Insurer and consumer had a war of words on Nov. 15, 2007, at the National Underwriter Company's first two-day virtual conference and expo. Billed to be a “Battle of the Bobs,” the debate featured J. Robert Hunter, insurance director of the Consumer Federation of America, and Robert P. Hartwig, president of the Insurance Information Institute (I.I.I.).

Unfortunately, this Iconoclast wasn't there to throw a match on the kindling to get a good roaring fire going. Had he been, given his “Grade-C” attitude about insurance (crotchety, cranky, crabby, and cantankerous), he probably would have rooted for the consumer Bob. After all, he has taken on the I.I.I. and their statistics before.

Now what could a consumer advocate find to complain about in the insurance industry? Surely we're not as bad as that terrible financial industry that got in too deep over sub-prime lending habits and triggered a financial hissy. Or are we? According to National Underwriter, P&C, the insurance industry may have been backing some of those loans, and might be in for its own hissy fit. At the very least, it will take a hit from all the director and officer claims that will result.

In any case, National Underwriter, P&C, predicted that these two Bobs would square off over hurricane and flood damage, credit scoring, federal regulation, and the industry's profitability, which is often right up there in the stratosphere with CEO pay.

Hurricanes and Flood

Not too much sense rehashing the Katrina mess, but it will have fallout. The bottom line is that the Federal Emergency Management Administration, which is supposed to be in charge of the National Flood Insurance Program, will probably change its position on having the Write-Your-Own insurers adjust flood claims right alongside carriers' own windstorm claims. It was a conflict of interest in appearance, and FEMA should never have let it happen, but there you have it.

When Congress heard that the same insurer staffs who were adjusting wind claims were also adjusting flood claims, something hit a fan. Now it is quite logical that if an adjuster arrives to a claim but there's no house there — it has been washed away — and where the back yard used to be is a commercial fishing boat, there's an awfully strong likelihood that the house was demolished by flood. There is certainly no evidence of wind. But how do we know that the same house was not totally destroyed by wind before the flood came along and washed it all away? Well, we don't.

Therein lies the ethical dilemma. How much of the damage we cannot inspect should we attribute to wind, and how much to water? Nothing? All of it? Half of it? So Congress said, “Enough!” and looked at legislation that would offer a policy covering both wind and water damage. I suppose they will let FEMA administer that, too. Oh boy! National Underwriter, P&C, said in the Oct. 1, 2007 issue that federal flood insurance reform legislation (including adding wind) “faces stiff headwinds, with Bush administration officials recommending a veto, and the Senate going in another direction.” Tailwinds, maybe.

Credit Scoring and Other Issues

The next topic — checking an insurance applicant's credit score — is more of an underwriting issue than it is a claim issue, but it has an impact on claims. While some might say that credit scores shouldn't have anything to do with underwriting insurance, the plain fact is that someone who is a deadbeat credit risk is probably going to be a claim-maker sometime during the policy period. Hey, I'm not saying that it's bad to be poor (although it certainly isn't good), but the reality is that often the folks who have gotten themselves into a credit mess are the ones who are apt to be a bit careless in other matters, too. It is always evident that the rich get richer, and the poor get children, although even high-class teens can be loss producers. They're the ones racing sports cars on Saturday night.

In July 2007, National Underwriter, P&C, reported on an ethics survey in which readers responded to the question, “Is it ethical to force an unpopular rating factor such as credit scores onto the consuming public, particularly if critics contend the accuracy of the information used — as well as the disparate impact it might have on low income or minority groups — is in question?” Only 14 percent said it was ethical, but 10 percent said it wasn't. Another 10 percent said it had nothing to do with ethics, and two-thirds said that they had no opinion as to whether it was ethical or not, and they were split as to whether credit reporting should even be used for rating purposes. I suspect I'd go with the folks saying it was ethical, based on long years of dealing with claims and seeing how socio-economic factors affected the costs of those claims.

But before your Iconoclast digs himself any deeper into this hole, let's move on to federal regulation. National Flood = FEMA. Enough said. Well, maybe not quite enough. A bunch in Congress, maybe right-wingers or left-wingers — or no wings at all — want to do away with the antitrust immunity given to the insurance industry under the 1945 McCarran-Ferguson Act, and return regulation of the insurance industry to the Feds. In Oct. 2007, a Congressional financial services subcommittee was split on the need for an optional federal charter. The National Association of Insurance Commissioners, meanwhile, defended their state-by-state position.

Federal regulation might do away with all of those state insurance departments, which as all consumers will tell you, are nothing but hotbeds for politicians on the take from insurance companies. Who needs those bums? With federal regulation, those state-by-state rate approvals and licensing and all those other insurance commission tasks could be done at one big bureaucracy. Right?

Wrong! There are, perhaps, a few areas where some centralization might be useful, but for the most part state regulation has been very effective, and the last thing anyone ought to desire is another big federal bureaucracy. While nobody wants to see monopolies created, eliminating the antitrust sword that would otherwise hang over the head of the insurance industry could have some negative implications. Insurers have to rely on each other — competitors though they may be — if they are to be efficient and remain solvent.

The feds got involved with group health insurance, citing the Employee Retirement Income Security Act (ERISA) as the basis for federal court jurisdiction, and now somebody hassled by their own group insurer can't use the state's insurance department complaint system or the state courts to sue the rascals. What? You have to write Congress now if your health insurer won't pay a bill? Who wants that? And what sort of positive regulation have the feds done over the ever-rising cost of group insurance? At least the states look at the rates.

Just what would happen if the insurance industry lost the antitrust law immunity it has by virtue of the McCarran-Ferguson Act? The National Association of Mutual Insurance Companies asked that question at their Septtember convention, reported Matt Brady in the Sept. 24 issue of National Underwriter, P&C, and got a frightening answer. In short, prices would rise while availability of coverage would decline. There would be smaller companies without the ability to accurately calculate risks or set prices, thus less able to compete. There would be no joint-venturing to provide multi-company coverages on major risks. Every time an insurer even peeked at another insurer's figures, there would be litigation filed. Every joint action between insurers would be challenged and put under suspicion. All of this would cost money, so prices would rise. Do we really want that, Mr. Consumer?

And what about those big-buck profits insurers have been hauling in? Shame, shame! Do we want them to lose money? Just because there were no big hurricanes that hit the Atlantic or Gulf Coasts in 2006 or 2007 is not to say that none will hit in 2008. Who knows what disasters 2008 will bring, and if they arrive, this Iconoclast wants a nice big fat insurance company insuring him! The skimpy ones go broke.

The Real Consumer Issue

If I were to have picked a topic for this debate, it would have been to ask the insurance industry's Bob why the industry has dropped the ball on educating claim staffs, putting them behind computers. When are we going to get adjusters back out on the street where they belong? Trying to investigate claims and prevent much of that $120 billion in fraud loss? If even half of that is correct, the consumers' Bob should blast our industry all over tarnation for having allowed it to happen.

A possible response? Well, it's all those dishonest “consumers” Hunter represents. Consumers, left to their own devices, will fudge their claims and exaggerate and make insurers pay more than they should — something I.I.I. calls “soft fraud.” Those consumers will get away with it, Hunter might respond, first, because adjusters don't go out in the field and investigate the claims anymore, meeting with claimants and insureds, and, even if they did, half wouldn't know what to do when they got there.

What on earth?! Hasn't the insurance industry produced the greatest batch of claim representatives that ever existed? Not according to National Underwriter, P&C. In the Sept. 10, 2007 issue, Mark E. Ruquet reported on what was said at the 11th Annual America's Claim Event panel discussion, which was sponsored by Claims Magazine and moderated by Managing Editor Eric Gilkey. It wasn't good.

“The retirement of experienced claim adjusters is forcing carriers to redevelop education and recruitment programs to replace and expand their dwindling ranks, insurance executives say.” Dwindling? Insurers have allowed those ranks to become downright devastated!

“There's a void in the industry,” said CNA's George Fay. Void? Quality claim adjusting skills are absolutely AWOL. Ruquet continued, “Mr. Fay said that after making significant cuts in the development and recruitment of claim adjusters over the years, insurers are now finding a shortage of professionals.” Co-panelist Vincent Armentano of Travelers agreed. “We need a critical focus on this,” noting that experienced claim forces will be greatly reduced in coming years.

Why? Because claim adjusting has become a dead-end job instead of a professional vocation, and it has a horrible turnover rate. Who wants to make a career out of sitting in a cubicle “processing” claims like some human automaton, knowing that probably half those claims are being overpaid or underpaid because the adjuster doesn't have the background in good solid loss and risk education to know the difference?

Profit From Loss

In the same issue of National Underwriter, P&C, Prof. Peter R. Kensicki, a member of the ethics committee of the CPCU Society, asked if it was ethical for insureds to profit from their losses. He asked the wrong question. What both he and Hunter needed to ask is whether it is ethical for the insurance industry to profit from its claim overpayments. If I had been Consumer Bob in that debate, that is what this Iconoclast would have asked.

If, as the I.I.I. Fact Book has been saying annually for years, the property and casualty insurance industry is losing billions a year to fraud, is that loss not going back into the premium formula and being charged to its policyholders as premium? Of course it is! And is profit not a percentage of premium? Of course it is. Well, if we were to put adjusters back on the street and reduced that fraud total down by even half — at not much additional cost, just better on-the-street adjusting — would that not bring the price of insurance down by a considerable amount? Of course it would.

Ah, but there is a catch. If the amount of premium came down, so would the amount of profit. The percentage would remain the same, but the dollar amount would fall. Try explaining that to Wall Street!

The catch-22 in all of this is that consumers want cheaper insurance, but they also want their stock portfolios to remain high. Insurers, at least stock insurers, depend on investors to purchase their stocks because those stocks are valuable. Investors will put pressure on corporations — including the financial corporations that own insurers — to keep the prices high. Consumers, meanwhile, may like the fact that they can “get away with something” when nobody from the insurance company ever comes out to really investigate the claims. What's the bottom line? Probably that not much will change in the near future. Claim representatives will stay stuck in their cubicles, and fraud will continue to flourish.

Ken Brownlee, CPCU, is a former adjuster and risk manager based in Atlanta, Ga. He now authors and edits claim-adjusting textbooks.

Special Reports /

Consumers, Insurers, and Ethics

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