Insurance is Complicated

Insurers are set up to pay three kinds of expenses:

1. overhead and commissions (under their control);

2. predictable claims (whose risk insurers ‘understand’); and,

3. crazily aggregating black mamba catastrophe claims (bolts from the blue).

Let’s play CEO: which one of these keeps me up at night?

Well, #3 looks pretty scary: that’s where the jacked-up Hollywood-style company killers lie in wait. It’s not just hurricanes, earthquakes and asteroids, either. Corporate scandals (think Enron and all the resulting litigation) and ‘latent’ exposures (Asbestos). Lots of drama, lots of victims and look! There’s Anderson Cooper, brows a-knitted, standing knee-deep in a floodplain shouting at a TV camera.

Meh.

Believe it or not, just knowing that some hairy stuff can happen keeps things in check: lots of capital, expensive insurance for Florida homeowners and constant testing of the market through the reinsurance process.

The softer blood-suckers (Asbestos and Corporate Scandal) resolve through the courts, which drag things out for EVER. This means an insurer, now anticipating lots of claims, can crank up the prices and effectively earn its way out of trouble.

Ok, how about #2? Tread carefully, there’s some action here, but the problem isn’t the cost, it’s the revenue and pricing. An organization needs to willfully brush aside good sense and undercharge for this to be a problem. And as stupid as that sounds, it happens because of…

#1: here’s the killer. No sucker is going to pay a premium for a fancy Louis Vuitton logo on the top of his/her policy, so insurers differentiate on price.

There are two ways of going about this: first, by identifying a poorly served subgroup. This is everyone’s favourite because the ‘winners’ feel smart for identifying a niche and the ‘losers’ feel smart for avoiding a trap. Realistically, this is hardly a scalable and sustainable business model.

The real answer is to pull costs from your process. Think like a manufacturer. Make. It. Cheaper. Then you know you’re in a better financial position at any market price. And the market does weird things.

For instance, imagine you’re a typical underwriter CEO when he finds he’s too expensive.

You’re losing money, but out of ideas. Cut your prices, fiddle the reserves a bit to buy time and hope the market turns!

I imagine these poor suckers like submarine captains who just realize they’ve been spotted on sonar and quickly rig for silent running.

Hundreds of feet beneath the sea, quiet as a mouse, on the brink of death and waiting, desperate for a happy ending…