Baseball & Insurance: Two Places Where Economic Idiocy Still Reigns

We came very close to having the season interrupted by a player strike. The two sides did reach an agreement, but how well it will work is still to be seen. At first blush, I dont think it went far enough to share revenues between the "haves" and the "have-lesses," but at least its a start. I certainly have no sympathy for either side. Its the millionaire players versus the billionaire owners. Who is really suffering? The consumer, the true baseball fan, like me.

My solution: repeal that antitrust exemption and force baseball to do business like the other major sports.

What, you might ask, does this baseball discussion have to do with insurance? All through my insurance career–and especially emphasized in CPCU–weve heard over and over again about the cyclical nature of insurance. But has anyone ever really considered what it means to be in a soft insurance market?

Let me tell you: it is pure idiocy. Underwriting, pricing and marketing sensibilities are thrown out the window. I was an underwriter during one prolonged soft market. For property submissions, literally the only question we asked was: "Is it on firenow?" And even if the answer was "yes," we often times came up with a price.

And when the market hardens, the idiocy is still present, just in a different form. Somehow insurance executives can justify soaring prices by claiming "hard market." What would their reaction be if the price of gasoline suddenly increased by 50 percent tomorrow? What if the local grocery store suddenly doubled the price of ground beef?

Ill tell you how they would react: theyd be all over the newspapers and TV wringing their hands and crying about how outrageous such price hikes are; how they just cant live with prices at those levels; and how they are being abused by "big oil" and monopolistic grocery chains.

Yet when insurance consumers complain about overnight price hikes and underwriting restrictions, these same executives just sit back and say: "Sorryhard market, you know."

My solution? Repeal McCarran-Ferguson. Force insurers to compete in the real world, like the rest of American business. Force them to innovate, to differentiate, to improve service.

What would happen upon the repeal of McCarran-Ferguson? I cant say for certain, but I know that insurers would be forced to reexamine their underwriting, pricing, marketing and claims-handling practices. They would have to write their own forms. They would have to gather their own statistics. They would have to deal more honestly and openly with their customers.

The repeal of McCarran-Ferguson would be immediately beneficial to insurance consumers. As with the breakup of any other monopoly, prices would come down, products would be improved, and differentiation among insurers would become the way of the future.

Indeed, it is the existence of McCarran-Ferguson that allows insurers to:

Operate in a vacuum, substantially unaffected by the same economic principles (such as the law of supply and demand) with which other businesses must contend.

Apply onerous price hikes and underwriting restrictions.

Mishandle (often to abuse) their customers at a most critical time in a customers life–the filing of an insurance claim.

There is a saying in physics that nature abhors a vacuum and will naturally fill that void. Because they operate in a vacuum, insurers have turned the claim-handling process from one of service into what seems to be a game of "one-ups-manship"–a highly adversarial and tension-filled process.

Nature may abhor a vacuum, but consumers have begun finding ways to fill that vacuum–to make the advocacy system work for them. Is the increase in the number of consumers turning to public adjusters a coincidence? I think not. Rather, it is the natural reaction of people to avoid being mistreated.

And make no mistake about it–property insurers are mistreating their customers. Ive seen too many examples to say that such incidents are isolated. Such mistreatment has become commonplace. The increase in the number of public adjusters evidences that fact.

We often hear insurers tell us that with almost 3,000 property-casualty companies in this country, we neednt worry about lack of competition. Why, then, does it look like all of those 3,000 have reached a uniform agreement on price hikes and underwriting restrictions? The answer: because they can.

Michael K. McCracken, CPCU, ASLI is associate editor of the FC&S Bulletins, published by the National Underwriter Company in Erlanger, Ky. This column represents his personal opinion. He may be reached at mmccracken@nuco.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.