Perception Gap Creates Animosity Among Consumers

The annual Gallup survey of the publics attitude regarding the honesty and ethics of the various professions sheds some light on this insurance perception gap as it pertains to the industrys most common customer touch pointthe insurance salesperson. The 2003 survey ranks insurance producers near the bottom of the list on honesty and ethical conduct, failing to surpass lawyers and members of Congress in the publics esteem.

Recent headlines regarding ethical lapses within corporations from a variety of industries, including insurance, no doubt fuel this cynicism, as do media depictions of "big insurance" aggressively pursuing profits to the exclusion of customer interests. But what is at the heart of consumer value perceptions of insurance? What shapes the way our customers view us?

Only A Promise

Because property-casualty insurance is a contract for future performance, and operates as an indemnity rather than a wealth accumulation vehicle, it occupies a unique place in the basket of goods and services purchased by our customers.

Think for a moment about how the insurance transaction compares to other consumer experiences. When our customers spend money for a vehicle, they get mobility. When our customers make mortgage payments, they receive a place to live. When they invest funds with a banker or broker, they see measurable performance.

As consumers, we are conditioned to expect tangible, immediate and measurable value for the money we spend. Yet, when our customers spend money on insurance premiums, they receive only a promisea promise of future performance.

This promise allows our customers to finance homes and cars, plan for the future, and manage the risks of everyday life. Even the insurance customer fortunate enough to never experience a loss has nonetheless received enormous benefit from the protection they have been afforded.

However, because insurance protection is not a top-of-mind issue, these benefits often escape the recognition of our customers. Many, if not most, personal lines insurance consumers therefore do not fully appreciate the true value of insurance protection.

Always A Cost

The Bureau of Labor Statistics estimates that personal lines property and casualty insurance premiums comprise a mere 2.8 percent of total annual expenditures for a typical American household.

From our perspective as insurance professionals, aware of its full spectrum of protection benefits, insurance is a bargain. But to the individual customer struggling to perceive insurance value and attempting to fulfill the myriad family financial demands, insurance is often viewed as a black hole, where cash flows in, but no value flows out.

Compound this with the fact common interactions such as premium payment and loss reporting are generally not desirable events from an insureds perspective, and we arrive at an industry with an uphill battle on the customer perception front. This is particularly true in the personal lines property-casualty arena where, unlike life and annuity products, financial responsibility laws and lender requirements interject a compulsory element into the insurance purchase decision for some customers.

Shaping Perceptions

Two important implications for industry and professional conduct stem from the realization that many of our customers will always struggle with perceiving the true value of their insurance protection.

First, ethical conduct and fair dealing in insurance must be of the very highest standards, equaling or exceeding those of other fiduciary relationships.

With a customer base struggling to perceive the true value of insurance protection, there is no room in our industry for practices that detract from our credibility. A customer willing to forgive minor breaches of trust in other financial arenas is unlikely to forgive an insurance practitioner for comparable indiscretions.

As evidenced by the number of traditional insurers moving into the financial services arena in the past few years, the Financial Services Modernization Act (Graham-Leach-Bliley) has yielded enormous opportunity for our industry to satisfy our customers financial services needs in innovative ways. But with this opportunity comes responsibility.

Just as the competitive landscape has changed for insurers in the wake of Graham-Leach-Bliley, so has the way many of our customers relate to us. The ability of insurance enterprises to now serve all of a customers financial needs carries with it a burden to maintain bright lines of distinction between indemnity products and financial services products.

It also increases our responsibility to ensure improper influence over customer behavior is an intolerable practice within the industry. Practices which do not pass ethical muster further diminish our customers perceptions of our industry and the value we provide as financial service professionals.

Insurance is a business rooted in promises and mutual trust. The industrys newfound participation in non-insurance financial services does not change this fundamental ethical proposition. Now, more than ever, the spotlight is on our industry to fully live up to the ethical standards we espouse.

Failure To Communicate

A second implication of our customers struggle to perceive the true value of insurance is that we need to adequately explain our practices and bridge the communication gap with our customers.

When industry practices are not adequately explained, insurers appear arrogant and disconnected from the customers we serve. Insurance is a business of contracts, actuarial tables and financial ratios. We speak a language much different than the normal experience of most of our customers. We engage in many practices which, while legal and justifiable, are often not understood by our customers. Customers who do not fully perceive insurance value have very low tolerance for practices they dont intuitively understand.

The use of credit-based insurance scoring in underwriting and pricing activities is certainly such a practice. In credit-based scoring, the industry has found a powerful tool for developing rate adequacy and segmenting markets effectively. Credit-based scoring ultimately supports insurance affordability and availability goals by allowing insurers to charge rates that are more commensurate with exposure, unburdening a vast number of customers from the responsibility of subsidizing the rates of others with previously indiscernible risk characteristics.

However, credit-based insurance scoring does not enjoy the same level of consumer acceptance as other, more intuitive, underwriting and rating factors. Consumers have not yet absorbed the message that insurance scoring is a practice through which those who represent higher levels of risk pay more, while those who represent lower levels of risk pay less.

Whether you believe the insurance industry is responsible for this communication gap, we would all agree that our industry must go beyond justifying our practices to regulators. Where possible, we must inform and educate our customers as well.

Proactively engaging our customers on tough issues like credit-based scoring is the only way to counter misinformation, engender critical thinking about our industrys practices, and positively influence perceived value from the products and services we offer.

Every interaction with our customers is filled with opportunities to behave ethically, inform and educate, and deliver truly outstanding service. As insurance professionals, we have an obligation to seize these opportunities, justify the faith our customers have placed in us, and ensure all of our actions are worthy of the profession weve chosen.

Ultimately, it is by this path alone that customer perception of insurance value will be improved.

Chad M. Sands, CPCU, CLU, is an auto insurance analyst with a Midwest-based multi-line insurer. Comments and questions are welcome at cms22@mindspring.com.

Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 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.