(The customer should have read the fine print. Image credit: Adobe Stock.)
Is there anybody left who has not seen the video of the United Airlines passenger, being dragged from his seat? The airline’s CEO defended United employees, saying that they were following proper procedures, and United defenders on social media have been alluding to the terms of the contract: “You need to read the fine print when you buy your ticket.” I imagine an insurance company representative making the same point to inform a person that, no, they are not actually covered for that loss—and doing the same harm to their company’s brand.
At the end of the day, what the public sees is that a customer was denied what he paid for because of the ethically questionable practice of overbooking. Not only that, but the airline was bumping passengers to accommodate its own employees. Random selection of passengers is no doubt the fairest way to solve the problem, but this should be done before passengers board—why was it not? Also, it doesn’t help that the passenger was a middle-aged doctor pleading that his patients needed him. The United passenger was probably foolish to resist as stubbornly as he did, but United’s personnel were even more foolish to insist. The prevailing impression is of airline dragging a bloodied passenger—who had done no wrong—literally kicking and screaming, from his seat.
There’s blame to go around. People complain about poor service, from both airlines and personal lines insurance carriers, but they still make their purchasing decisions based on the lowest cost. Companies are driven to compete on price, which requires ever-increasing efficiency measures, which in turn erode service. Airline customers delude themselves about what their fare entitles them to, and insurance customers similarly delude themselves about the real economic value of their premium. But when the moment of truth arrives, the customer is always right, and it is the company’s brand that suffers. In the case of United, Market Watch predicted this morning that a dropping stock value could wipe $1 billion off United’s ledger.
Learning to Live with a Bad Reputation
Like the airlines—and used car salesmen—the insurance industry has learned to live with a bad reputation. But can nothing be done? Does insurance imply a fundamental conflict of interest between insurer and claimant? Possibly. But can that conflict not be mitigated?
Startup insurer Lemonade has taken an approach based in behavioral science to address the moral hazards associated with the traditional insurance contract. The company charges a flat fee, and any money left over after claims goes to a charity of the policyholder’s choice. The jury is still out on how well that model will work, and how far it might scale across different types of customers. But might it be that insurers generally could do more to introduce greater transparency into their customer communications, making it clearer what is and is not covered for a given policyholder?
In recent years Allstate has undertaken an advertisement campaign essentially cautioning consumers that, with car insurance as with other things, you get what you pay for. That’s a step in the right direction. Perhaps technology also presents an opportunity to create a better customer interface, with tools that demonstrate clearly what will or won’t be covered by what type of policy or what amount of premium paid.
Regaining Sight of the Social Good of Insurance
Insurance is a social good, an important mechanism of risk management and, in turn, of economic stabilization. That social value was probably clearer to policyholders participating in mutual fire associations than it is to customers moved by mass advertising to choose the coolest and cheapest car insurance. Can a more honest customer relationship be reached on a mass-consumption level? Does this problem represent a special opportunity for regional mutual insurers?
Customers will continue to wish to spend less money—especially for a product they are forced to buy by law—and will engage in self-interested special pleading in favor of what they’re getting for it. And insurers will compete on price, knowing that customers will believe they’re getting more than what they’re paying for. But does the industry need to continue to operate on a principle of “there’s one born every minute”—and the ultimate disappointment and resentment that implies in the case of claims? Are insurers content that, at some moment, they’re going to be metaphorically dragging their customers, bloodied and humiliated, off the plane?
(1) Anthony you mention that personal lines insurance customers seek the lowest price and the insurers oblige by competing on price and becoming more efficient. This game of diminishing returns may already have become close to asymptotic so further efforts with technologies like telematics to understand actual driving behavior versus proxies for driving behavior may not provide the desired ROI. It’s hard for me to feel sorry for either side of this equation. If customers want to buy a commodity and pay the lowest price then they shouldn’t complain about quality as long as their purchase ends up being close to what all companies provide for features and experience. And if insurers want to sell a commodity then they shouldn’t complain that customers don’t have loyalty or make a fuss when something goes wrong because the depth of the relationship is shallow and the propensity for forgiveness is low. The entire market has driven personal lines (mostly auto) to be highly commoditized. If the time spent to shop is only to “save x%”, then no one should be surprised that customers complain about insurance with a clear conscience.
(2) Given the airline story, it always amuses me when people say that based on some bad experience or flight “I’m never flying XYZ Airline again” – to which I think given that there are rarely more than 2-3 viable airline route options at any given time slot from/to any given origination/destination city, good luck with your long term boycott of 1 of those 2-3 choices.
(3) Depending on what you mean by a “social good”, I don’t see the industry that way. I see insurance as a legal requirement in some contexts and/or a risk management tool. In general, insurers are for-profit (or at least a break even) enterprises and they provide important products and services that are the cornerstone to a healthy economic system. With P&C at least, there is no social requirement to have insurance (except maybe workers comp). Even personal auto insurance is a legal requirement only if you choose to own a car. So, it’s not a social good any more than car ownership is a social good. Customers should not think that they should spend as little as possible for the product(s) just because certain laws require you to buy them. Some of the lowest priced insurers are not the best rated insurers. Consumers have to decide the degree to which product and service quality trump the lowest possible price. This concept harkens back to college marketing or economics class when we have two competing value/price curves. Not all cheap products are good and not all good products are cheap. The consumer deals with this issue by speaking with their wallet.
(4) Some of the negative perception of the insurance industry is also the result of insufficient consumer education about risk management, what a customer buys when they buy insurance, and basically what is an insurance product. You know, the ads that say “I had an accident for the first time in years and I’ve been paying for insurance all these years and now when I have a claim I have all these challenges settling the claim” – this perpetuates the erroneous assumption that insurance is something that, if unused, is still available. Those in the know, know that insurance is consumed – after policy day last, the contract is over – it’s consumed. Similarly, many consumers resent paying a deductible when they are innocently damaged in a car accident (not at fault). “Gee, I’m just driving and minding my own business, someone crashed into me, and I’m out $1000 for my deductible”. What is misunderstood is that the consumer didn’t purchase a $0 policy. The $0-1000 layer of risk is not covered. There is also rampant consumer and 3rd party fraud which everyone pays for. If the industry could figure out these hot topics and massively educate consumers about the realities, consumer perception of the industry and its products might improve over time.
(5) From the industry perspective, there are likely better ways to deploy capital but insurance still is a decent way to make a profit and the risks of the endeavor are pretty well understood and manageable – in my view it’s all very fair because the system overall works very well. All the parties willingly and unwillingly make it work very efficiently. Globally the P&C industry is something like $1.2 trillion dollars. Without the P&C industry, we would all live a much riskier and potentially devastating financial life.
Thanks for the comments, Gents. Barry, I’d like to hear more about the “legal and fiduciary responsibilities.” I’m sure there’s more to be said.
I have a correction to the article: turns out that the flight wasn’t overbooked after all, but rather fully booked. This actually makes United’s actions worse.
https://www.inc.com/cynthia-than/the-controversial-united-airlines-flight-was-not-overbooked-and-why-that-matters.html
Well reasoned and clearly stated.
I don’t see the problem being resolved any time soon. Insurers have a legal – and fiduciary- responsibility to pay only the claims, or parts of the claims, that meet the terms, conditions, and restrictions of the legal contract (that as you know is what an insurance policy is).
I would agree that the insurance industry has been horrendous at informing the general public and insurance clients what is and is not covered.
However, the insurance industry can’t be dragged off its legal and fiduciary responsibilities either.
Barry, I don’t think there is anything in Anthony’s argument here that calls for the insurance industry to “be dragged off its legal and fiduciary responsibilities.” If I read him correctly, the essence of his argument is this:
“Insurance is a social good, an important mechanism of risk management and, in turn, of economic stabilization. That social value was probably clearer to policyholders participating in mutual fire associations than it is to customers moved by mass advertising to choose the coolest and cheapest car insurance. ”
If insurers were to act more keenly in respect to the social value they provide than the prices they charge — and to the spirit of their legal and fiduciary responsibilities than to the exact letter of their contracts — they would be much more likely to avoid the PR horror shows they’ve mostly skirted by — so far…