I teased this topic a bit in the intro to last week‘s post so wanted to expand on it here. One of the things that surprises me most when people talk about innovation in insurance is how often the elephant in the room is ignored.

The general trend in insurance over recent decades has been to make it more of a commodity. Price is the only thing that matters. The big “breakthrough” of recent years has been to add “fast and easy” to cheap. In other words, make it more of a commodity.

Carriers would prefer you didn’t think about your insurance. You should blindly buy whatever is the lowest price and most convenient and trust that it will protect you when needed. But does that make any sense? Have insurance companies really proven they deserve your trust?

Maybe if you’re buying term life, price is the only thing that matters. If you’re dead, you’re dead. It’s pretty cut and dry. You don’t have to worry about some small print denying your claim.

But would you buy healthcare from the cheapest doctor? Would you really choose Dr. Nick over Dr. House to save 15%?

Insurance Should Be Sold On Features

Similarly, when you are buying P&C insurance, the quality of what you’re buying matters. A lot! Two similarly priced contracts can have vastly different levels of coverage, as I showed in the example from last week.

If you want the short synopsis (though you’ll learn more at the link), I showed how, for <5% extra premium, you can buy back the coverage gaps that have sneaked into policies in recent years and offset most of the cost by raising your deductible $1500. This caps your downside which is what you’re supposed to be buying insurance for.

Isn’t this the elephant in the room? Shouldn’t companies be competing on the services they offer rather than only the price?

Would you pay the same for an old flip phone as a new iphone? Or do you understand it has fewer features and is less valuable?

If you investigate the benefits you get when you buy a phone or a mattress or exercise equipment, why wouldn’t you do the same when insuring your home or your business?

Actually, I can tell you why. Because it’s too hard. Actually, it’s intentionally too hard. And yes, that’s a feature, not a bug.

Insurers Like Ignorant Customers

What do I mean? Insurance agents (including the digital ones programmed by direct writers) have little incentive to make sure you buy the features you want. They don’t get paid more for that. If anything, they get paid less because it takes them more time to close a sale for the same commission.

When insurance companies market on price, they don’t do it because it’s good for you. They do it’s because it’s good for them. They realize most consumers don’t understand what they’re buying and aren’t willing to make the effort to learn.

Therefore, the fastest way to close a sale is to keep you in the dark about product features and distract you with price. Faster sales means more profit for the producer.

The commission isn’t a function of time to close the sale, after all. It’s a function of the premium.

That’s why they’ve added so many coverage restrictions in recent years. It lets them lower the sticker price more and they know the customer won’t ask what’s missing. It’s what I call insurance shrinkflation.

If the customer is unhappy down the road when they have a claim, well, that’s part of the cost of doing business. After all, most policyholders don’t have claims! Thus, most customers won’t find out what extra risk they took to get that lower price.

I guess that’s one way to run a business. But isn’t that like saying the 1 in 100 storm probably won’t happen in the next ten years, so why should your company buy reinsurance?

So if the company selling insurance to its customers recognizes they need to buy protection for unlikely events, why don’t they treat their customers the same way? Would you want to buy a Toyota from a dealer who drives a Mercedes?

But Is This Ethical?

There’s one giant issue though with this cynical approach to sales. Insurance companies have abdicated their most basic duties to the purchaser. See the following from a course for getting an insurance agent’s license.

How many of those would you say most agents actually do? I’ll give you #1. Any others? Any agent running your info through a rater is absolutely NOT doing #2-5.

How many would you say expressly do the opposite of that checklist? Especially #5? Do you know many agents who show you the lowest quote and then say “before you buy, I want you to know you are giving up coverage here, here, and here vs. that policy that costs 10% more”?

I’m sure you can find some at the high end, but if we’re talking auto or small business BOP, how many CSRs are being trained to do that? And how many of the new “technology based” solutions address the topic?

So let’s go back to the elephant in the room. Why have insurers ignored their responsibility to the customer and why is nobody trying to change this?

How does leading with price meet those five criteria above? If one wanted to meet those five criteria, how would they do it? I think you would start with using improvements in technology to understand the client’s needs better before starting the shopping process.

That would allow to meet your obligations as a producer, differentiate your service from price centric competitors, and reduce strife for those who end up having claims.

Who Is Insurance For?

In other words, insurers have a choice: do you want to run the company for the benefit of those who will never have a claim or for those who will?

If your answer is the former, please tell me how you can be certain which customers will never have a claim!

Insurers are supposed to be selling protection for when something bad happens. That is their value add. Becoming a price driven commodity is not value add. It cheapens the industry’s reputation and raises the risk of conflict when the insurance is actually needed by the customer.

Not to mention it’s deceptive if it’s not prominently disclosed what people are trading off in coverage to get that lower price.

We tend to stereotype car salespeople as being untrustworthy, but when you buy a car, you can compare all the different option packages available for a model and see what each one costs.

You can go online and see what the manufacturer’s costs are, how much they expect to make on the sale to you, and estimate what you will need to pay. You can see what inventory they have to know how easy or hard it will be to get the color you want. You can take a test drive to see how the new safety feature works.

An insurance purchase offers you none of these benefits. You can choose which price you want, but it would be like if you were presented two prices on the same model of car, but the dealer didn’t tell you one was new and the other is five years old with 80,000 miles on it.

Sure, it might be there in the terms if you choose to look at them, but should it have to be buyer beware? If the industry wants to improve its reputation and not be a commodity, then it needs to focus the sales process on helping people understand the terms more easily so that they know if that low price is truly a good deal or something they will later regret.