[Feb/2023 | Business] Inside the Insurance Industry
Inside the insurance industry note
Company Legal Structure: Stock Company vs. Mutual Company
Departments inside Insurance Company:
How marketing is done: independent agent / exclusive agent / direct writer (GEICO/USAA)
Insurance broker vs. agent (the fiduciary duty is a bit diff)
Bid Rigging for insurance broker (maximize commission)
Commission structure: auto makers pay dealership bonus by “deader holdback” usually. Link – https://www.reddit.com/r/askcarsales/comments/b5waqw/how_does_a_shopper_find_out_what_the_dealer/
Claim adjuster: pay as little as possible to close the claim
Clauses in insurance policy are “court-tested” (case law etc.)
Adjuster have duty to clients (Unfair Claims Settlement Practices Act Model language) – 弱爆的消费者保护法
Tricky example: voluntary damage insurance actually never provided coverage it’s designed for!
Each claim should stand on its own merits: i.e. when hail damage roof, new roof might not receive payment from claim while old roof might, because new roof not supposed to be damaged.
Insurance seems to have a lot of gray areas/flexibilities… – 水很深
Policy cancellation? Material change of risk
Homeowner insurance likely go up if claim filed.
Business vs. Personal insurance policy diff – business insurance evaluated on loss ratio, insurance company happy with 50% loss ratio. In personal side, insurance company look at frequency of claim. Underwriter thinks frequency breeds severity.
What if insurance claim denied – 1. Adjuster 2. Insurance agent (dual fiduciary duty, don’t want to lose insurance company more – cost maybe 100K, than lose insurance client – cost maybe 1K); 3. public adjuster, insurance consultant, attorney. 4. File complaint at commissioner of insurance.
Most of cases insurance adjuster handle it correctly.
Adjusters – some company use only inside adjuster, some company use external.
Author thinks the outside adjuster didn’t do a good job. Maybe due to lack of training/accountability.
Underwriter – risk is acceptable vs. unacceptable. Pricing authority.
In auto industry – preferred credit / tiered approach for pricing. Underwriters can make exceptions.
Policy Services – some quality consurance on insurance product.
Audit Department – whether commercial policy has changes.
Loss Control
Specific industry, i.e. reduce worker’s compensation injury
OSHA inspection for workplace
Legal department support claims department, determine which claims to fight & which external attorneys to use to fight the claims.
Actuary
Analyze rate increase/decrease
Massage the numbers to say what you want to say 🙂 For example: based on company’s PnL
A trade off between not bankrupt vs. not competitive pricing
Also some adverse selection if price hike too much – i.e. best customer may leave
Factor based rate hiking instead of increase 10% in all of the state
Once figure out a pricing, depends on what kind of law in use, might need to file with state department (with / without approval – depending on specific law) before using it
Subrogation
Works with claims department to chase down who owes money to the insurance company – “bad guys”
I.e. car accident someone crashed you at-fault, insurance pays you and work on chasing down the party “at-fault”.
Becoming more aggressive chasing down – especially worker damage caused by unrelated third party 🙂
Usually demand letter then entitled to lawsuit
Can outsource to collection agency – can play hardball
Internal Audit
内部监管+detect fraud
Some fraud types
1. Adjuster 成立皮包公司给他付claim
2. insurance agent: 客户给钱没帮客户买保险，保险premium进自己腰包
Product Dev
Be better than competitor
Marketing department 传入市场竞争信息给管理层
管理层决定之后下令让product dev 开发新产品
IT
MGMT
Lobbying
Example 1. California Prop-103, Insurance heavily regulated as “public good” – rollback pricing
Example 2: Terrorism Risk Insurance Act – 恐怖分子引发的事件可以最后美国政府兜底
Reinsurance
Insure the insurance company
Three ways of reinsurance
Treaty – entire book / with exclusion
Facultative – case by case, i.e. a specific building
Bordereau – against specific set of risks
i.e. acquire all auto-insurance from another company
Reinsurance might cause premium to rise for all insurance products
Pricing
There might be tiers for personal insurance policy
i.e. car/home – can have discount for insurance
But insurance company to maximize profit won’t want others to know
Business insurance: even more flexibility
Experience rating
A-rates give underwriter the ability to price any price
Loss costs
Property rate: from ISO inspection
Factors including: frame vs. masonry, fire protection (distance to nearest fire station)
Commercial auto-pricing
The price might be higher for you without your fault (to maximize profit)
External Parties
Public Adjuster – consumer advocates, paid by consumer, small amount of them available
Insurance consultant – third party that lets you know how good your insurance agent is
provide services such as exposure analysis & recommendations
Litigation
When insurance company rejects claims
Bad faith
Firth party bad faith vs. third party bad faith
very state-dependent
Hard to prove
Get the best deal
Need to have insurance knowledge
Very company dependent – for example: “property coverage” diff from company to company
How to vet insurance agent: Qs
1. Strongest/weakest area
2. What can you offer me that other agents cannot
3. who writes you “personal insurance coverage” – some best agent have others write them to have extra eyes
4. If do business, who handles my account, you or your customer service?
5. Ask referral – 10 past clients
6. What insurance company you represent? Their A.M. best ratings?
7. Claim reputation of the insurance company you respect? Slow payer / tough payer?
Ask the diff between their quote & other agents’ quote
Alternative: Use third-party insurance consultant (fee-only) to help decide which is best.