The Catch 22 of Insurance

This is a reference to the classic book –Catch-22, a cornerstone of American literature and one of the funniest—and most celebrated—books of all time (one of my father’s favorites). For those of you who read it – you will understand the reference: for others “Catch 22” is used to describe a dilemma or difficult circumstance from which there is no escape because of mutually conflicting or dependent conditions.

How it relates to Insurance

People often choose coverage that does not fully protect them in order to keep their premiums low and affordable, but when they suffer a loss they are unhappy that not all the damage is covered. This is a more common situation then you would imagine.

However, consumers are also unhappy when they have paid a premium and loss does not occur, because they perceive that the insurance was a bad investment or purchase.

This is the classic flaw of understanding expected value & utility value of what you are purchasing, see our article about Why people love buying Lotto and hate buying Insurance.

Frustration is built up by the difference in paying for value and not understanding the true value of the product. Closing the gap of this understanding is one of the main goals of this site.

Value defined

Similar to other large insurance systems or social security for example, some consumers will not get anything back for a given policy or receive back as much premium as they have paid over time. In the case of social security, you could have paid in your whole lifetime only to die at or before retirement.

That is how insurance works, however the protection and piece of mind was the true value received during those non-claim years.

Utility value is the true value of the insurance. Piece of mind can not be provided if a customer knowingly under purchases insurance to save money. The promise to pay in the event of a loss is only as good as the counter-party as well as the expectation that you will be paid.

Some will pray on consumers misunderstanding on what is a recoverable loss and/or pray on their fear that they have an uncovered loss (This should not be our readers – the goal is to inform and empower you). But keep in mind the insurance industry although misunderstood and poor reputation, does pay insurance claims.

Industry Marketing issue

According to the Reputation Institute 2008 survey:

fewer than two of five adults in the United States feel positively about the insurance industry as a whole.
the industry’s reputation, as measured by admiration, trust, good feeling and overall esteem, ranked in the bottom quartile of all industries.
None of the 11 major U.S. carriers in the survey escaped this negative perception.

Why?

Part of the reason is the industry has done a poor job with marketing and explaining the value to consumers. Hence a negative feedback loop and the Catch 22 of Insurance. People try to buy less than they need or to pay as little as possible, then are dissatisfied at the time of a claim or if no claim at all. They think insurance companies are out to get them or screw them out of their money.

This message is sometimes disseminated by the following:

plaintiffs attorneys trying to sell you their service
new startups claiming to have a better mouse trap.
and others looking to influence consumers decisions

This message, is also reinforced during the point of sale and claims handling process. Specifically reminded or reinforced at time of claim denial (due to the under or mis-purchase of risk transfer protection), and around and around the negative feedback loop we go.

Marketing to get customers is not the industries issue. Everyone knows the Geico and other iconic insurance marketing jingles. However, rarely does the industry highlight it pays out billions in claims per year to help customers get back on their feet.

Not that the image will alone be improved by macro data, but according to the III:

$290.6B was paid out in losses in 2015 for P/C Insurers (over $1 Trillion was paid out from 2011-2015).
P/C insurers paid out $15.2 billion in property losses related to catastrophes in 2015, compared with $15.5 billion in 2014 according to the Property Claims Services division of Verisk Analytics. There were 39 catastrophes in 2015, compared with 31 in 2014.
The U.S. insurance industry employed 2.5 million people in 2015, according to the U.S. Department of Labor. Of those, 1.5 million worked for insurance companies, including life and health insurers (851,100 workers), P/C insurers (599,700 workers) and reinsurers (25,100 workers). The remaining 1.1 million people worked for insurance agencies, brokers and other insurance-related enterprises.
Insurance carriers and related activities contributed $450.3 billion, or 2.6 percent, of U.S. gross domestic product in 2014, according to the U.S. Bureau of Economic Analysis.

Thoughts

My motto is get the best expected value of the purchase possible and you will be happy. The feeling of dissatisfaction won’t occur as you purchase the right coverage and got the best risk trade according to value.

How Insurance industry can respond

New startups, attorneys and Insurtech companies have been trying to capitalize on the industry poor image and ability to market itself. Rightfully so, the insurance industry is a sitting duck…they need to embrace lowering costs to consumers through the utilization of new technologies.

If 60 cents of every dollar is going back to the customer, how does the industry lower it’s expenses to make it 70 cents of every dollar going back to customers. This is something to be embraced by the right technology offerings who can offer value to all of your stakeholders.

Keep in mind, the baby boomer generation is going to be retiring in the next 5-10 years and the normal hiring practices will have to be revisited. Should companies replace this retiring person with another body, or train the staff or build tools to allow people to do more with less?

The companies that will be most rewarded by consumers and investors are the ones with the highest profit per employee.

Questions:

Will costumers make the shift to looking at expected value or continue to be stuck in Catch-22?
What will brokers and agents do to protect their business models?
Will they “Build a Wall” or embrace new Insurtech?
Impact of retirement of baby boomers on expense ratio?