what is best for their clients. I know many agents who live to help their clients. I know carriers who, throughout their culture, really believe that they are there to help their insureds to the extent of what is written in the policy. These are wonderful people who are representing the industry well.
However, there is big money behind the slop. One reason for abundance of funds is because it is far, far easier to scale slop. In the insurance world, quality requires an agent to spend time to discover and uncover their clients' needs. The whole idea of insureds figuring out their own coverage needs is ludicrous and anyone who has ever sat with an insured and gone through coverages and exposures knows just how silly and misleading this assumption is. Insurance contracts are not 30 pages long because choosing the right coverage is simple.
Being a professional and truly taking care of your clients has great opportunity because many people and businesses do want professional advice. But it is harder than ever to be a professional. The forces are blowing against the true pros and many people prefer the industry to consist of "great amateurs."
The great professionals will need to do the following to win:
- Focus on clients who want professional level service.
- Charge the right amount of money. Normal commissions are inadequate for the value you bring.
- Know your coverages far, far better than is the norm with other agents.
- Develop much stronger communication skills:
The ability to translate difficult coverage language into language that insureds understand.
Improve, through training, verbal, and written communication skills for one-on-one communication.
Improve and develop far better speaking abilities.
- Develop the tools/skills required so that customers understand you are delivering more than an insurance policy. Any amateur -- even bad amateurs -- can deliver insurance policies. The difference between you and the amateurs must be the delivery of the right policy with the value proposition that goes with the right coverage and risk management recommendations. The entire list and development of these options is about a 40 hour program so this is not the place to go into detail.
- The professional must truly care about their clients' well-being. I am sure some amateurs care, but they do not truly care. The difference is simple. Many people are heartbroken for others when something bad happens, but they don't do anything to help. A person who truly cares about their clients' coverages will do everything they can to convince those customers to buy the coverages they truly need. They will learn the coverages. They will learn to describe the coverages in a manner that clicks lightbulbs in customers' minds.
- The professional will take the time to talk to their customers.
I see some agencies already using this professional (if not fully developed) model and it works well. They'll continue to have a long, prosperous career because the big money is not targeting truly professional agents. The big money is going after the great, and not so great amateurs.
The future is pretty obvious and it is a two-way fork to the future. One road is short and one is long. Which path will you choose?
Do You Have Any Idea What You Are Selling?
Someone wrote to me to tell me I was basically an idiot for previously writing that insurance is designed to protect assets and that products advertised as insurance that do not protect assets are not really insurance.
The writer's first point was that under various state insurance codes--I will use the one he cited for California--"Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event" (California Insurance Code, Section 22) was that liability/casualty insurance does not protect assets.
I will be brutal here: If you do not understand that casualty insurance/liability insurance protects assets, you probably should not be allowed to maintain your insurance license. Liability insurance is 100% designed to protect the policyholder's assets. Otherwise, if it is determined the policyholder must indemnify another party against loss, damage, or liability arising from a contingent or unknown event and must spend their personal assets in order to indemnify the other party, they have lost those assets in the process. Simply put, if you are sued for $100,000 and must make a $100,000 withdrawal from your savings account, you have lost $100,000 of assets. If you have a liability policy that will pay the $100,000, your liability policy has protected your assets.
It is neither here nor there whether an insurance policy protects property or liability. The purpose is the same--to protect a policyholder's assets.
The same "expert" went on to say that life insurance does not protect assets because it does not prevent a person from losing their life. That is a silly point. The writer then goes on to say that life insurance protects the beneficiaries but does not protect assets. Again, this is indicative of ignorance.
How does life insurance protect assets and what assets does it protect? Take a simple situation not involving tax planning. Why is a primary earner's death so devastating to their family that it necessitates the purchase of life insurance in the first place? Because the primary earner's income stream is stopped.
That income stream is an asset. An income stream in this sense is no different than the income stream of a business. The value of that income stream can easily be calculated using a variety of capitalization models. The amount of life insurance a family needs can be calculated using one of these models and hence, the life insurance protects the asset known as an income stream.
Understanding that an income stream is an asset, a clear and legally defined asset, is something about which everyone selling insurance should understand. However, in teaching dozens of business income classes, it is not something most people in this industry comprehend. Life insurance in many ways is quite similar to business income insurance because both are designed to protect what would have been a future income stream.
My clients who understand income streams well, sell business income coverage that is structured far more accurately for their clients than the common, generic approach of, "We just give everyone ALS." Insureds deserve agents who truly understand income streams and how to value those streams as assets. Agents failing to do so are failing their customers.
Life insurance sold for tax planning purposes, which is a huge proportion of the life insurance that is sold, is designed to protect assets. Otherwise, assets must be sold to pay taxes. Sometimes the asset lost is cash, and therefore it does not have to be sold, but it is still lost.
A problem arises when life insurance is sold and the beneficiaries do not really have any kind of insurable interest in the insured. This "life insurance" is no longer really insurance. It is more of a put or call, speculation, or cause for crime, but it is not insurance any longer.
Another point of contention he expressed that health insurance is not really health insurance and in most cases (self-insured individuals are an exception as I pointed out in the previous article), it is not really insurance. The reason, as I previously noted, is that true insurance is designed to protect the assets of the named insured and the named insured has an insurable interest. Fully funded employer provided health insurance policies are not protecting the assets of the named insured and the named insured does not have an insurable interest in the employee (to have an insurable interest would require ownership in the employee which is illegal). Therefore, health insurance fails the insurance test.
A self-insured person, say a self-employed person who is also self-insured for health insurance, has bought real insurance. The named insured has an insurable interest in themselves, and they pay for their own insurance 100%. The insurance protects their personal assets against spending time in a hospital and being unable to work. In effect, health insurance in this scenario is protecting the self-employed person’s income stream and their bank account, both obvious assets.
An employer paying for their employees' health insurance is not protecting their balance sheet because they are not liable for their employees' hospital bills when they break a leg skiing on vacation. They have no risk or exposure to their balance sheet and unless, and maybe not even then, the person meets the criteria of an irreplaceable employee critical to the daily functioning of the organization (think a $1 million commission producer in an agency with $1.2 million in total commissions), that employee's hobbling around does not materially endanger the cash flow of the company either. In other words, there’s nothing to insure.
Individuals could just as easily buy their own real health insurance. Employers offer it as a benefit, a subsidized benefit and that is all it is, albeit an extremely expensive benefit.
The last major point this writer raised was that I was wrong in stating that workers' compensation is not really insurance either. He proceeded to give me a history of why workers' compensation exists. Why something exists is of no importance relative to what it is. Workers' compensation is a benefit to the employee. The fact that it replaces what would otherwise be some form of insurance an employer would buy in the event an employee sued them for a workplace injury does not make workers' compensation "insurance". It is simply a benefit designed to avoid having a true insurance product because business leaders, politicians, maybe the plaintiff's bar, and maybe the unions all agreed workers' compensation was a better solution than constant litigation. It is great they developed a non-insurance solution that is still sold by insurance companies and uses the word 'insurance."
A professional understands exactly what they are selling. At the very least, a professional understands that casualty insurance protects assets just like property insurance protects assets--just different assets. A professional understands that an income stream is an asset. When private equity and Harvard MBA's talk about monetizing the value of their product, they are talking about the value of future cash flow.
I hope this article helps further clarify what insurance is and is not for those beginning their careers. I sincerely hope this intrigues a few people enough to truly explore the value of insuring future cash flows because that is where the future of insurance lies.
About Burand & Associates, LLC
Chris Burand is president and owner of Burand & Associates, LLC, a management consulting firm that has been specializing in the property/casualty insurance industry since 1992. Burand is recognized as a leading consultant for agency valuations, helping agents increase profits and reduce the cost of sales. His services include: agency valuations/due diligence, producer compensation plans, expert witness services, E&O carrier approved E&O procedure reviews, and agency operation enhancement reviews. He also provides the acclaimed Contingency Contract Analysis® Service and has the largest database and knowledge of contingency contracts in the insurance industry.
Burand has more than 30 years' experience in the insurance industry. He is a featured speaker across the continent at more than 300 conventions and educational programs. He has written for numerous industry publications including Insurance Journal, American Agent & Broker, and National Underwriter. He also publishes Burand's Insurance Agency Adviser for independent insurance agents.
Burand is a member of the Institute of Business Appraisers and NACVA, a department head for the Independent Insurance Agents and Brokers of America's Virtual University, an instructor for Insurance Journal's Academy of Insurance, and a volunteer counselor for the Small Business Administration's SCORE program. Chris Burand is also a Certified Business Appraiser and certified E&O Auditor.
NOTE: The information provided in this newsletter is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
Burand & Associates, LLC is an advocate of agencies which constructively manage and improve their contingency contracts by learning how to negotiate and use their contingency contracts more effectively. We maintain that agents can achieve considerably better results without ever taking actions that are detrimental or disadvantageous to the insureds. We have never and would not ever recommend an agent or agency implement a policy or otherwise advocate increasing its contingency income ahead of the insureds' interests.
A complete understanding of the subjects covered in this newsletter may require broader and additional knowledge beyond the information presented. None of the materials in this newsletter should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this newsletter. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.