Economics shows us that lack of competition results in too-high prices and shoddy product. The market forces that correct for those are missing.
Would you be surprised if I told you that the insurance industry exemplifies that principle?
In his memoir “Am I Being Too Subtle?” Sam Zell, a billionaire investor and chairman of Equity International, writes, “I’m always on the lookout for anomalies or disruptions in an industry, in a market or in a particular company…. Any event or pattern out of the ordinary is like a beacon telling me some new interesting opportunity may be emerging.”
The insurance industry is an anomaly. How so? It plots to eliminate competition and limit the flow of information in order to maximize income, all at customers’ expense. This, even though there are thousands of insurance companies and hundreds of thousands of insurance brokers and agents in the United States alone.
Consider the following scenarios. Can you see that control is taken away from you, the customer? (In each case below, “you” refers to an insured company.)
Scenario 1: A broker signs you up for an insurance program based on a five-page proposal, a smile and a handshake. Then, a month or so later, dozens of pages of fine print show up.
Analysis: In what other circumstance do customers sign contracts without seeing them? The full policy language is not presented as part of the proposal. And don’t count on the broker to know, or be able to negotiate, the terms. A broker proposal typically contains language like “Your review of these documents and any review you may seek from legal counsel or insurance consultants is expected and essential.”
In a lawsuit filed by an insured against a broker, for which my firm, Licata Risk Advisors, served as an expert witness, the broker’s defense was that, “Like other insurance agents and brokers, the Defendants did not owe [the insured] a duty to ensure that it understood the full import or meaning of the terms of the coverage provided.”
Scenario 2: You want a certain coverage and the broker says it’s not available in the market.
Analysis: That just means that your incumbent insurer’s underwriter won’t approve that coverage. The broker isn’t willing to do what’s needed to get the deal done, which is shopping the coverage to other insurers — exactly what brokers are supposed to do. It’s clear that this is the case, because on occasions when a second broker appears to bid on your business, you’ll find that suddenly the coverage you wanted becomes available after all.
Scenario 3: “Insurance company X says it can’t compete with the current pricing” is a common broker comment.
Analysis: Don’t blame the broker too much for this one. This is more the system at work. Insurers won’t quote a price to a client’s incumbent broker unless that broker reveals the account’s current pricing. So the broker in effect has no choice but to reveal it. But it’s still an anticompetitive practice.
If you reach out to a second broker that doesn’t know what the pricing is, the insurer will be forced to set pricing based on its needs. In that case, the difference between the current pricing and the new pricing can be hugely in your favor. That’s how competition works.
Scenario 4: You approach a broker other than the incumbent for a quote from a particular insurer, but the second broker says he or she is “blocked” from that insurer.
Analysis: When a broker says that, it means another broker has made a submission to the insurer in your name. That’s most likely the incumbent broker. In fact, the incumbent may have submitted your name to 10 insurers — often, without your approval or even your knowledge. This is a disguise. The incumbent appears to be shopping for a better deal on your behalf, while the actual motive is to freeze out competitors.
This behavior amounts to corporate identity fraud. Would you applaud your financial adviser at your bank for applying for credit in your name without your knowledge?
Scenario 5: Your broker delivers your renewal proposals at the last minute.
Analysis: How better to keep you from having time to react competitively? A theoretically negotiable deal becomes “take it or leave it.” You have to control for this by insisting on early quotes or arranging for extensions that you can exercise when quotes are unacceptable.
Scenario 6: In addition to the delivery of insurance products, your broker offers services like loss control and claims management. You may find that the services are shallow or even that they exist in name only.
Analysis: You’ll likely get better services from outside specialists, but that’s not the overriding factor here. The real problem is that tying services to insurance products makes it disruptive for you to leave your broker. The products and services should be unbundled so that there’s real competition for the big-ticket item: the insurance itself.
Are these things normal? Not if judged by:
- Standard business practices.
- Rules of ethics. (You might say this is a simple case of “buyer beware,” but as government investigations have indicated, it’s the misrepresentation that’s the problem. Such investigations have found that brokers do not always consider their clients’ best interests, instead acting primarily in their own interests and those of their favored insurance companies.)
- Strategic goals of insurance buyers.
The insurance industry is, without question, an anomaly and anticompetitive.
Frank Licata is president of Licata Risk Advisors, a Boston-area risk management consulting firm.