A very professionally minded client of mine who was recently promoted to an executive position commented on how amazed he was to discover how sloppily the organization he is now leading was managed and yet still made so much money.
He nailed it. He answered his own question. The industry is sloppy because it can afford to be sloppy and the few firms that are led by more professional and operationally minded people are not yet powerful enough to move the market. For now, then, the profit margins are too high for anyone to really care. In other words, "I make plenty. Why should I make more?"
Brainwashing employees to believe in the mythical success of their company's corporate/industry initiatives, combined with laziness, are contributing factors to this problem too. My favorite such myth approaches the category of amazing urban myths in the belief that certain companies are going to spend themselves into bankruptcy through excessive advertising expenses and therefore, other carriers should wait them out. When asked how that scenario would be possible given that the "spendthrift" companies being discussed have expense ratios 30%-50% less than average even after spending all that extra money, the unanimous response I have received is, "but that does not count their advertising!"
If those companies' financials do not include their advertising expenses, they are probably not reporting any of their numbers correctly and are in violation of every state and SEC accounting rule imaginable. I cannot believe that is the case. Instead, the people who believe that mythical narrative are either ignorant or accusing these entities of fraud. The former is far, and I mean far, more likely but in my experience they have never actually analyzed the financials of the companies at hand. Instead, the Kool-Aid they are drinking tastes better and requires less thought. Perhaps that is why drinking alcohol is less prevalent today than when I entered the industry. The insurance industry Kool-Aid is so soothing that alcohol is no longer necessary.
Another myth is that nuclear court verdicts will sink the industry. More likely attorneys run amok will smell property claims opportunities (see Florida) and sink the industry that way. Carriers increased surplus in 2021 by $100 billion dollars. It takes a lot of nuclear verdicts to eat up one year's increase. For more perspective, the industry finished 2021 with $1 TRILLION in surplus (which it seems to have lost in 2022 due to investment strategies, not claims).
The industry is sloppy. Some carriers, probably most (but I have only interacted on this subject specifically with a few representative ones), cannot even manage to track their internal workflows correctly. They cannot run proper loss runs (at least from my analysis, their loss runs have major errors though they seem largely unaware of the inconsistencies). Somehow, they are willing to pay three entities to do one job -- underwrite. They pay underwriters to underwrite, they pay agents to upfront underwrite, and they pay IT firms to create predictive modeling software to underwrite. Does it make sense to pay three entities to do one job?
Carriers even pay two entities to complete applications. There is the agent and then there are the IT programs that automatically complete applications.
Then the carriers ignore the actuaries they employ. I have found that this fact is not allowed to be discussed in polite circles and it is not new. Thirty plus years ago I was with an RVP reading the actuaries' rate increase demands. He laughed and explained to me how he would cut the rate increase in half and the loss ratios would be fine. He was right. I had the same experience more recently with a CEO who just flat out ignored their actuaries' advice and the results were far better than if he had followed their advice. As many carrier executives have privately expressed to me, "we're not even sure why we employ them."
Predictive modeling should take their place too.
I am not even touching on the pure incompetence of some carrier IT systems, especially between merged carriers. Not to mention the carriers' pure incompetence relative to reinsurance (see the little noticed changes forced by the Iowa Derecho for proof).
At the carrier level, two crucial realities exist. The first is that the most successful carriers, as judged by their profits and growth rates, have much less waste as evidenced by their expense ratios and productivity metrics. I have developed a proprietary statistical analysis that is definitive on this point.
Second, many carriers, even large ones, are total wrecks and in attempting to camouflage their incompetence, they sell a narrative that the entire industry shares their personal woes. If they are losing money and not growing, all carriers must be losing money and not growing. One of my favorite examples of how this line is actually quite profitable for some carriers involves commercial auto. However, in nice company and in the company consisting of people drunk on corporate messaging, no one challenges, and everyone just believes.
Agencies are even sloppier than carriers. One sign I am really pleased to see is how agencies that are professionally run do not have the employee turnover problems that plague most other agencies. Their professional culture means they are less sloppy. In a cleaner shop where procedural consistency exists, more fairness exists, and this environment is extremely attractive to prospective staff. Hence, not only do they not have turnover, but some also have waiting lists of people who want to work with them. Solid leadership pays dividends.
A key reason agencies are so sloppy is that carriers pay the same amount of premium to professional agencies that they do to sloppy agencies. That shows pretty sloppy management at the carrier level.
If being sloppy is cheaper and the revenue is the same, it seems like a good business decision to remain sloppy. Many of the buyers/leaders entering the industry for the first time recognize this opportunity and are eagerly taking advantage of it. We will see if and when the carriers ever adjust. A few seem to be modifying their compensation plans to reward quality and I am really hoping the trend continues.
An additional incentive that benefits sloppy agencies is the E&O standard of care. As long as an agent does not promise anything that exceeds an order taker's standard of care, they can get away with almost anything (in most states). A fantastic example of this truth was a case in Federal Court. The insured's home was barely above sea level and not far from the water. The homeowners asked if they should buy flood coverage. The agent advised he did not think they should buy it. Of course they had a claim and brought an E&O suit against the agent. The judge concluded it was so obvious that the agent was incompetent and sloppy that he had no standard of care and the insureds lost the case.
Someone mentioned to me when I was encouraging them to take steps to increase their profits that they did not need more success. Their agency was sloppily run every which way but the owner was making plenty of money. Until the forces of change really screw down pressure on sloppy agencies, nothing will change for those with adequate success.
For those carriers and distributer executives who see the opportunity that tighter, better operated, more professional organizations have in front of them, outsized success is for the taking. The price is straightforward: Leadership. Leadership that is willing to create enough urgency to cause buy-in and cultural change. Do you have this level of leadership?
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