The Insurance Industry’s Fundamental Persistent Objective

The insurance industry has one overarching fundamental persistent objective: getting and keeping sufficient scale comprised of clients who have a high likelihood of generating profit. Of course, I mean “profit” as described or defined by the metrics of the insurance lines of business each insurance company conducts commerce.

Scale for the sake of scale is essentially a financial horror scenario for insurance carriers. No insurance line of business is a commodity. Each insurance line of business must be underwritten according to the requirements of the metrics of that line of business. Wanting to achieve scale for the sake of scale (probably) works for commodities as well as technology sales: it sure as hell doesn’t work for any insurance line of business.

Each time an insurance carrier makes a sale it is simultaneously purchasing a probable loss. The carrier needs underwriting experience, investment acumen, and time to create the requisite reserves (and surpluses) to not only cover the probable loss but also generate a profit.

That Total Addressable Market (TAM) that VCs and other investors salivate over when they see the multi-trillion dollar insurance industry? Scale, and by that I mean ‘profitable scale‘ that has been built, and continues to be built, throughout the various insurance lines of business by the extremely hard work of insurance agents / brokers and the industry’s carriers’ underwriters by identifying which customer to acquire on a one-by-one basis over the decades. (Obviously group insurance is a different beast but I’m discussing personal and commercial P&C insurance as well as individual L&A insurance.)

What about paying claims?

Paying claims is the moment of truth for the client (and also for the agent or broker who represents the client). But not every claim can be paid within nanoseconds (or quicker): there is far too high a level of insurance fraud (and not just health insurance fraud where the size of the fraud is the equivalent of some countries). Insurance carriers have a fiduciary responsibility to only paid the claims, or parts of the claims, that meet the terms, conditions, and restrictions of the contract (e.g. the policy).

Carriers aren’t in the business of replacing a physical asset that didn’t work or has been damaged. Carriers are in the business of determining WHY and HOW (and WHEN) the physical asset doesn’t work or has been damaged. Carriers aren’t in the business of offering coverage for a person’s actions or behaviors UNLESS those actions and behaviors are covered by the terms, conditions, and restrictions of the contract. Again, an investigation could very well be warranted. Similarly for corporations purchasing commercial P&C insurance and submitting a claim (perhaps that water damage is not covered because the water came from below rather than from above [unless the company purchased flood insurance].)

Might the simpler, short-tail insurance lines offer an opportunity to pay claims quicker and quicker? I think these short-tail insurance lines offer an even better opportunity, particularly in our mobile, digital web-connected era, to create increasingly more fraudulent situations. (Hello, Deep Fakes !) Fraud-as-a-service could be extremely profitable … for the dishonest claimants but not for the insurance industry. (I could even see FaaS as an app for various insurance lines of business or perhaps Cyber Fraud – CFaaS.)

Speaking of “profitable scale”: customer service is a critical component of expense for carriers and agents/brokers to offer administrative and claim service. Insurance firms need to hire empathic service professionals (and subsequently teach them the insurance business). But it also speaks to the requirement for insurance firms to identify the subcontractors they use: it should be straightforward for carriers to accomplish this because carriers have been participating in ecosystems for decades and decades and decades (healthcare providers, property restoration expert, medical rehabilitation professionals, automobile body shops, …).

Customer Service or Claim Service: Best practices is infinitely more than FAQs or a Search-and-Find web site for all of your claim questions. Best practices involves humans – knowledgeable, empathic people.

Returning to the title of this post but in the form of a question: how does an insurance firm succeed at realizing the fundamental, persistent objective of creating profitable scale ?

Answer: Similar to how porcupines make love – very carefully with skillful knowledge of the matters that, well, matter.

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