A scarcity, winner-take-all mentality causes insurers to reduce coverage, raise rates, and commit bad faith by focusing on reducing legitimate claims expenses. A scarcity mentality occurs when a person or company believes that they are limited resources that must be divided between themselves and other people or companies. It causes a company or person to believe that for them to gain in a transaction that the other side must lose. While this belief is not isolated to insurance companies, it can drive anti-consumer and ultimately anti-competitive behavior.
A recent report by insurance industry vendor, Aon, highlights how this type of thinking can cause insurers to make decisions that are detrimental to consumers and short-sighted. In a report entitled “Homeowners Return on Equity Outlook,” Aon paints a bleak picture relating to the cost of replacing asphalt shingles on home roofs and how its expense is driving down profitability. The only solutions suggested by the authors of the report relate to higher deductibles, depreciating roofs, and better underwriting. For a good summary of the report, check out this article in Carrier Management. Interestingly, the article deviates from standard methodologies to determine insurer profitability and does not rely on actual loss history but instead replaces it with a predictive model. To contrast, a report by A.M. Best finds that the first nine months of this year were profitable for insurance companies and is optimistic about the future of the property and casualty segment of the insurance industry.
Scarcity thinking has led to bad faith in the insurance industry. For instance, in the 1990’s Allstate hired McKinsey & Company that produced a report entitled “From Good Hands to Boxing Gloves” that advocated a series of measures designed to reduce claims expenses and raise insurer profitability without regard to the merits of the claim. State Farm hired the same McKinsey & Company who initiated a similar program entitled Advancing Claims Excellence. UNUM was famously profiled by 60 Minutes in connection with its bad faith practices relating to the denial of disability claims.
However, it doesn’t have to be this way. Insurers can think win-win and promote good faith claims handling and good insurance products. Last week, I detailed a program implemented by the Alabama Department of Insurance and participated in by insurers that, among other things, provides insurance discounts to homeowners who upgrade their roofs to the Fortified Roof Standard developed by the insurance industry research body, the Insurance Institute for Business and Home Safety. This solution helps policyholders and insurers by limiting loss severity and lowering premiums. Solutions like this one, show that there are more tools available to insurers besides cutting coverage and denying claims.
Please contact us if you need help with your roof claim or other property insurance claim.