Be cautious about insurers who consistently underprice:
I always shop for insurance based on the lowest price, as I indicated there is a huge compounded impact based upon the difference in price or overpaying for insurance. However, I set a minimum threshold for financial strength. There is a reason to be cautious about insurers who consistently underprice risk.
Caution is different than avoid, I am always looking for the best price risk takers.
Tools
I use AmBest ratings and via commentary from insurance industry and financial websites like www.seekingalpha.com. As well as online reviews to see what people are saying about the company.
Discussing insurance with family, friends, and agents or brokers is also an approach to understand who is the cheapest pricing insurer.
Do your own research…
Concern with under-pricing
A concern for me would be that I paid my insurer for years and then when I finally go to submit a claim…”poof” they are like Kaiser Söze from Usual Suspects. The insurer is gone, I never see them again, and I have to worry about getting on a line of creditors or actually fighting in bankruptcy court. (Please note, the insurance industry and regulators have various safeguards to prevent this scenario and the default of one insurer has the potential to be borne by other insurers in a Guarantee Fund or the State Fund.)
This is one concern with insurers who consistently under-price their business.
Another concern when insurers consistently under price risk is that they got it wrong. Eventually they will need to make an adjustment to their pricing to make a profit. Be prepared to jump ship or move carriers prior to that time. It will be painful for their customers.
As we discussed previously, not all insurers are created equal. They have different costs of capital, investment strategies, risk tolerances, balance sheets, etc. But they will be compared as such….In this world of amazing new technology, the ability to compare quotes online and compare pricing is easier thanks to these tools (i.e. Zebra).
I also think brokers and agents will come around on these tools over time as they save professionals time and money using these tools.
Concerns
My concern is it turns insurance into more of a commodity. Although the pricing appears to be comparable across companies, consumers might not understand the differences in policies and strength of insurance carriers.
Insurance not the first industry to online comparison
This is not an issue for other consumer products on comparison tools (such as hotels or airfare) as normally the manufacturer of the product or service is aware of their costs of good sold or their wholesale cost. From knowing this costs that business can markup the product for retail sale to make a acceptable margin, pay taxes, pay employees, etc.
Unfortunately, insurers are still not able to perfectly see the future so the price they quote the consumer is an estimate and that margin can erode if the assumptions or estimates are wrong.
I’m concerned an online comparison tool may in the short term be a good tool for consumers by removing expenses and layers from the value chain, but may result in a race to the bottom or pressure on the State Guarantee Funds.
Without pricing discipline and disregard for online market share insurers will struggle with inefficient pricing due to commoditization, under pricing, developing losses, the speed of the insurance market cycle, cost of capital concerns, or under-performing consumer insurance portfolios.
Thoughts
I’m not trying to scare individuals about the strength of their carriers. There are consumer protections already in place. As mentioned above, adverse development and insurer solvency is a risk that is carefully monitored by state insurance regulators.
Insurers buy reinsurance protection to protect against volatility and protect margins, also investment income has been a contributor to insurer liquidity.
The role of evaluating the financial strength of insurance carriers was typically done by an insurance agent or broker previously. If the trend of more consumers using quote aggregation tools, I want them to be informed on the differences between carriers. Or how to research on their own.
