Forecast & Trends, 2018

We believe 2018 will see a continuation of the significant and industry-wide auto-insurance premium increases that began a little more than a year ago.  More expensive repair work to more intelligently-wired cars is one of the largest drivers of higher claim costs, as are recent large-scale weather events across the U.S. (Hurricane Harvey destroyed 1 million cars storm-wide).  There’s also been an unfortunate uptick in roadway fatalities after years of decline, some are saying due to more distracted driving while using phones and in-car technology.  And medical costs continue their climb.  But in our opinion, the industry’s failure to predict the rise in auto repair costs is the biggest cause for the ongoing search for rate increases to fix poor underwriting performance.  We think that will continue for a couple more years.

Home insurance premiums as a whole haven’t seen material increases over expected inflationary pressures, but wildfires and severe storms present a rising concern as underwriters try to determine if we’ve been hit with some recent bad luck, or if we’re in this pattern for awhile.  An immediate response to the rise of wildfires in populated areas is a diminishing interest in providing coverage in areas at risk for wildfire.  We’re already seeing some insurance companies making wholesale statements like “in area X, no more home insurance will be offered due to wildfire concerns”.  This may seem reasonable until that “area X” keeps expanding until it reaches where you live, or if insurance companies begin cancelling policies.

A few industry leaders are investing in new things, and we’ll likely see continued experimentation in pay-by-mile insurance, in shared insurance coverage with autonomous car manufacturers, in finding solutions for VRBO/Airbnb owners, drone insurance, and new ways to interface with prospective clients and active clients.  What is not likely is the industry going back to the days of training, developing, and supporting experts to provide counsel, advice, and service to customers.  We believe insurance companies will become more like faraway manufacturers and processors, and consumers will then search for outsourced 3rd parties for things like advice, special care, or advocacy.

Be Engaged

I always ask new clients how involved they were in the design of their old insurance portfolio, and 99% of the time they something like, “I wasn’t.  The agent just told me what I should have and I bought it because they seemed really nice”.

I believe a better way is to be engaged in the design of your own insurance.  There’s very little subjectivity in how your insurance will perform after a loss, so the outcome of your future insurance claim begins the moment you decide on what to purchase.

I also believe that no one cares as much about your insurance meeting your expectations as you do, so your first priority is to find counsel from someone who can draw-out a detailing of your standards, expectations, attitudes, and tolerances.

I find that one useful tool is answering among the set of mutually-exclusive questions below.  It doesn’t replace a full insurance audit or inventory, but my clients say it’s a great way to start a discussion about what really matters to them in protecting their financial plans for the future.

Choices

Insurance Premiums, Explained

How an insurance company determines your specific premium is a complex set of algorithms that only a few people at the insurance company even know the formula to.  Everything from credit, education, years since you last switched insurance companies, the highest liability limits you’ve selected in the recent past, whether you own a home, where you live (in addition to the cars you drive, and whether you’ve had tickets or claims) can all be factors.

But the general concept of how insurance premiums are calculated is pretty simple and it should give you some insight into how you can design your total risk-management plan to try and maximize your position when it comes to choosing among your insurance options.

Keep in mind that insurance is a contractual promise to finance your loss according to the policy contract you’ve designed and selected.  In exchange for that promise of future loss-funding, you and all your neighbors pay premiums in advance so there’s enough money in the hands of the insurance company to pay for individual losses, pay their administration costs, and pay their shareholders any profits.

It’s important to know that the biggest risk to an insurance company isn’t failing to predict the one rare huge loss, it’s failing to predict the frequency with which losses occur.  That’s why after you have a claim, your premiums go up – it isn’t to make their money back, it’s because the #1 predictor of a future loss is having a loss.  Nobody likes to hear that, but it’s math and a statistically-provable fact.

It also partly explains why there have been huge increases to auto premiums across the industry.  The rapid inclusion of in-car sensors, electronics, and driving aids has shot the cost of repairing even small bumper damage through the roof.  It’s not just that an individual car is now more expensive to repair, it’s the failure of the insurance companies to predict how quickly consumers adopted such features into their cars.  Now there are huge losses and deficiencies in premium across the board and insurance companies are trying to make-up for lost time.  We think that will continue.

On the other hand, losses with a very low probability of occurring, even if the consequence of such loss is high (like a very serious auto accident), is often manageable when the insurance company can calculate a longer-term likelihood of collecting enough premium before that kind of a loss occurs.  It’s why every additional million dollars of excess-liability insurance gets cheaper than the million that came before it.

So in the calculation of everyone’s insurance, there’s an innate bias against things that happen a lot.  Damage to your bumper, theft of jewelry, broken windows, and water damage to your home are common examples, and insuring against these losses is the most expensive insurance that you buy.  And while not enjoyable, none of those are probably going to be life-altering.

In contrast, if you were responsible for an auto accident that left someone seriously injured, or your dog bit a child, or you were responsible for a serious mistake made by your own child, having to pay to resolve that loss (and the probable lawsuit) could ruin your financial position.  And insuring against these losses is the least expensive insurance you buy relative to the benefit provided by the policy contract.

The benefit of knowing this is to create your expectations on how you want to allocate your insurance dollar.  In our opinion, the best use of your premium is to buy loss-funding for things you could never pay for yourself (lawsuits, serious injuries, etc), and the worst use of your premium is to buy loss-funding for things that happen a lot.  So we advocate setting a high priority on umbrella policies, life insurance, and disability insurance and using high deductibles to keep small and frequent claims away from the insurance company in exchange for lower premiums.

Premiums explained

 

Favorite Things & The Future

These are a few of my favorite things:

  • Talking to our clients – truly the absolute best part of what we do is relate with people who keep us employed and busy.  We love caring for those who care for us.
  • Learning – there’s always more to know and experience.
  • Sharing – giving away all that we know so it can fill-in gaps of understanding to help people make important decisions.
  • Getting out of the office and face-to-face with my clients.  Old school, but priceless to me.
  • My stand-up desk.  A total life changer.
  • Our company.  We’ve been here since the early 1950s, and John, Jim, and I have a combined experience of almost 100 years.  I care about them and their families and we’re lucky to be partners together.

We’ve always devoted ourselves to a reactive availability, consistency, and being aware of what matters to you.  And we’ve recommitted ourselves to proactively giving away more of our experience and the secrets of what we know.  As the rest of the industry pulls itself away from quality care and service, I believe we win if we do three things well:

  1. Share our learned intelligence to inspire your good decisions.
  2. Unburden your hassles of getting the right things done.
  3. Stand up against motives that aren’t in your best interests.

Thank you for all you do for us, Merry Christmas, and Happy New Year!

photo: Rachael McGraw – Snoqualmie Pass, WA

Set These 3 Expectations

It’s critically important to understand that insurance is not a transfer of risk.  You bear the consequence of a sudden loss, and all insurance does is pay for losses as spelled-out in the contract that you and an insurance company mutually agree to.  So insurance is risk financing and not a transfer of risk.  Nowhere is that more obvious than in situations where your policy either doesn’t cover a particular loss, or you run out of insurance because the value of the loss exceeds the limit of coverage.

So you can’t get rid of risk, but you can establish expectations of how your financing plan (insurance) performs, and we believe those expectations should hinge on 3 points:

  1. Scope: every insurance contract spells-out exactly what losses are covered and what losses are not going to be covered.  So the question for you is, how far do you want your insurance to go in what is covered?
  2. Scale: every insurance contract spells-out exactly how much of a loss is going to covered.  So the question for you is, how much of any particular loss do you want your insurance to pay for, and how much do you want to pay for yourself?
  3. Delivery: every insurance company delivers on their promises differently, based largely on corporate culture and managerial decisions.  So the decision for you is, how professionally do you want the promise of coverage delivered?

It’s my experience that most folks fail to concern themselves with these 3 points, and jump instead to “how much does it cost”?  Your bad insurance-claim experience starts on the day your buy your insurance, and buying a $1 hammer when you needed a $2 shovel is a good way to eventually have a bad claim experience.

I believe most bad claim experiences happen because consumers don’t know/believe that there are differences between insurance policies and insurance companies.  So either do your research, or ask a counselor like me to help you with some education and decision therapy.

Photo: Reykjadalur, Iceland

Owning rental homes – 3 questions

Many families own investment properties that they hold for rental to others. Unfortunately, we see frequent problems with how families insure those rental homes, and I think most stem from not slowing down the process to address major issues and instead jumping-in too quickly with an insurance-policy purchase.

We believe these three questions need to be addressed before determining how rental homes should be insured:

  1. Intent:  Are you holding on to one home that’s been in the family for years, or do you plan on owning 10 rental properties?  Do you anticipate rentals being a significant source of income?  Do you renovate and sell (flip) fixer-uppers?  Do you charge just enough rent to cover expenses so you can pass-down the home to the next generation?
  2. Ownership:  Do you want the rental(s) to be included among your personal liabilities and responsibilities?  If something unfortunate happens at/because of the rental-home investment, are you okay with the consequence possibly affecting your personal wealth?
  3. Use:  Do you have long-term tenants, or do you rent to short-term occupants (VRBO, Airbnb, etc)?

Answers to these questions draw-out determinants on how best to design the portfolio.  For example, should an attorney help transfer ownership into an LLC?  Do commercial insurance contracts improve the scope of coverage needed?  Do some underwriters have special programs (or conversely, will you lose your current insurance because your underwriter won’t accept the homes)?  Will the coverage on the rental homes affect the insurance held on other assets?

The mechanics of how to insure rental homes isn’t difficult, but we see too often families with the wrong plan because they’ve never stopped to define the plan in the first place.

Photo: Rachael McGraw – Manhattan Beach

Risk Economist

I’ve always had a passion for understanding why and how people make decisions, especially among mutually-exclusive decisions.  What’s more important to you, choice A or choice B?  And then, once chosen, do your behaviors support your choice?  It’s why I talk so much about the importance of being intentional and the boss of your own life.

The single factor I specialize in are the individual decisions that surround how you deal with what you see are risks to your personal wealth – what you worry about.  I’m involved in examining whether your worries either overstate or understate the actuarial basis of your true exposure to loss.  I’m involved in helping you create a vision of a less-worrisome state.  I’m involved in your pursuit of fulfillment as you move from scarcity to abundance.  And I’m involved in controlling, financing, and transferring your actual loss exposures so you can focus on better things.

I love the puzzle-solving and accountability of getting the right answers for what each family needs, and I love seeing the liberation of at least some of the worries that face busy people with often-complicated financial lives.  My best days at work are when a client tells me that they learned, they felt unburdened, and they have more confidence focusing less on worries and more on wants.

Fulfillment | Reason | Purpose

All of us want fulfillment in the areas of health, wealth, faith, and relationships.  Contentment in the bonds that we have with our friends and family, peace that we’re following a purpose, luxury that we’ve earned financial freedom and flexibility, and appreciation that we’re physically able to enjoy all those things is a heightened state toward which most of us spend a lot of time planning and executing.

And since I don’t know anyone who’s naturally born into such complete fortune, it’s why I’m passionate about constant betterment.  Today you’ve got to be better than yesterday if you’re going to get where you want to go.  And the more comprehensive that betterment is in all aspects of your life, the better chance that you’ll enjoy real fulfillment.

We focus our professional expertise on the protection of wealth as an important conductor of financial fulfillment.  If there’s confidence in the protection of wealth, there’s freedom to put capital to work, which leads to prosperous achievement, which yields the luxury of financial freedom and flexibility.  It’s the reason our doors are open for business.

But what gets me up in the morning is the call to be a steward of opportunities provided.  Wealth protection might be the reason we do what we do, but stewardship is our core-deep purpose.  With everything we do, we seek betterment in our application of wisdom, in our unburdening of worries and hassles, and in our ability to fight until it’s right – all so that it contributes to the fulfillment of our friends and clients.

Photo: Rachael McGraw  –  smokey summer, Flathead Lake, MT

When to talk about risk

“If you don’t know where you’re going, you’ll never get there.” – Yogi Berra

Don’t talk about risk, and especially don’t talk about insurance, when that’s the only thing on the agenda.  You wouldn’t shop for eggs without the recipe for cake, and you shouldn’t shop for insurance unless you know the recipe for your financial plan.  Because let’s all agree that insurance is just a way to finance things that would otherwise derail a financial plan and by itself serves no other purpose to the buyer.

So the best time to talk to me about risk is when you’re done with your financial plan.  What do you have?  What do you want?  Where are you going? How are you going to get there?  Finalizing the plan itself can be hard work, and achieving the plan is 10 times harder, requiring a lifetime of commitment and discipline.  But all that difficulty makes my job working for you that much easier, ironically, because as you feel the effort of building wealth you start to realize that you don’t ever want to go back and start all over again.  Protecting the financial plan starts to sound like a good idea real quick.

Building wealth and attaining life-fulfillment is hard, and sometimes the more of the former you get, the less of the latter you experience.  My father-in-law once said that at some point he started to feel “the tyranny of ownership” and the worries that increased in the process of adding to his life’s financial complexity.  But that worry makes my job of working for you that much easier, ironically, because as you feel the worry increase during your season of wealth accumulation you start to realize a desire to have someone help you unburden the weight of concern over threats to your family’s prosperity.  Someone watching your back starts to sound like a good idea real quick.

And I use the word “insurance” a lot because society colloquially associates it with protection, but insurance is just 1/4th of the risk-management strategies you should employ to your financial plan and we help with all 4.  We believe that protecting wealth can free capital to build prosperity so that your passions and your cares are met.  So if you’ve got a financial plan for where you’re going and are somewhere near the dashed-grey line below, we’d like to help.

Ideal Client

Photo:  Rachael McGraw, Flathead Lake, MT

Thank you

Every day we get to apply things we care about to the lives of people who are generous to us with their trust and attention.  That feels like a pretty good symbiotic relationship, if you ask us.

We are attracted to the puzzle-solving and creative process of designing and engineering plans that protect wealth.  We are attracted to the friendships formed when getting to know a family and their history.  We are attracted to the competitiveness behind elevating what consumers can expect and learn about this industry that otherwise does so poorly on so many fronts.  And we are attracted to unburdening the hassles so that our clients can focus on better things.

We are grateful for the times we are asked “what do you think”?  We are grateful for the times our clients tell their friends about us.  We are grateful for the times our clients say, “I never knew that, but now I understand”.  We are grateful for the times our clients say they appreciate not having to worry about another detail in their life.

We exist to care for the people who care for us, and we are so grateful to have so many opportunities.

Photo:  Flathead Lake, MT