Accident Forgiveness – Meh

Insurance companies love selling “accident forgiveness” on their auto policies.  Ever wonder why they’d do that?  Consider this:

An insurance company has 10 clients.  Statistically let’s say they know that 2 of them will have an accident in the next 5 years costing $5,000 each.  So over the next 5 years they’ll spend $10,000 paying claims, but let’s say they only collected $8,000 of premium for that same period.  Consequently, they need to raise rates enough to make up the additional $2,000.

Here are the options the insurance company has in order to remain profitable:

A). Without accident forgiveness, it makes sense that the 2 who got in an accident will see their premiums go up by $200 for the next 5 years to collect their $2,000 back.  If either of those 2 clients leave before 5 years are up, however, the insurance company doesn’t have a chance to make up the cost of the claims.

B). Or, they sell each of the 10 clients “accident forgiveness” for $40 for 5 years.  The same 2 get in accidents and their rates don’t go up, but the insurance company collects $2,000 from the “accident forgiveness” premium.  The 2 who caused the accidents are happy because their rates didn’t go up, the insurance company’s happy because they pre-funded the claim cost and don’t have to raise premiums, and the 8 who didn’t get in an accident think they are happy because their accident might be next and who wants to give up their accident forgiveness benefit?

So it sounds like everyone’s happy, right?  And maybe everyone should be.  But I have a concern that the “accident forgiveness” is a profit center that puts more money into profit than to cover losses.  And maybe that’d be okay, but I also think it provides another avenue for arbitrage and manipulation without traditional correlation and relevance in rate and market selection.  I do not know one way or the other.  But what I do know is that at least one insurance company pays their agents MORE as a percentage to sell policies that come with “accident forgiveness” (and many other add-ons).  And when it starts to seems so important to try and convince me and my clients why they should buy stuff like this, it not longer feels like we’re dealing with a true consumer-driven benefit.

From agent to advocate

Related to the last post, I’ve taken stock into how our jobs as risk advisors have changed.  It used to be that we’d recommend a risk-financing strategy, find an underwriter best capable of backing it, and then sell the consumer on why the plan makes sense and why that underwriter is the best for them.

These days, we still recommend a strategy, but we spend more time selling the underwriter on why they should take-on the consumer than the other way around.  Maybe over time our job will continue to evolve from an expert with the eyes & ears of the underwriter to an expert who best understands and advocates for the client.  I’d prefer that.

And in defense of the importance of that position, just ask me how well I think the consumer is generally protected by relying on what they can get a) online by themselves, b) from an insurance-company employee, or c) from an insurance salesman.  The proof I’ll share will come from real losses, real claims, and real disappointments where somewhere along the line someone didn’t design the plan correctly and didn’t choose their underwriter wisely.

Photo: Amber McGraw, Silfra in Thingvallir National Park, Iceland

Diminishing abilities of insurance companies

Sometimes it makes sense for insurance companies to say “no thank you” to a potential customer.  Some factors relate directly to the expectation of losses where it’d no longer help the insurance company keep rates competitive for the rest of us.  Taking on as a customer someone who doesn’t care about safety and has 10 speeding tickets and prior accidents to prove it might be a good one to not insure, for example.

But I’ve got to say that it seems more and more that unless the black boxes and algorithms that drive insurance quoting and qualifying these days approve you automatically, your chance of getting an insurance company to provide you with what you need is diminishing.  Rapidly.  There used to be an old-time partnership between the agent and the insurance company where out-of-norm issues could be resolved with a discussion, a weighing of options, and sometimes a negotiation.  We wonder if those days are done.

And while this automation is awesome for many situations (thank goodness) every single day  we find families who need something that falls outside of what some programmers can design.  And every single day we find it harder and harder to have common sense discussions with common sense people with the authority to make decisions that lead to providing an important financial product to a family in need.