Daily sales & marketing tips for insurance professionals

Insurance scoring—insurers loooove it, and they think everyone else should heart it too. They insist that prices stay low because insurance scores (which include but are not limited to a person’s credit score) have an impressive knack for predicting risk.

But the public and state regulators need regular convincing, with fairness their primary concern. The NAIC recently convened a public hearing on insurance scoring, and industry representatives were forced, once again, to defend the practice, largely against a 2004 study conducted by the Missouri DOI.

The Missouri study revealed that the strongest predictors in a consumer’s insurance score were race and income, a fact which—rather understandably—created some hostility among the public and nervousness among policymakers.

The Insurance Information Institute (III) criticized the report when it came out in 2004, pointing out methodological errors that they said were the result of a pre-existing bias against the practice. Further, the III said, the Missouri department of insurance failed to acknowledge the benefits bestowed by insurance scoring: “The study’s opinions imply that the MDOI is prepared to eliminate the credit-related discounts currently offered by insurers to thousands of minority families living in Missouri as well as to homeowners and drivers throughout the state.”

Most states allow credit-based insurance scores, which is a fact commonly touted by insurance industry groups. (They’re less excited about mentioning that 48 states have laws putting certain restrictions on the practice.)

The faltering economy and tightening credit markets have sparked new criticism of insurance scoring. Critics predicted that the poor (whose ranks are swelling and whose credit scores have suffered) would be dealt another blow with worsening insurance scores and thus higher premiums.

“If insurance prices started to rise for no good reason, at a time when the public was least able to pay more, it would be a political, regulatory, and public relations disaster,” said Brian’s Sullivan’s May 18 Auto Insurance Report (print only, subscription required). “Insurers would be headed for a fierce beating, and worse, it would be well-deserved.”

Sullivan reports that while insurance scores are indeed dropping, they have not dropped as steeply nor been as volatile as credit scores, and that is good news for the insurance industry, because it means that insurance scores are calibrated well enough that they don’t simply mimic credit scores. (Many people falsely equate the two.)

Ultimately, though, the insurance scoring debate will probably stick around for a long time to come, with neither side landing a fatal blow against the other. Part of the reason is that the two sides approach the issue from radically different places. The insurance industry’s arguments, which center around efficacy, accuracy and low prices, don’t hold sway with opponents, who think that there is some larger issue of fairness at stake.

Writing for the New Yorker, economist James Surowiecki notes that the FIRE economy–which stands for finance, insurance, and real estate–shrank for the first time in 16 years. “Since 1980, this sector’s share of the economy has grown by almost half. Now, apparently, the worm has turned,” says Surowiecki.

Looking at credit default swaps and mortgage-backed securities, it’s easy to understand how and why the finance and real estate markets are shrinking. And the insurance industry, of course, is so interconnected with those two that it was only a matter of time before it started to feel the pain as well, even if it wasn’t as reckless as its siblings in the banking and property sectors.

Surowiecki looks back at the last 10-20 year period as the “financialization” of our domestic economy, when Wall Street became an economic driver in its own right, as opposed to a follower. And that’s where things went wrong.

“Wall Street needs to recognize that its proper role is, as it has been in the past, to follow the real economy, rather than trying to drive it,” says Surowiecki. ” During the housing bubble, the financial sector essentially tried to create reality. Now’s the time for it to respond to reality instead.”

State Farm has been trying since January to get out of the property insurance business in Florida (really, who can blame them?). But it turns out that such a move is easier said than done. 

Florida’s Office of Insurance Regulation (OIR) issued a set of conditions for State Farm’s withdrawal, and there’s one condition in particular that has become a sticking point. In essence, the OIR would like to free State Farm agents from captivity and allow them to sell policies from other insurers.  

“That’s not something we’re willing to do because that’s in direct conflict with our business model,” State Farm spokesman Chris Neal told the Tampa Tribune. “It’s been a very successful business model.”

You can’t argue that it has been a successful business model, but I’m scratching my head about State Farm’s reluctance to give their agents the freedom to sell from carriers. In this month’s issue of the Property Insurance Report (subscription required), Brian Sullivan opined that customer service and potential damage to the State Farm brand were likely concerns. 

But Florida insurance officials see a larger problem if these agents aren’t set free: the already precarious state-run insurer would have to shoulder more risk.

“If those agents are not allowed to write new business for companies other than State Farm and Citizens, that leaves Citizens as the only alternative,” said OIR spokesman Ed Domansky. “That’s just not acceptable.”

As always, readers, your thoughts are welcome. Leave a comment below.

But before we get to the Don, let’s talk about a lesser-known guy named Nassim Taleb.

Nassim Taleb is an economist and the author of Black Swan: The Impact of the Highly Improbable.

Black Swan’s thesis statement is thus: improbable events are actually more probable than we think, and their effects are often devastating.

“What you don’t know can really hurt you,” was the lesson Motley Fool book reviewer Jack Uldrich took from the book.

The “black swan” of the title refers to the discovery of the Australian black swan. Until the discovery, most of the world was operating under the belief that all swans were white. The presence of a black swan came as a shock.

Now, the term “black swan” refers to any event that comes as a surprise and debunks long-held beliefs.

Some might say that the current financial meltdown was a black swan: with a couple of decades of incredible economic growth and globalization, people started to believe that the market was invulnerable, that the invisible hand would always guide us to greater wealth and stability …

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” said Alan Greenspan last October as the U.S. economy unraveled.

“This modern risk-management paradigm held sway for decades,” Greenspan said. “The whole intellectual edifice, however, collapsed in the summer of last year.”

To continue with Taleb’s metaphor, Greenspan thought all swans were white until the summer of 2007. He thought the free market system was perfectly calibrated by rational self-interest. He never thought that it could spin wildly out of control. Boy was he wrong!

Unknown unknowns
Remember when former defense secretary Donald Rumsfeld talked about “known knowns” and “known unknowns”? Here’s the full quote, which got him a lot of jeers at the time:

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.

The thing is, despite being a terrible military planner—perhaps the worst ever—Rumsfeld was right on the money with this quote. (The tragedy is that he didn’t heed this known known: invading and occupying a country, particularly if it’s a Muslim country,  is never, ever a cake walk.)

It’s the “unknown unknowns” that Taleb focuses on in Black Swan. They are the things that seemingly come out of nowhere and in seconds demolish our bedrock beliefs.

Anyway, all of this is preamble to this list of Nassim Taleb’s life tips, which he shared with the Times (UK) recently. I figured that if I posted them without any context, you might just brush them off. But, truly, everyone should be listening to this guy:

Taleb’s top life tips

1. Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.

2. Go to parties. You can’t even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.

3. It’s not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.

4. Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act — if you can’t control outcomes, you can control the elegance of your behaviour. You will always have the last word.

5. Don’t disturb complicated systems that have been around for a very long time. We don’t understand their logic. Don’t pollute the planet. Leave it the way we found it, regardless of scientific ‘evidence’.

6. Learn to fail with pride — and do so fast and cleanly. Maximise trial and error — by mastering the error part.

7. Avoid losers. If you hear someone use the words ‘impossible’, ‘never’, ‘too difficult’ too often, drop him or her from your social network. Never take ‘no’ for an answer (conversely, take most ‘yeses’ as ‘most probably’).

8. Don’t read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants… or (again) parties.

9. Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.

10. Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.

Go to parties? Skip the news? Tease people who take themselves too seriously? Brilliant.

In simplistic characterizations of our current health care crisis, insurers make for easy villains. After all, they’re the ones assiduously looking to deny or drop coverage, refuse benefits, raise premiums, etc.

But there is another player in this drama that’s gotten a free pass from critics: health care providers. Doctors and their places of work, hospitals, have somehow been able to remain above the fray. (Maybe it’s part of our culture’s collective idolization of those in the medical profession.)

The thing is, doctors, collectively represented by the lobby known as the American Medical Association, are perhaps the biggest beneficiaries of the status quo, and they are incredibly influential in their efforts to perpetuate it. According to the Columbia Journalism Review, “the AMA ranks second over the last ten years in the amount it has spent to influence Congress.” Maybe it’s just the hardened cynic in me, but it seems that money has been spent on putting breaks on reform.

Teamed up with increasingly unhealthy patients, doctors are among the biggest drivers behind skyrocketing health care costs. But no one seems to question this trend: most of the public’s ire gets aimed at insurers for not paying, not those MDs who scribble out prescriptions willy-nilly and suggest every costly treatment in the book.

The fact is, true health care reform will require steps that reduce medical spending while improving medical results. This excerpt from an article in the Columbia Journalism Review sums ups our situation up nicely:

In a presentation to Congress, acting [Congressional Budget Office] director Robert Sunshine amplified this point: “Significantly reducing the level of growth of health care spending would require substantial changes in the incentives faced by doctors and hospitals to control costs,” he said. Translation: to really reduce medical spending, doctors and hospitals might face cost controls that could lower their incomes. The American Medical Association successfully fought this possibility every time health reform rose on the national agenda, and it’s a good bet they will fight again, while angling for a prominent place at Obama’s table. [Emphasis added]

While not at all blameless, insurers get perhaps an inordinate amount of flack for our current health care woes. It’s time we put a little heat on health care providers.

Hat tip to Claire at Terms & Conditions for linking to this list of the most ridiculous insurance claims of 2008. Attorney Randy Maniloff, of the law firm White and Williams LLP, compiled a list entitled “Special Report: Coverage For Dummies.”

Maniloff explains: “Reading a lot of insurance coverage cases makes you realize that some people do really dumb stuff . Their not-to-be believed behavior causes injury, a lawsuit is filed and then comes the inevitable insurance claim. The results are mixed, but more often than not courts do not allow these tomfools to pass the buck.”

The number one Tomfool? A motivational speaker from South Carolina. The verdict?

General liability coverage not available to a motivational speaker for injuries sustained by a program participant when, at the repeated urgings of the speaker, the participant attempted to break a board with her hands. Ouch.

Here’s one of my faves:

No coverage owed under a general liability policy for an insured who injured an old friend by saying hello to him using his “signature greeting” —placing him in a headlock and squeezing while simultaneously asking how he was doing.

Huh. Guess the headlock hello hasn’t caught on yet.

If you’ve got a taste for legal writing, check out Maniloff’s review of the most significant industry-related court cases of the year. Good stuff.

Pay as you go insurance–coverage that reflects driving habits and usage, much like how a cell phone plan works–is starting gain popularity on this side of the pond (it has been around in the UK for a while). Progressive now has a pay as you drive plan, called MyRate, that has drivers installing a gizmo on their car that tracks their mileage and driving behavior. Information is collected every six months and used to recalculate the driver’s premium.

Environmentalists love the idea (because it will likely spur a reduction in miles driven). California’s insurance commissioner is on record supporting the trend. And insurers like pay as you go because it means they can more accurately assess a driver’s claims risk.

It remains to be seen whether regular consumers will be willing to part with quite a bit of privacy in order to enjoy a lower premium. (With gas prices so high, my hunch is that they’ll take the savings.) Although, according to a survey on this site, the reaction seems pretty mixed.

But what about you, Joe Agent? What do you think of this trend? Will lower premiums necessarily result in smaller commissions? Leave any impressions in the comments below.

This post on driver distraction, from the Insurance Information Institute’s blog, made me think of all of the multi-tasking agents out there, who doubtless talk while driving and maybe–yikes!–compose text messages behind the wheel.

Nationwide finished their second annual report on driver distraction, and the results are sobering. “Almost all Americans believe they are safe drivers, yet almost three-quarters guilty of distracted driving,” says Nationwide. Distracted driving includes (but is not limitied to) talking on a cell phone, writing text messages, fiddling with the stereo, and eating. The National Highway Traffic Safety Administration (NHTSA) says that driver distraction is the culprit behind nearly 80 percent of all traffic accidents.

Worse still, 90 percent of respondents to the Nationwide survey say that DWD (driving while distracted) will become a bigger problem with advancing technology (as in gadgetry).

And if you don’t think talking on a cell phone is a hazard, consider this study from the University of Utah, which found that talking impaired driving ability as much as drinking alcohol.

[Related: Dial 'D' For Driver Distraction]

P.S. The University of Utah study also concluded that hands-free devices do not reduce the danger associated with talking on the phone.

Photo from Flickr

Progressive formed a case study for a Harvard Business Review article about being a successful (read: profitable) services company.

Frog Design called attention to two of their, um, progressive (lower-case p) strategies, which seem altruistic on first glance. In fact, they are shrewd policies that end up saving the company money while generating great PR.

1. Speedy on-site claims processing.

Progressive is known for quickly dispatching its white vans to accident locations.

How it makes Progressive look good: Swift attention gives Progressive the ability to legitimately boast that it makes high priority of its policyholders’ safety and convenience.

How it saves them money: Cuts down on fraud. Ethically challenged policyholders are less likely to come up with a whopper if they know a claims adjuster is en route.

2. Ticker-tape display of rivals’ quotes.

On its home page, Progressive shows competitors’ rates, which are not always lower than theirs.

How it makes Progressive look good: Not only does it make them look confident that they offer the best value, it makes them look transparent and noble when they don’t have the lowest rate.

How it saves them money: They are so confident in their underwriting formula that if another competitor offers a lower price, they can rest assured that they (the other company) screwed up and will be saddled with a policyholder who is a liability.

So is Progressive brilliant or what?

The subject of today’s post comes from the pages of the Harvard Business Review, by way of Frog Design (and a tip of the hat to my former colleague Megan for pointing me to Frog Design, whose site I have since added to my RSS reader).

“U.S. auto insurance is generally an all-you-can-eat affair.” That’s according to rogue economists Steven Levitt and Stephen Dubner, authors of the popular book and blog “Freakonomics.”

In a recent article in New York Times Magazine, Dubner and Levitt make a compelling case for pay-as-you-go insurance pricing.

According to Levitt and Dubner, our current driving system (if you can call it that) has over $300 billion in unpaid costs (well, actually, they’re not unpaid. They’re simply not being paid by the people who are running up the tab). Here are the price tags associated with our current system:

~ Carbon emissions: $20 billion a year
~ Wasted fuel and lost productivity due to congestion: $78 billion a year
~ Auto crashes: $220 billion a year

Dubner and Levitt believe that the “externalities” (fancy word for negative results) linked with driving — CO2 emissions, crashes and congestion — could be curtailed with insurance coverage that rewards people who drive less and punishes (that’s a harsh word–penalizes) people who drive more.

To a certain extent, we already have pay-as-you-go pricing, but it’s predicated on people self-reporting their annual mileage, “which has an obvious shortcoming,” say Levitt and Dubner. (In general, economists don’t trust anyone to do the right thing unless it’s in their economic interest to do so; maybe that’s why they call it the ‘dismal science.’) In the case of self-reporting of mileage, it’s pretty clear that the financial incentive is to under-report–and let’s call that practice by it’s true name: insurance fraud!

As things stand now, a person who drives only to the corner store on weekends pays about as much (give or take) in insurance premiums as the guy who burns up the highway every day. What’s unfair is that the latter driver contributes far more in terms of the evil Cs — carbon, congestion and crashes. Mad Max doesn’t care, though. Currently he doesn’t have to pay for his extravagant driving habits; he gives the tab (in the form of pollution and hospital bills and unlivable cities) to all of us.

Pay-as-you-go would give the tab back to Mad Max.