Darren McGraw & Mechelsen Private Client

The challenges faced in the hard insurance market will not only be overcome, but they will also pave the way for intentionality and invention. This period of disorder will lead to a new and improved order, surpassing the old way of doing things. As advisors and brokers, we have the opportunity to guide consumers through this transformative phase, and I foresee the following changes on the horizon.

While many brokers may still focus on amassing a large customer base, the key to success will be developing a unique skill, connection, or positioning that aligns with customers. It’s not about quantity, but quality. I believe that the most successful brokers will forge their own path, prioritizing customer alignment over customer aggregation.

The burden on the consumer will grow as gaps widen between insurance company investments in customer-centric and product-centric initiatives. Less transparency on a particular product’s availability and inner workings will bring brokers back to the fold as trusted advisors. With insurance companies retreating from historically “on your side” commitments, the future won’t be one to go it alone.   

Brokers aren’t likely to significantly influence insurance companies, but we’re not sitting idly by waiting for them either. They’re in the manufacturing business; we’re in the advising and service business. I’m convinced those of us who’ll be around in the future will make that distinction more obvious to consumers than we’ve done in the past.

If insurance were easy to understand and transparent (in other words, information was symmetric), then the right policies would go to the people who valued them the most. Differences between insurance companies A and B would be known, meaning the demand (and thus the price) would be efficient. The more valuable policies would sell at a higher price to those who wanted it, and the less valuable policies would sell at a lower price to those who wanted it.

However, several years ago, insurance companies started advertising themselves with funny bits and platitudes that obfuscated the truth about what their policies contained. And they convinced consumers that ease of doing business and discounts were the important consideration when trying to choose. What completely vanished from the insurance zeitgeist was any address of aligning policy content, consumer centricity, and explainability with consumer needs. And take a guess at which end of the quality spectrum those advertising-heavy companies came from.

So now consumer demand, informed that it’s all about price, supports an asymmetric information strategy. If I know my quality is poorer than that of my competitors, I will invest in so much advertising that I change your thinking of what matters, so you don’t spend too much time thinking about it. I have the incentive to over-inform you with just one important element (price and convenience) so I don’t have to tell you about the other elements (coverages, claim service), and now the market is no longer efficient.

Price is important—absolutely. But it’s not as important as buying something that does what you want it to when you need it to. Be your own advocate and express what you expect your insurance to do and how it does it. Only then go shopping.

I will double down on this blog’s position taken for many years: insurance is not a solution for solving your risk management exposures. Having that expectation will lead to the same dissatisfaction you may be feeling in response to your recent premium increases, your policy cancelations, the withdrawal of your insurance companies, and the shrinking quality of what you’re spending more not to get.

True, insurance companies are struggling to run their businesses profitably (Current Topics—Darren McGraw & Mechelsen Private Client). But figuring that out is their job. Your job is to decide who you listen to and what you do now that the light’s been shed on the systemic brokenness of the industry. Do you believe that 15 minutes can save you 15%? Do you believe your water damage should be covered because “that’s why I buy insurance”? Do you believe you have “the best coverage for the best price”? I’m sorry, but I think your disappointment will get worse before it gets better if you do.

Instead, realize that insurance is nothing but a purse that helps you recover from a limited scope of losses to a limited list of things you own for a limited amount. It’s passive, just waiting for the bad day to happen before it [might] perform for you. It offers no active advocacy to protect you or your family from the bad day happening. That doesn’t make it wrong; it just makes it a flimsy thing on which to pin all of your hopes.

Instead, buy your insurance with a matching investment in loss avoidance. The best competition to insurance is never needing insurance. Insurance companies have made their move by shrinking the supply of access and quality, so meet their effort with a reduction in your demand. Until we move to a lower equilibrium where we expect less from an industry that gives us less, consumers have little power.

As the insurance economy becomes less relational in favor of technology-supported responsiveness and data-based granularity, it changes who will run the industry.  Already in decline are agents that sell local families 3 or 4 annualized policies for perpetual commissions, underwriters who make experience-based decisions on eligibility, and claims adjusters who review repair estimates.

In their place will come people applying an insurance context to 3 core competencies: inquisitive use of data, adaptive creativity in communication, and inventive solution finding.  With insurance products changing, service offerings automating, and AI performing rote activities and decision-making, tomorrow’s insurance talent will need fewer insurance skills than ever.

Future standouts in insurance will be better at demonstrating nuance than policy-language proficiency.  They will have hard skills in technology application and soft skills in asking superlative questions of customers and data.  They will use fewer bullet points and spreadsheets and more infographics and chatbots.  They will be valued less for their task accomplishment and more for their impact.

Insurance has a self-centeredness problem in how we talk, who we promote, and the tasks we perform.  Those come from things we invented, not from what’s been in demand.  However, that fever is about to break, and the new insurance paradigm will attend to what it means to address someone’s worries. To do that will bring opportunities to creative thinkers, technology wizards, and challengers of the status quo.

Risk and insurance developments will change how consumers find counsel and policy services. Insurance companies are reducing commission payouts, incentivizing decreased quality and quantity of experienced agents and brokers. Insurance companies will develop policies with eligibility and premiums based on your behaviors, making more of your insurance costs related to you and less to the consumer category you’ve been put into, but not necessarily making the rationale more transparent. The supply of insurance is shrinking (often replaced by E&S solutions), increasing the costs and complexities of insuring risk exposures.

These will lead to consumers finding their future insurance experiences bifurcated between learning what they should do and getting it done. To help address the question of what to do, some current insurance brokers will turn their knowledge and experience into consulting practices, assisting consumers in designing their insurance needs, preventing losses, and advocating when claims and problems arise. Wealth management firms that already have a fiduciary service model in place will develop in-house risk management services. Consumers expecting concierge advice will seek one of these intimate relationships.

Commissioned agents will continue to dominate how consumers buy, service, and manage the intricacies and moving pieces of their insurance portfolio. Agents and brokers will replace advising with attentiveness, perfecting proprietary relationship-communication tools and predictive CRMs to translate insurance company data into actionable behaviors that improve the quality of the consumer experience. Chatbots, online portals, app notifications, and instant processing will improve the speed and quality of insurance service to align with modern expectations. Consumers expecting concierge service will seek a progressive and technology-focused broker.

We can’t wait. 

We are neither inventors nor visionaries of what insurance and risk management will look like, but we are avid students who seek out and listen closely to what those who make markets and steer ships say, do, and suggest about the future. With discernment and a healthy collection of data as a background, here is what we predict you can look forward to.

• Granular data about you will be more involved in determining what insurance is available to you and at what price. Your daily habits and behaviors (and, in some cases, in real-time) relative to your risk hygiene will govern your insurance profile. This isn’t much of a prediction as this is already here, but it will be the norm, not the exception.
• Insurance coverages will be unbundled such that the coverage you’ll get for fire risks might be separate from the coverage you’ll get for theft risks, which might be separate from what you’ll get for water risks.
• Subscription services that combine proactive mitigation services with loss recovery help will come from data companies who’ll fight for profit based on the losses you don’t have.
• Reduced mass-market insurance options and increased specialty insurance options.
• A smaller number of people selling you insurance, a greater number of people connecting you to a broader ecology of services that aim to reduce your demand for ever needing to use insurance.

Many questions remain about how deploying new methods reaches a critical mass for fundamental change. In addition, fairness, transparency, and trustworthiness have not yet been measured sufficiently to shepherd a path toward all of this change being deemed “good”. But these questions are already in the minds of important people, and I have confidence that the effort to answer them will lead to a new and better way than how all sides would describe the current state of insurance in the U.S.

I am passionate about, and excited for these things coming to the world of risk and uncertainty management:

• Widely available alternatives to traditional insurance underwriting, pricing, and products.
• Equalized access to loss-prevention data so consumers can be guided toward desired outcomes.
• Consumer-centricity. Even an attempt at it.
• AI that synthesizes data with less bias than decisions made by what people “feel is true”.
• A commitment to being a social good.
• Replacement of the Morse-code like communications experience with insurance companies and their systems.
• An end to blaming losses for failure when it is the precise nature of the business you’re in.
• Predict & prevent > respond & recover.
• Some optimism. About anything.

Revolutions start when order turns to disorder. Eventually, reorder becomes a preferred replacement to the old ways of doing things. Traditional insurance and risk ecologies are demonstrating systemic weaknesses highlighting how quickly legacy belief systems can become uncompetitive. The technology industry is especially poised to introduce themselves as replacements to those who reverse-engineer response plans based on irrelevant history. I don’t know if they’ll wind up doing better, but it’s time to give them a try.

At what point does insurance become less efficient than other financing alternatives? Insurance has some inherent advantages in the leveraging of premiums into loss settlements. Still, it does not offer any significant return on loss prevention investments and is suffering from increasing opportunity costs as the quality of the industry’s ability to administer its own product has been declining.

It begs the following questions:

• When might a different risk management solution be better than buying an insurance policy?
• At what point does investing in loss prevention mean you could reduce insurance for an exposure based on how current policies are written and priced?
• How can self-insuring for some loss exposures lead to a decrease in insurance premiums and avoid paying the insurance company administration expense?
• What alternative recovery plan would suggest that you could avoid the cost of the insurance claim experience?

Insurance is not inherently bad; it’s just struggling right now to do better at being what it has the potential to be. If your insurance company is absent while it waits for you to have a bad day, or if your insurance company responds to you in ways that don’t meet your expectations, then perhaps everyone would benefit from taking a step back to look at alternatives.

The competition to insurance is not different insurance; it’s not needing it. With insurance companies actively closing/restricting new policies, non-renewing customers, reducing coverages, increasing premiums, leaving some States, and eliminating programs, they’re trying to tell you they want you to want them less, too! We can all pitch in to help achieve this goal.

Transparency. That’s what insurance is missing. Do you know exactly why your premium went up? I don’t, and I’m in the business. I know about general rate increases, and I know about the increase to my dwelling coverage every year as a function of inflation, but I have zero way of knowing or accounting for exactly why my premium went up the way that it did. And I can’t know for any of my clients, either. I find that irritating.

Somewhere there’s a computer that knows. It took the inputs it was supposed to, it performed the function it was programmed to, and it spit out a premium as a result. So where is that report about me and why can’t I see it?

My beef isn’t that I don’t think insurance premiums should go up, because I think that they should. I’ve seen the data and I get it. But I don’t buy the “trust me, we know what we’re doing” argument, and I don’t buy the “it’s proprietary” argument, and I don’t buy the “it’s too complicated” argument as to why/how those rates are calculated for my family.

I want to participate in the relationship I have with companies that provide me my important financial instruments. I expect it of my banking, of my investment advice, of my tax preparation, of my mortgage, and of my insurance/resilience financing. My interest is not to stand in judgement, it’s to understand the specific components of what I get in exchange for what I pay and then use that knowledge to contribute to mutual betterment. Can I behave differently to reduce my exposure and thus reduce the pressure on the insurance company, thereby contributing to lower premiums for me and the collective? Can I take an action today that will re-categorize me in a better light for rating or coverage eligibility? Which side of the relationship wouldn’t benefit from a shared understanding?

I see the current injustice as an imbalance of knowledge. Those who have it control it and don’t share it, when sharing it might give those on the consuming end of the relationship some opportunity to affect outcomes. Insurance companies that dole out passive advice about how to reduce losses are not as noble as those who might share more of the full story and give people like us something to do about it. Democratizing knowledge inspires behavior. Hoarding it does not.

One of my fundamental frustrations with the insurance industry is that insurance companies make products they want to sell, but they don’t often make products people want to buy. On its worst days insurance is sold with jingles and “comedy”. On its best days insurance is sold listing out features of coverage written in the policies, on promising an ease of doing business, and on triggering your reaction to price sensitivities. Either way, it’s still about them coming at you with things they like about themselves. That doesn’t feel much different to me than those inflatable dancing men placed in front of mattress stores and car dealerships.

But what do you want to buy? Do you want to buy bundling? Do you want to buy discounts? Do you want to buy a “name your price” tool? Do you want to buy 15 minutes and 15%? Good grief. What if instead you shopped for things you’d actually want?

• Would you buy their claims service handling?
• Would you buy their reasonableness in reaching an agreed cost of repair with a contractor or body shop?
• Would you buy their access to help on billing questions?
• Would you buy their claim settlement options?
• Would you buy their objective to stop paying for your loss at $X?
• Would you buy their transparency on how they arrived at your premium rate?
• Would you buy their forthrightness on policy coverage education?
• Would you buy their investment in helping you prevent a loss?
• Would you buy their loyalty in times of difficulty?
• Would you buy their priority ranking of the policyholder?