Combatting Unethical Price Discounts

I have clients coast to coast suffering losses to one or two insurance companies that have found a miraculous way to offer rates 25% less than the overall market. Let’s walk through some logical and business-responsible ways in which a 25% lower rate is even possible.

​The first place to look is at the historic loss ratios by applicable line of business for these carriers. Were their loss ratios materially better than the industry’s, and since their rates were decreased, did their loss ratios increase? Loss ratios should increase materially if rates decrease by 25%, all else being equal.

Historically, one of these carriers has run a pure net loss ratio worse than the industry over the last five years through 2024 (the most recent year available at this detail and date). This is materially worse than the industry in all but one major line of business. The loss ratios have averaged almost eleven percentage points worse than the industry average on an unweighted basis. Even at normal rates then, they are incompetent underwriters.

How can a 25% better rate be justified? It cannot be justified without cutting corners, and I encourage the NAIC and A.M. Best to investigate this.

What corners might be cut? For property, I’d start with TIVs. Are the TIVs correct? A very simple test is to look at the rate filings to determine the full TIVs in a given sample of zip codes. Divide that by the number and types of properties. Then compare that to third-party sources. It’s not a time-consuming test. Using homes for example, if the replacement cost is less than $200 per square foot, odds are extremely high that the homes are not being insured to value.

Next, look at the forms. Agencies can do this when an insured advises they’ve found coverage elsewhere. Ask to look at the new carrier’s form. But take it a step further and think through the claims practices. I encourage everyone to follow Merlin Law’s daily newsletter because they have published some insightful cases involving interesting ways to calculate replacement cost, including suits over the value of totaled vehicles. A carrier can charge less if their forms cover less. And some of these carriers are getting awfully sneaky about how they’re calculating replacement cost, including using a different form for adjusting claims versus the form used to determine coverage. It is a bait-and-switch scenario and should be prohibited.

But agents must be excessively careful in discussing these situations because states have insurance specific disparagement laws. These laws state that you cannot offer any opinions about the quality of insurance companies, especially insurance company financial situations, or how they handle claims. All that is allowed is pointing to facts. You can share the A.M. Best rating. You can pull a Yellow Book and point to the numbers, which will likely bore your clients to death.

Or you can collect articles about carriers being sued for bad claim practices. I see a lot of articles regarding a particular carrier’s claim practices, and it happens to be the same carrier offering really low rates. That’s probably a coincidence.

Agents can also ask their states’ DOI for a list of complaints by carrier and share those with clients. Or you can show claims survey data, even data you create yourself. The key is that you offer data only without any commentary. Don’t cross the line because these kinds of carriers get a little upset when their practices come to light.

This is a lot of work to address what perhaps the state’s DOI should be addressing. But with rates high, regulators will look the other way when a company decreases rates 25%, even if it is not justified. Regulators have more pressing issues.

If it is a direct writer offering significantly lower rates, I would not personally be worried about advising clients of the difference in the standard of care that applies to independent agents versus captives/direct. I wouldn’t be concerned because I would not be an order-taker agent. If you are an order-taker agent, you probably don’t want to make this point because you’re not really any better. But a professional agent can honestly, without really any material increase in risk, explain why independent agents have a greater duty to advise versus all the other categories where the insured must read and understand their policy.

I read an E&O case this morning where the insured had been told they had full replacement cost on their home. Their home burned to the ground in a wildfire. They learned the replacement cost estimator had severely underestimated the replacement cost and that they did not have the replacement cost endorsement they thought they had. The court ruled they were responsible for reading their policy every year and determining whether they had the right coverage. Insureds have no idea what endorsements are or are not available. That is a ridiculous standard, but it is the standard in that state. A professional insurance agent can point to that ridiculous standard and say, “I’m better. I’ll actually read your policies for you. After all, I’m the one with the license.”

It is unfortunate that the burden of doing what is right falls squarely on the shoulders of the professional agent and pretty much no one else. To that end, the professional agent deserves to be paid more. I am a big fan of charging fees because standard commissions are inadequate. Every state allows fees, but the regulations vary significantly. Get good legal advice before charging fees, but you are worth the extra money if you are a true professional agent.

And by charging fees, you help distinguish yourself from the arguably unethical insurance entities selling inadequate coverage, using bait-and-switch claims processes, and marginal forms. And you are doing your customers right by taking care of their most valuable assets.

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NOTE: The information provided herein 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 Insurance Education, 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.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.