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The Marketing and Selling of Insurance

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All too often consumers are led into purchasing policies that do not provide even remotely sufficient insurance to protect them from the effects of reasonably anticipated losses. It is crucial that you understand insurance well enough to be able to ask the necessary questions so you can assess the abilities of the potential insurance agents you contact and can help whichever agent you ultimately choose to procure insurance appropriate to your needs.

There are three primary marketing channels of property and casualty insurance, particularly homeowners and personal auto insurance, in the United States. They are:

  1. independent agents;
  2. captive agents; and,
  3. various forms of direct marketing.

This latter category includes what nominally appears to be a variety of marketing channels often using direct mail. These channels are employed by GEICO, Progressive Casualty, certain American International Group mass-marketed insurances, often by direct mail, as well as other regional and national carriers, such as 21st Century Insurance (a primarily personal auto insurance carrier operating in California, Arizona, Nevada, Washington, and Oregon).

In some cases, a given insurer may employ multiple marketing channels.

INDEPENDENT AGENTS

An independent insurance agentis a person who is licensed by the department of insurance in the state (or states) where he or she conducts business. Licensure generally involves passing a written examination to show that the person meets minimum standards of knowledge regarding the business of insurance.

Independent agents are typically parties to contracts with several insurers by which the agent is authorized to write business (i.e.,policies) for that insurer. In most states, each insurer files a notice of appointment of each agent with the department of insurance in that particular state. each insurer files a notice of appointment of each agent with the department of insurance in that particular state. Independent agents are usually compensated by the insurers they represent through payment of a commission that is a fixed percentage of the premium of each policy sold. This commission percentage may vary with the size of the premium or line of business. For example, insurers often pay higher commissions on commercial lines policies than they do on personal lines policies. This is due in part because the underwriting and production of personal lines policies is often less complex, presenting fewer variables, and typically involves smaller premiums per policy.

The administrative costs to the insurer of issuing a commercial policy for a small business and a personal lines policy are roughly the same.

Independent agents frequently state that one advantage of dealing with an independent agent is that he or she often has the flexibility to obtain competing quotes from several insurers. These competing quotes may offer the insured broader or lesser coverage in response to greater or lower premiums, thus offering the insured a range of choices.

An independent agent will not have a State Farm, Farmers, Allstate, or Nationwide logo in their Yellow Pages ad, or over his or her office. Independent agents are often members of professional/trade organizations, such as the Professional Insurance Agents(PIA) organization or Independent Insurance Agents(IIA) organization. Their advertising in the Yellow Pages and otherwise will usually make clear that they are independent agents, especially the fact that they represent several companies. In some regions, the Yellow Pages will have listings of agents who represent particular insurers that conduct their business even though they are independent agents—so checking by a particular name, such as Hartfordor Kemper, may help you identify local independent agents.

CAPTIVE AGENTS

Captive agentsrepresent only a single insurer. In some instances, they may even be employees of the insurer. Examples of captive agents are agents who sell State Farm, Allstate, Nationwide, and Farmers policies. A State Farm agent, for example, is limited to offering the policies offered by the State Farm companies. If a given customer seeks a type of insurance not offered by a captive agent insurer, the customer will end up having to go to another agent or broker to obtain a quote or a policy.

Nonetheless, the captive agent manner of marketing of insurance, particularly personal lines policies, obviously has been successful. State Farm, Allstate, Nationwide, Liberty Mutual, and Farmers control a substantial portion of the United States personal lines insurance market.

However, if you really want to comparison shop for competing quotes involving considerations other than price from several companies, including from one or more captive agent companies, you will have to contact an agent from each company separately and compare the results on your own.

The most important thing the consumer needs to do is locate a competent agent. While there is no single yardstick by which to gauge an agent’s competence, things to inquire about include:

education level (i.e.,is the agent in question a college graduate?—sometimes the ability to spot issues is crucial);

how many years of experience does the person have as a licensed agent?;

whether the agent is a member of any of the professional insurance associations. While not a perfect measure, such memberships can indicate a level of knowledge and commitment to a business and career; and, whether the agent has a chartered property casualty underwriter (CPCU) designation.

NOTE:A CPCU designation is earned by completion of a series of college-level coursesin various aspects of the business of insurance and by passing a nationally administeredexamination for each of the required courses. CPCU designations are sought andearned by many insurance industry personnel, such as underwriters and claims representatives,in addition to agents and brokers. Holding a CPCU designation isconsidered within the business of insurance a mark of commitment to an insurancecareer and a significant professional achievement within the business.

There are competent and professional agents who are independent agents, and who are captive agents. You just need to understand enough about the various marketing channels to make a decision which form makes the best sense for you.

DIRECT WRITERS

As our economy and markets have changed, other insurance marketing channels have developed. While these alternate marketing channels for insurance initially focused on motor vehicle insurance, more recently they have expanded to include homeowners insurance as well.

The problem with these direct marketers is that there is no practical ability for the average insurance buyer to compare the terms and conditions of the policies offered in order to determine whether or not the coverages offered meet the needs of the insurance buyer. And there is no one to provide any counseling with respect to decisions involved in the purchase. You do not have the ability to call on the services of an agent to help you choose the policy limits appropriate to guarantee that you have sufficient coverage to repair or replace your residence and possessions in the event of a major loss.

Many of the 800-number or Internet sellers of insurance have engaged in widespread television advertising of their policies. These TV commercials frequently emphasize potential premium savings as the inducement to buy that company’s policies. Premium savingsdoes not mean much without advice about variations in optional coverages or how much in limits the average person needs to purchase for adequate protection.

These direct sales operations present a potential trap for the unwary by creating a serious risk of uninsured or underinsured loss exposures. A particular disadvantage of many such direct marketing insurers is that there is often little or no opportunity to review the policy forms utilized to determine whether they contain unanticipated restrictive terms. Certainly, in order to be licensed to sell policies in any particular state, the policies’ terms necessarily will be in compliance with that state’s minimum requirements. However, that does not ensure that such policies will necessarily provide the best coverage for your particular needs.

Compounding this problem is that most insurers charge a penalty if a policy is issued and then cancelled at the insured’s request midterm.

EXAMPLE:You purchased a one-year policy and cancelled it after two weeks because you discovered it contained restrictive terms that did not provide coverage for a particular loss exposure. In this situation, you will receive a refund that is less than fifty-weeks worth of the premium. Unless a direct marketing insurer offers the opportunity to examine the policy in advance or offers a no-charge return policy, you might want to pass. Instead, avail yourself of the services of a local agent you can meet in person and discuss your insurance needs with to obtain the best compromise between cost and extent of coverage provided.

RETAIL VERSUS WHOLESALE BROKERS

Many insurance consumers will never need to deal with the concept of retailbrokersversus wholesale brokers. An insurance broker is the agent of the insured and can submit applications for coverage to insurers for which the broker does not have an agency appointment.

Some insurers will only accept applications from a broker with which they have an agency relationship. In addition, coverages can be placed with non-admitted insurers only through an excess or surplus lines broker.

A wholesale brokeris a broker involved in the procurement of a policy that does not have a direct relationship with the insured. For example, an applicant for a personal auto policy might not be an acceptable risk to standard carriers due to a variety of underwriting factors, such as age or poor loss history (i.e., excessive number of citations or accidents). The problem is, in many states, surplus lines regulations and statutes are not scrupulously observed. And, when they are not, it is usually to the average consumer’s disadvantage. If an insurance agent you may have turned to suggests that he or she is going to provide you with a quote or recommends that you purchase a policy through a nonadmitted insurer (a surplus lines broker), you should start asking some pointed questions as to why.

A policy issued by a nonadmitted insurer in your jurisdiction is not protected by your state’s insurance guaranty fund. In the event that insurer becomes insolvent, your policy is worthless. For the sake of some premium savings, you are completely unprotected in the event of insolvency of a nonadmitted insurer.

When you place insurance with an admitted insurer, you are protected up to the limits established by your state’s insurance guaranty fund in the event your insurer becomes insolvent. In general, that means you get a lawyer appointed to defend you if you get sued and a covered judgment or settlement will be paid up to the covered statutory limits of your state’s guaranty fund. It also means that your covered automobile physical damage claim or claim for damage to your house or possessions will be paid, subject to the statutory limits.

For example, in California, under Insurance Code section 1063, the maximum amount of a claim payable by the California Insurance Guaranty Fund is $500,000. That is an amount sufficient to cover most serious liability claims that the average homeowner is likely to face. It also is an amount sufficient to cover many partial losses to a residence and contents, even though, in the face of escalating construction costs, it may not, in some cases, be sufficient to cover total losses.

There is a reason why one of an insurance agent’s most essential functions is to place coverages on behalf of their customers with insurers that are financially strong. This is because the amounts typically available in the event of insurer insolvency under the various states’ insurance guaranty funds may be less than the loss exposures of many insureds.

State laws exist that require warnings to the insurance purchaser of the risks involved in purchasing insurance from a nonadmitted carrier. However, few, if any, brokers involved in the sale of such policies generally warn of or explain these risks and the trade-offs involved to their customers adequately. This is particularly true in the personal auto liability coverage context, where these abuses are most prominent.

A far too common circumstance, particularly in major urban areas, with large numbers of substandard riskinsureds, is for high-volume brokers to run mass-marketed commercials, promising to be able to provide auto insurance to anyone, and at great savings. Such mass marketers of insurance often emphasize that coverage can be available for low down payments, and low monthly payments. These representations are often highly deceptive. Such operations often sell ridiculously expensive, low-limits policies, often issued by nonadmitted insurers. Rarely do such operations inform their customers of their state’s assigned riskprograms, which, if applicable, usually provide better coverage than that from a nonadmitted insurer.

Unfortunately, the fact is that while certain high-risk insureds may need to consider purchasing insurance from nonadmitted insurers, these insureds are usually commercial insureds with higher exposure to risk and loss histories—individually or as an industry classification. This leaves them perceived as high-risk from an underwriting standpoint. The average personal auto or homeowners insured should rarely be in such a position.

Other disadvantages exist using a nonadmitted insurer. Nonadmitted insurers prey on persons who have been advised that they are substandard risks, particularly in the personal auto context. The claims service offered by nonadmitted insurers is generally poor or nonexistent. They offer and sell policies that are often apparently cheap (compared with the premiums that would be charged by an admitted insurer) and they let the insured nominally satisfy their state’s financial responsibility/proof of insurance laws. However, their promises are often functionally smoke and mirrors.

An insurer that does not pay claims promptly or does not step in and defend an unsured when he or she has been sued has given none of the protections expected by someone who has purchased an insurance policy. It does you little good when you are faced with a lawsuit resulting from an accident to find yourself having to fight a two-front war—one against the person suing you and a second against your insurer to obtain the coverage that you paid for.

Brokers that routinely place personal lines policies with nonadmitted carriers may argue that they are saving their customers money. These claims are usually illusory. In most cases, however, the premium savings do not offset the risks of an uncovered loss in the event of insolvency of the insurer, or in the case of a nonadmitted insurer simply failing to observe its policy obligations. Many nonadmitted insurers are domiciled outside the United States, making suing them and recovering an uncertain proposition.

There is almost never any need for an individual or a family to turn to a surplus lines/nonadmitted insurer for personal auto or homeowners insurance. Many states have what are called alternative marketmechanisms.

Examples of such alternative marketmechanisms are automobile assignedriskplans, and FAIRplans. (FAIR refers to fair access to insurance requirements, under the plan established under the California Insurance Code.)

Under such plans, all admitted insurers writing automobile or property insurance are required to participate or fund these plans. In the case of most assigned riskauto insurance plans, when a person qualifies (usually by virtue of proof of refusal to issue a policy by a certain minimum number of insurers), he or she is assigned to an insurer that must issue a policy. This is subject to such policy limit and premium limitations as may be established by the plan.

Nonetheless, the ability to purchase a policy through an assigned risk plan guarantees that an individual is going to be able to obtain coverage from a standard lines admitted carrier. Assigned risk plan policies are more expensive, but the insured has the security of coverage with an admitted insurer. If the policyholder cleans uphis or her loss, violation, or infraction history, he or she can eventually purchase coverage in the standard insurance markets and will no longer need to rely on coverage through an assigned risk plan.

FAIR plans are alternative market mechanisms for hard-to-place homeowners or other property insurance polices. These are used in areas such as Southern California, urban areas that are underserved by standard lines insurance markets, and other areas that are considered higher than normal risk (such as homes located in and near brushareas). Again, the issuers of policies offered through these types of programs are entitled to charge premiums that reflect the increased risk assumed. However, for most persons, policies procured through such plans are preferable to policies from nonadmitted insurers. This is due to the protections afforded by the fact that these policies are covered by each state’s insurance guaranty funds and because of better and more reliable claims service.

GUARANTY FUNDS

Each state has an insurance guaranty fund. Each operates in substantially the same way. In the event of insolvency of an insurer whose policies are covered by the guaranty fund (i.e.,an admitted insurer in that state), policyholders of that insolvent insurer are covered up to the statutory limit. This limit varies from state to state, but is sufficient to cover most anticipated property claims and all the genuinely catastrophic liability claims. In addition, the guaranty fund statutes provide for defense of liability claims in addition to paying judgments or settlements up to the amount of the statutory limit.

The protection offered by the guaranty fund is not perfect protection. But, the protection offered is far better than having none and is a substantial reason to purchase insurance coverage from an admitted insurer as opposed to a nonadmitted insurer.

Guaranty funds are funded by you and every other policyholder in your state. You are all providing protection for each other. The initial capitalization (i.e.,start-up funds) for guaranty funds comes from assessments of all admitted insurers doing business in that state, in proportion to the respective amount of premiums written by each insurer in that state. Under the guaranty funds statutes of all states, the insurers that have paid these assessments to provide the start-up capital to establish the guaranty fund were, and are, entitled to recover the costs of those assessments. This is recovered by premium surcharges on all of their policyholders. If you were to examine your premium billing notice over a period of time, you will notice such surcharges, typically between $1 and $5.

This charge is imposed by your insurer proportionately on all of its policyholders to cover the costs of assessments it has been obligated to pay to fund the guaranty fund in your state.

The guaranty fund in each state operates much like an insurance company. Guaranty funds set reserves, retain defense counsel, and settle and defend claims. They also adjust property claims. The primary difference is in the source of their funding. Insurance companies fund their operations primarily by charging premiums and by realizing investment income on their reserves (premium reserves and loss, loss adjustment expense, and other reserves). Guaranty funds likewise generate income by investments received on reserves. They do not have, however, premium income as a source of income. Nor do guaranty funds have the overhead associated with marketing and selling policies, as do insurance companies.

When an insurance guaranty fund needs to generate income because the claims it has paid are depleting it imposes assessments on all admitted insurers doing business within the state.

CHOOSING WHAT IS BEST FOR YOU

A good independent agent is likely to be the best place for most insurance consumers to start. By employing an independent agent, you preserve the maximum number of options for yourself. And, you are less likely to find yourself in a situation in which you have insufficient limits or unexpected gaps in insurance coverage in the event of a major loss.

This is particularly true if you are the owner of a small business. The underwriting of commercial insurance policies is inherently more complex than is the underwriting of personal lines policies. Independent agents are much more likely than captive agents to have a substantial volume of commercial business in addition to their personal lines book of business. Consequently, a good independent agent is likely to be much more attuned to the inquiries necessary to assure that your coverages are as complete as possible and to avoid coverage gaps. This is particularly true with respect to the form of and the amount of business interruption insurance, plus additional, optional commercial coverage, that may be appropriate for you.

These are some common examples of situations where a good independent agent’s skills are important. For example, a developer might want its own coverage to apply only as excess coverage over its coverage as an additional insured under the policies of the subcontractors working for it on a construction project. The knowledge of the developer’s loss exposures and the ability to assure that those loss exposures are covered appropriately requires expertise that is often beyond that of an agent for a direct writer.

Similarly, a vendor might want the coverage of its own policy to apply only as excess coverage over its coverage as an additional insured under a manufacturer’s policy for product liability suits brought against the vendor by a purchaser of an alleged defective product made by that manufacturer. Again, effecting the insurance needs of such a vendor requires a certain level of knowledge and expertise that may be beyond that of many personal lines oriented agents.

The choice is yours. The important point is for you to realize that you have a choice and that exercising that choice means that you need to better inform yourself so that you obtain the protection best suited to your needs.

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