Why quotes may change
By Paul Martin, CPCU
A friend called wanting advice about an insurance quote he delivered for a duplex. The insurance company had contradicted his quote a few days later because one underwriter was overruled by another who was higher in the chain of command. As a result, the client’s premium changed dramatically, and the increase left my friend in a terrible spot.
In this case, each side of the duplex was valued at over a million dollars and it raised some interesting coverage questions. Do you insure the duplex on a Homeowners form for the dwelling, then insure the tenant’s side on a Tenant form? Or do you insure one side with a Homeowners and the other side with a Dwelling form? Either way is doable and allowed by the ISO manual, but which is best?
My friend’s predicament got me thinking about how agents are often pressed to explain how insurance premiums are created and how, sometimes, the “insurance logic” conflicts with the customer’s assumptions about what they’re paying for. Here are some other situations when the customer may not understand how the premium is developed.
The quirks of insurance ratings. My spouse and I were out running errands. I noticed that the strip shopping center we were in had an interesting variety of occupants: a burger joint and a pizza shop among other stores. I commented to her that all the stores in the strip shopping center had something in common. They shared the building fire rate for their insurance with the pizza shop with the brick oven. She said, “That’s not fair.”
But it is. Businesses that share a building with other businesses are exposed to the same hazards as their neighbors. If the restaurant with the flaming oven is next to the card shop, the card shop is sharing the fire exposure. Customers would likely never think of that.
[A]gents are often pressed to explain how insurance premiums are created and how, sometimes,
the “insurance logic” conflicts with the customer’s assumptions about what they’re paying for.
In the same way, customers who buy workers compensation insurance may be baffled that all their payroll is subject to the same rate as the most dangerous operations on site. These situations have been well studied by the National Council on Compensation Insurance for decades and, trust me, they’re right.
Consider a typical national brand tire shop where people get tires replaced every few years. There are the employees who work back in the bays, swapping and repairing tires, and there are those service folks who work out front, where there is that funny smell of new tires.
The service folks speak to customers and discuss warranties and payment plans and take credit cards. However, their payroll is lumped together with the technicians in the work bays as if they were changing tires themselves. Because there is no physical separation, service employees “could” go back there and expose themselves to the same hazards as the bay employees. Because of this, there is no difference in rate.
Too risky for the algorithm. Another friend asked me about an insurance quote that made him think he was being cheated by the insurance company. I explained that what happened to him was likely not the result of a person making a decision but, instead, an algorithm that quoted his insurance.
In today’s personal lines insurance, a computer (not a person) is deciding what premiums people should pay. I told my friend that based on what he had requested and other factors, the computer was likely interpreting that he was a poorer risk than other customers. I explained that because he had asked for the minimum coverage, in his situation, he gave all the signals of someone who was a higher risk than someone else.
While algorithms are different, many see this as a warning: Those wanting minimum protection can be interpreted as “taking their chances” to save some premium, while those who want to protect themselves with insurance at higher levels are seen to be more “risk averse.” The computer makes their bet on those who are more risk averse, thus a lower premium.
Audits and how they work. Customers may also get confused with audits.An agent must properly explain which commercial polices are auditable and which are not. The best agents don’t let their customers be surprised.
For example, if the economy is expanding and businesses are doing well, has the agent warned customers that additional premiums may be due at the policy’s end? Have they explained how the premium basis can change based upon their success?
Another opportunity to educate customers can happen during the quoting process. Consider when another agent “low balls” the premium basis to get a better premium. Until you determine the customer’s operational performance, the eventual premium may be very different.
Endorsement premium differences. Another premium difference customers will likely never understand on their own involves endorsements, like the additional insured endorsements on a CGL policy. Asking an insurance company to add a simple vendor endorsement is one thing; adding a general contractor to a big job is another.
Agents must have a perspective about what they are asking the insurance company to take on as an additional risk and what that can mean in the long run, including the risk of litigation and long-term liability. If the agent doesn’t understand these differences in risks, then they should educate themselves and their staff about it.
In closing, insurance professionals are constantly challenged to educate those we work with. Insurance is a noble calling that requires us to pour what we know into customers every day to help them understand. We’re not trying to get in their pocket, we’re just trying to make it all work. For them.
Paul Martin, CPCU, is director of academic content at The National Alliance for Insurance Education & Research headquartered in Austin, Texas. Paul works to develop, maintain, and deliver quality educational programs for the organization. Paul has over three decades in the insurance and risk management industry.