By Michael C. Perlmuter, JD, President & General Counsel

I subscribe to the digital version of Insurance Journal, a trade publication dedicated to reporting the most current trends and events in the insurance industry.

No one can read each Journal “cover to cover.” The technical content tests one’s concentration.

That said, my mind was attracted to an article entitled “P/C Insurers Caught Between Slowing Premium Growth and Rising Loss Ratios” in a recent issue.

The article confirmed my long-held opinion that the primary business of insurance companies is not really selling insurance. Instead, their primary business is simply attempting to make money on their money.

Insurance itself is merely a product that has morphed into insurers’ means to an end — that is to bring in money, called premiums, and managing the same to make more and more.

Rationale would sensibly dictate their making more would result in lower premiums, investments producing greater efficiency in operations and enhancements in client care. Ultimately, policyholders would report en masse unparalleled customer service.

Instead, the business model is failing insurers…and in turn failing the policyholders. Insureds need to be aware of insurers’ rather invisible modus operandi. Furthermore, policyholders having to contend with insurers must understand the value of the Public Insurance Adjuster when faced with a property or business interruption claim.

Let me explain.

To operate profitably, insurers must earn more from premiums than they pay out in claims. To accomplish this, premium proceeds are invested across a range of asset classes — principally stocks, bonds, mortgages and real estate. Generally speaking, nearly 70% of all dollars invested by insurers has been invested in bonds.

During the past several years, the depressed bond market has generated low yields and resulted in the profitability of insurers being squeezed. Additionally, as set forth in the Insurance Journal article, “for U.S. property/casualty insurers, net written premiums still grew in 2015, but the rate of expansion slow[ed], and the industry’s collective combined [loss] ratio worsened slightly.”

Okay then. BUT, 2015 wasn’t the first year of said losses.

Now we pull back the covers . . .

In 2014, the combined loss ratio grew to 97.8%. That means that for every dollar that insurers collected as premium, they paid out 97.8 cents in claims. And that doesn’t account for the overhead operations of the insurance companies, their advertising and commissions paid to brokers and agents, as well as some other costs.

In the 4th Quarter of 2015, insurers reported their combined ratio was 100.5. This was 33% lower than Q4 2014. This downtrend occurred during a year in which underwriting gains were up $8.7 billion.

The headline here is that while insurers’ products were heading in the wrong direction, their investment income was at $47.2 billion for the same period.

What does that tell you? That insurers don’t make as much money selling their product — insurance — as they make on their investments.

So, how are insurers dealing with this claim-to-premium squeeze?

There are only two factors that they can control and neither benefits the policyholder:

  1. The insurers have reduced overhead, and
  2. The insurers necessarily attempt to reduce the amount they pay out in claims.

Neither is what you expected nor wanted to hear. Consider both the impact and how to fight back.

Not that many years ago, when you experienced a property insurance claim, you called your agent who reported the loss to your insurance company. Your insurance company sent out one of its own employees to assist in resolving the claim — its insurance adjuster. My oh my how the insurance world has changed!

Fast forward to 2016: You have a claim. You call your agent. He calls your insurance company. What happens? On more and more property claims than in the past, your insurance company places a call to a third party — a so-called independent (or not) adjuster, who is employed exclusively by the insurance industry, to adjust your loss.

So, you no longer deal directly with your insurance company at all.

These independent adjusters have sold insurance companies on the proposition that they will be able to resolve your claim for much less than the claim would otherwise settle for…even after paying the independent adjusters on an hourly basis…so that it makes sense (and dollars!) to hire these third-party adjusters. The insurance company saves on both ends: smaller claims and lower overhead!

So, now you are working directly with a company whose only interest is impressing the insurance company that hired them to keep their claims low. They have no pre-existing relationship with you, no continuing relationship with you and frankly don’t care what your long-lasting opinion is of them.

Doesn’t sound very fair, does it?

This semi-captive adjuster (who claims to be independent, but is always retained only by insurance companies…for their benefit) then reports to a desk adjuster at your insurance company, who neither has much experience in adjusting losses nor has ever been in the field and seen or smelled a loss. It is the desk adjuster’s job to settle the loss. But, they only have limited dollar authority to settle.

So, welcome to the treadmill of property losses…where the hired gun adjuster gets paid by the hour and wants to string your loss out as long as he can (and the only way he can make up for his time is to drive the settlement down lower and lower), reports to a desk adjuster, who hasn’t been in the business very long and doesn’t have sufficient authority to settle many losses for their fair settlement amount.

So how does an insured manage the new world of property claims?

You absolutely, positively need to retain an expert on your side of the claim. Those experts are called Public Adjusters. They have been licensed by state governments to exclusively assist policyholders in the adjustment of their property losses and are the only claims professionals who can legally represent your rights during the claims process. Perhaps most importantly, Public Adjusters are the only professionals in the entire string of a claims adjustment that are on your side exclusively and do not have any conflict of interest.

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