Farmers Insurance Laying Off 11% of Workforce, Citing Industry Challenges
insurancejournal.com
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I would think the PR department could come up with something about "trying to keep costs competitive for our customers" or something like that. Instead they're telling California and Florida customers to take a hike ... along with 11% of their employees.
When is the last time we heard a company enact a company-wide, 50% cut in officer's salaries and a freeze on their compensation?
But how can you prove that? The very justification for generous executive pay is that you couldn't get most people to do that role because it's so demanding and without these particular people, revenue/profits would tank. (slight exaggeration, but I don't think by much).
That's also my justification when I eat a second bowl of ice cream. Surely nobody else will want this ice cream. I guess I'll just have to eat it myself.
Private equity is much maligned, but it has turned around some failing companies by gutting upper management then having a new IPO which worked out fine.
See page 10:
https://www.zurich.com/-/media/project/zurich/dotcom/investo...
Buybacks come from net income (profit). A business always has a choice of using the profit to pay the business’s owners (via dividend or buybacks) or to invest it back into the business (such as spending on R&D).
Obviously, what portion of the profit is ideal to spend on R&D and what portion of the profit to pay to owners is not an objective truth.
And buybacks are nothing special, except that they allow more flexibility in how to reward the owners.
Never confuse the textbook economics with the reality of individual incentives. Company management used the low interest rate environment of the recent past to borrow money that was then used in buybacks. Executive management generally is in a no-lose situation with regard to compensation, there may be long-term incentives, but the CEO generally can exit within the term of their employment contract with a sizable payout even if they blow up the company. The board is supposed to prevent such tactics, but US corporate governance is largely about cross-pollinating memberships so that CEOs can all vote 'yes' on each other's pay packages.
Are people who buy stocks not incorporating the increased debt levels of the business in their valuation of the share price?
Due to inflation people with large amounts of capital have little choice but to invest somewhere. Ultra safe bonds are also ultra low yield which limits options.
If a business borrows money, and people still buy the shares, then that means people are willing to bet the amount borrowed will still allow for a sufficient return on investment. So where is the problem?
> If a business borrows money, and people still buy the shares, then that means people are willing to bet the amount borrowed will still allow for a sufficient return on investment.
The problem isn’t with the company but with the market. Sure the value of those companies adding debt drops with the reduction in their expected ROI but that’s not the end of the story because you need to consider how that money is reinvested.
Suppose the S&P collectively borrowed 10 trillion dollars doing this. Each company that takes part is as you say a worse choice, but the overall market is now inflated with this money so everything becomes a worse investment simultaneously. Which then sends some money back to the original companies who issued dividends/ buybacks with borrowed money.
Yes, that is what safe means. Risk and reward. Reward without risk is simply expanding the supply of money, aka inflation, aka reduced purchasing power of the currency.
>Suppose the S&P collectively borrowed 10 trillion dollars doing this. Each company that takes part is as you say a worse choice, but the overall market is now inflated with this money so everything becomes a worse investment simultaneously. Which then sends some money back to the original companies who issued dividends/ buybacks with borrowed money.
If everyone did it, then it is not a "worse" investment, it is simply keeping up with the reduction of the currency's purchasing power (e.g. all businesses taking advantage of covid stimulus). But it is a nonsensical premise anyway, since there are insufficient lenders to lend the S&P $10T, and the limited number of lenders will, on average, do due diligence when lending, even to S&P companies.
Anyway, back to the point was hand, which was refuting yborg's claim that business leaders can just borrow willy nilly and pay themselves via gains in stock price via buying back shares.
The only situation this happens is when the business has large stockpiles of cash saved abroad, and so instead of bringing it into the US and having to pay taxes, they are able to borrow money at near 0% interest rates because lenders know they have such huge stockpiles of cash abroad and healthy cash flows. Delaying tax liabilities is simply the logical thing to do when the government has set fiscal policy such that you can find lenders to lend to you at near 0% interest.
Lending like this shouldn’t change purchasing power for real world goods much, the point is it specifically impacts investors.
> Anyway, back to the point was hand, which was refuting yborg's claim that business leaders can just borrow willy nilly and pay themselves via gains in stock price via buying back shares.
Sure, but my point was what happens to individual companies is different than what happens to markets. If half the companies on the S&P did this then the other half would see a small price spike. The price spike in other companies would also increase the valuations of companies that borrowed, not by enough to fully offset the borrowing but still more than zero.
Borrowing isn’t required here, if Google issued a dividend for the majority of it’s reserves a significant fraction of that money would get reinvested in stocks and a small fraction of which would go back to Google.
https://www.zurich.com/-/media/project/zurich/dotcom/investo...
You can see executive compensation details in any 10-K. But people still like to use the nominal values of the shares to stoke emotions.
Today, we compensate them like they are doing the lion's share of the work.
I did not say anything about a leaderless company. I said that the current perceived value of C-suite contributor is way over-inflated. That culture can and should change.
I also don't think compensation is the only/best tool to prevent or punish bad decsion making. There have been cases where developer/dba have put companies out of business with a poor decisions. We don't pay them millions of dollars to 'get the best' we put processes in place to prevent issues like that. Otherwise, I'd suggest doing the same thing to the bad CEO that you'd do to other employees: fire them. That's why you have a board.
Instead, "work" is measured exclusively by output. How much happier is the customer now that you've done your work? How much of that happiness translated into an actual transfer of resources from the customer to the company?
Seen through this lens, it's obvious that a couple of smart decisions at the top can easily outweigh years of grunt work by thousands of employees.
Now it's just a question of getting the best decision makers and leaders into the top positions so as to maximize overall value creation. But that's much, much easier said than done.
Further, suppose you setup long term options and the stock tanks for something completely outside of an executive’s control. They aren’t going to sit around waiting for useless options to vest so you need to increase their compensation package to keep them. Thus they aren’t taking the same risks as investors.
I know 2 CEOs who aren't on that list who took pay cuts. If I told BI about it, that's not enough for them to publish an errata on the article.
> Execs who are heavily compensated in equity also benefit from reducing their wage salaries to minimize tax liability exposure
That makes as much financial sense as a buying a $20 bill with a $100 bill.
There is plenty to sue over. Statistically, are the laid-off employees older, more male/female, or more minority representative than the national workforce? Were any verbal promises of no layoffs or ongoing work made by anyone to any employee in those states? Do any municipalities in those states have unique notification other laws around layoffs?
Anyone can sue anyone for anything. If I sue you for emotional distress because I allege you like clowns and that bothers me, it will be thrown out (rightfully) more or less instantly. But a huge layoff at a national corporation? There will be thousands of nuisance suits and probably tens of maaaaybe suits given the complexity of state and federal laws.
It's not Farmers fault that we released too much CO2 and now wildfires and hurricanes are way worse and getting even more worse.
If the people of California and Florida want insurance so they can build matchbox houses in high risk disaster zones, then they can start a public insurance fund and pay for it with their own taxes.
https://en.wikipedia.org/wiki/National_Flood_Insurance_Progr...
From my understanding, this subsidy to people living in flood prone areas was basically untouchable due to Florida’s status as a swing state. I wonder if that has or will change due to Florida no longer being a swing state.
Florida may turn into a swing state again. There's a lot of demographic changes occurring there.
(though, as glaciers melt, you apparently get some seismic activity due to the reduced weight on the crust)
This has always been the case in Florida. Insurance simply costs more to compensate for risk. Flood insurance is separate in the US (and very costly).
California might have more to do with the regulatory and legal environment.
> now wildfires and hurricanes are way worse and getting even more worse.
What happened to the climate/weather distinction? So, every hot day and hurricane is evidence if the earth warming? Every cold day and blizzard is a temporary local weather event, not indicative of the long term trend?
Bad weather == that's climate change
Good weather == that's just weather
These are operating margins, not profit margin, but page 7 should still give an idea for which businesses have more pricing power than others. And of course, bigger companies getting bigger means businesses might simply be gaining negotiating power overall.
All of those charts could [and should] have the same Y axis scaling, including being anchored at 0% at the origin, and the information would be much more easily consumed at a glance.
No one looking out for me means I’d better screw everyone else over first and “get mine”.
Now, risk-free investments (such as a 30-year US Treasury) are yielding 3x what they yielded just 3 years ago. That dramatically changes the calculus when considering whether to invest in a risk-free or a risk-on asset.
To me, it would be weird if companies acted the same way in such a different environment rather than weird that they act differently.
If someone said I’m going to start free climbing the tallest buildings in the world - but I need insurance - the company will tell you to get lost because the risk outweighs the reward. This is what insurance companies are doing all over the place (fl/ca) because those environments are truly becoming uninsurable.
But then people are shocked and awed when the situation happens with them. Why? An insurance company is not a charity it’s just a profit engine. Don’t get mad at the dog for barking at the mail man :)
I assume it's because of natural disasters such as Fires, Hurricanes, and sea level rise?
https://www.iii.org/fact-statistic/facts-statistics-homeowne...
Houses are more expensive in CA, building costs are more expensive in CA and the weather is more volatile (and becoming increasingly so) in CA.
The rate level in CA needs to increase. The regulator in CA makes it difficult to raise rates, so companies are responding by reducing their appetite.
So you would have a situation where a roof needed to be replaced, should cost $30k. A roofer comes up with an estimate for $60k (and maybe pays the homeowner back a $10k kicker), gets the homeowner to sign over the insurance policy to him. Then he hires a lawyer who spends $50k of his time litigating the case. Let's say the court sides in favor of the insurer and awards $30k, the lawyer still gets $150k (3x multiplier on the $50k of fees).
As a result you had Florida accounting for 8% of the homeowners insurance claims nationally and 75% of the lawsuits nationally. There are billboards for insurance attorneys EVERYWHERE in florida.
The phenomenon impacted big national companies like State Farm that have similar claims handling procedures across their book. So State Farm would handle claims exactly the same in Florida as in Illinois and get sued 10x more often in Florida because of the financial incentive to sue. It also impacts Florida's state-owned insurer, which does compete very vigorously in the market and is the largest insurer in the state.
David Altmaier, the former Commissioner of Insurance in Florida, wrote a good piece on that situation - https://floir.com/siteDocuments/ChairIngoglia04022021.pdf
Fortunately Florida took a really good stab at fixing the problem with some legislation passed last December. It will take a while to see if the legislation worked, however. Meanwhile we still have the macro factors (climate change, reinsurance costs) to contend with. https://bestsreview.ambest.com/edition/2023/february/Florida...
Systems do sometimes collapse, but I would prefer to look at it as "we are smart enough to study these systems and act in the social best interest when failure is imminent or has already happened, and responsible enough to work to improve the society that makes our lives possible."
Parts of the world are becoming inhospitable for human life. We can try as we might to terraform and engineer against it but Mother Nature will win.
At some point as an insurance company or even whole industry needs to look at the data and assess whether the juice is worth the squeeze. These companies - despite marketing materials - don’t care about fixing your home. They are only interested in risk versus reward. When the operating environment becomes too risky you either raise prices astronomically (this is happening) or you pull out entirely because your customer base simply can’t afford it (this is also happening).
Regarding the stance that we are smart enough to outsmart these problems - I agree but also disagree. What do you do when all signs are pointing to no and the cost of potential solutions far outweighs any benefits? You cut your losses and move.
We are smart enough to be proactive about these sorts of things, and considering we already have such an apparatus called "the state" to use to our benefit, we can provide assistance to people to reinforce their homes or move when necessary (in a rote economic sense, to keep them net-positive productive, in the utilitarian sense; in a humanistically compassionate sense, to keep them dignified) instead of trying to guide systemic patterns of behavior by punishing individuals for making impossibly complex choices regarding where they chose to and already do live.
That's literally the apparatus of the state (in both senses of the word) used to the benefit of the residents. That may just have the effect of moving the problem from "my insurance premiums are too high" to "my taxes are too high", because at the end of the day, someone has to be paid to fade the risks inherent in insuring the property against perils.
The issue with Citizens is that it does create a lot of financial risk for the state, especially since it doesn't buy as much reinsurance as a private company would.
as opposed to the whims of a few unelected bureaucrats? influenced by the whims of the politicians trying to buy votes?
> We are smart enough to be proactive about these sorts of things,
no, "we" are not. Let's suppose you are, for the sake of argument. What reason is there to think that the sort of people who get appointed to regulatory bodies are equally smart? As opposed to just "well-connected."
You're talking like this is some kind of conspiracy theory, when there's not really any other way it could work. Banks will not give you a mortgage without home insurance, because then it would be an unsecured loan against an asset which would be worthless, with them eating the loss, if the house was destroyed. That's not sinister: nobody wants to loan against an ephemeral asset. And car insurance is mandatory because if you hit somebody, causing a million dollars of lifetime medical bills, and you don't have insurance, you've just fucked their life over with no possible recourse.
Markets have taken many different forms, have been entrusted with different sets of responsibilities to different degrees, over the course of economic history.
Perhaps it makes more sense now to develop a fiscal institution to run insurance than to continue to rely on a market-based solution.
Lenders are mostly in the business of underwriting loans so that they conform to certain standards, such as those set by the government (fannie mae/ginnie mae/freddie mac/etc), and then selling them to the government after which their cash flows then get sold to investors looking for fixed income investments.
So it might be too much work to for little return to step outside of this optimized system and custom design a mortgage product, especially when the alternative is government subsidized mortgages whose interest rates you will not be able to beat.
>Mortgage interest is tax deductible but home insurance isn't.
Since 2017, 90% of US tax filers do not itemize, and so they cannot deduct home mortgage interest.
Wow, as someone who's been itemizing his whole life, that's astonishing if true. Learned something new today!
Odd then that so many forms of insurance are mandated by the government.
Alternatively, suppose cars become super risky and you need to charge $10,000 a month to insure the car, and reasonably conclude that no one is going to pay that, and after you pay for marketing and overhead and payroll, you will still lose money if you try to sell the insurance product. Do you stay in the market?
It's especially funny to see everyone in the comments complaining that the insurance company is "only thinking about the short term".
There should be no marketing if it's mandated. These companies should not be run for profit since having insurance is required by law in many situations.
It's safer to just get out of the market entirely. You can always go back in but if you stay in too long it could wipe you out entirely.
Payroll? Overhead? Marketing? Rent? This isn't a thought exercise, there are real costs associated with being in a certain business.
You're currently paying for that neat little 3d animated gecko under threat of US law.
That list includes my state. I buy auto insurance because it's more convenient (and cost-effective) than going through the bond posting process, arranging my own claims-handling and legal representation in the event of a loss, etc.
I pay $1220/yr for insurance for two cars and two drivers (and for coverage well above the state minimums and excellent customer and claims service). IMO, it would be crazy for me to turn down that deal.
I looked into a surety bond specifically for auto insurance thinking I might be able to earn a bit of interest on $100-200k cash, get a small dividend, and "break even" in half a dozen years or so. The reality was pretty grim, basically if you're not already actively searching for things to do with 6 or 7 figure sums, it's not worth the time, and that's ignoring the logistics of having someone available for the claims processing side.
The healthcare argument is different and reasonable. The lack of a taxpayer-funded health scheme in the United States combined with making it illegal to opt out of being alive (and requiring health insurance) is nonsense.
The problem is lack of competition, both in pure number of companies due to consolidation, and also widespread collusion between what should be independent companies in the form of adopting the same business policies, software, and even surveillance databases (aka customer records).
https://en.wikipedia.org/wiki/Motor_vehicle_fatality_rate_in...
If you have a 3 year old child crying in a restaurant, can you get mad at it? No. You can pat it on the back and take it outside to respect the space and other patrons, but you can’t get mad at a child for crying. Same analogy. Don’t get mad at nature doing nature things.
Say you were an insurer… would you want to take risk for Florida hurricane losses knowing what we know?
If we want a functional insurance market in these places, we need a student loan type solution - make the Feds the reinsurer and have the insurance company mostly administer the policy.
Yes, flood insurance and some other examples, but my objection isn’t based on platonic ideals of equally bad policy for everyone, it’s based on pragmatic ideals of not extending bad policy more widely.
Let the market price insurance. At most I might support a mandatory tax on profits that is set aside to cover exceptional future losses, kind of FDIC-like.
At the risk of taking this down a political path, I'll take this a step further. States like FL who fall into this bucket are further aggravating as they are also the ones that espouse personal responsibility & small government.
I'm not personally against subsidizing these things. But I am against people screaming until they're blue in the face that they hate socialism and then cry foul when their insurance rates are too expensive for them to afford.
I'm 100% fine with an individual choosing to not pay going insurance rates and choosing to live in a risky environment. I'm also 100% fine with that person eschewing the idea that government should be subsidizing anything. I'm 0% fine with such people coming back and complaining that the leopards ate their face.
It's becoming more difficult to find a place to live that does not have some potential issue, be it water, weather, heat, cold, earthquakes.... supervolcanos :)
Depending on climate there’s some other options too.
... in a non-hurricane zone, right?
Sounds like some of these coastal areas are on a ~5 year roof replacement cycle. Up here in DC, shingles last for 30+.
And then wouldn't it be in the interest of the insurers to maintain a shared list of "bad" (unprofitable) customers and freeze them out? Which is already a bit of what credit scores are for?
"Your previous insurer dropped you, there must have been a reason."
And, yeah, when applying for a policy, the questionnaire should include "have you filed a claim for X, Y, Z in the last 2 years?" Auto insurance does this already.
Insurance companies have a privileged legal position to do all sorts of stuff.
Where do you live that’s so safe and disasters are uncommon and aren’t on the increase?
Everywhere will have different risk factors, the American attitude seems to be ‘I won’t pay for anyone else, even if it means I ultimately will have to pay more’.
Where I live, hardly any disasters - tornado about every 100 years, last time there was huge wildfires was just after WWII, zero risk of flooding - biggest 'risk' I have is being snowed in for a few days as I dig out - there are plenty of places that have a much lower risk profile - and people like me, that pick where we live based in part on the risk, shouldn't have to pay extra insurance to cover people who willing choose to live in low-lying, flood prone areas.
If you build your house in an area like that and fail to build any sort of protection for expected conditions, why in the world should your losses be subsidized by everyone else?
When the cost of insurance for your beach house is too high, that is a signal that you are at extreme risk, not a signal that you should pass a law to make the rest of the country pay for the portion of the risk that you can’t afford.
I don’t see a solution honestly. With global warming large parts of the world will become uninsurable. And we shouldn’t expect insurance companies/the government to carry that burden just because someone decided to live there.
It’s easy for states to regulate insurance companies for political points, which you’re seeing in California and Florida. However, insurance markets collapse slowly and then very very quickly when the math stops working out.
If beachfront properties have substantial risks that inland properties don't (such as flooding from storm surge*), then not using is_beachfront? as a factor will end up being a subsidy to the owners of beachfront properties.
Of course, there are ways to be humane about this, given that tearing people apart from their communities is bad for society. The government could taper off the program slowly, giving communities time to relocate. Or they could provide damage payouts with the stipulation that they are used to relocate somewhere else with lower risk, not rebuild in the same spot.
But to indefinitely subsidize building in doomed places? Doesn't seem right. I'm sure there's nuance I'm missing, happy to be enlightened.
If the amount of uninsurable properties is (comparatively) small, it’s way easier to throw some money at them and keep everyone happy. I think that’s the basic premise of the program.
Everything changes when, for example, a large chunk of South Florida becomes uninsurable or inhabitable, potentially displacing hundreds of thousands. I don’t think we have anything in place for that scenario.
In order to enjoy living in places where nature exact a larger toll - near the ocean, on a mountain that gets dry and doesn't have a fire station nearby - homeowners will need to invest in hardening their homes, invest in buying more expensive insurance and will need to make sure they have the financial buffer to rebuild if their home is damaged by the weather.
As the ocean rises, we will need to move more inland.
That's why I'm surprised that the government provides subsidized insurance for folks in extremely flood-prone areas.
There is a pretty obvious solution in my mind: The federal government offers homeowners a buyout for them to move out of that property. If they choose not to take the buyout, they are removed from the flood insurance program.
This would save the government a lot of money over time, even if they made the buyout significantly higher than the property value.
Doesn't matter if it's beachfront - there shouldn't be a home on a beach that sees significant hurricane damage every year.
So we're going to buy those folks out anyway. This year, next year, 20 years from now. Eventually. It would be better to start now. New Orleans should have been abandoned already.
You're acting like a buyout is inevitable when it's not. The last thing we should do as a society is a multi-hundred-billion / trillion dollar buyout of beachfront hotels and luxury property.
The wealthy beachfront property owners will point the media's cameras at the also-destroyed properties of the poor and elderly in the area, saying "How can the USA let these poor people lose everything!" We, the stupid taxpayers, will fall for it and bail everyone out.
What the perso you are responding to is saying is that we should start in incentivizing people out of such properties now versus it happening over a longer period at a higher cost. Either way some people are going to probably have to move so we may as well get ahead of it
"Now you need to reach into your pocket and pay them back." "Nah; fuck off. They can live with their decision."
Or at least they ought to be left to fend for themselves if they suffer losses due to that.
Is that a controversial statement? Beachfront property is not a human right. If it's too expensive to insure, then it becomes available only to people who don't financially need insurance - or those who are willing to risk going without it even if they would need it financially.
If the problem is stated that way, I think a lot of Americans are going to realize how little they care about Florida's insurance market.
Cutting officer salaries would accomplish little, except accelerating talent loss.
Man those SaaS products are so expensive, cut those programmers salaries - might be a corollary.
My point, and I think there is one in here, is that insurance companies have been making terrible decisions based on marketing instead of basing them on what the actual risks involved are.
California's fires and Florida's weather are a lot more risky than people are willing to admit. Some coastal states have passed laws prohibiting the consideration of climate change in insurance and governmental decisions. Those states are also seeing insurance companies performing strategic withdrawals from those markets. But they aren't as big as CA & FL, therefore they don't get the media attention.
There's a significant feeling I have of "I hope residents of those states are happy with the outcomes created by their state government's choices."
Memes and The Onion have become reality and I want off this timeline.
Also, pretty sure actuaries are still pricing risk, based on how many people in these organizations’ directories work at insurance companies.
One of the hardest things about insurance is figuring out the probabilities of very unlikely events. Hurricane Andrew was a moderately large storm that directly hit three major population centers - Miami, Ft. Myers and New Orleans. That circumstance is infrequent enough that modeling it statistically leaves a wide range of uncertainty.
I would think about insurance as more of a smoothing mechanism of inherently uncertain outcomes. When something happens that's unexpected and causes a larger loss, that is typically recouped by the industry over a few years of higher rates. That way the industry is still absorbing volatility, which is valuable to their customers, but doesn't require that they be 100% correct about the probabilities of infrequent events.
> I would think the PR department could come up with something about "trying to keep costs competitive for our customers" or something like that.
Keeping pricing competitive and staying profitable are both things that a business has to do when it doesn't have a monopoly (or oligopoly). It can't stay profitable for long while losing customers, and it can't keep customers w/o having competitive pricing (or quality). It's a tight rope to walk. Which of these they talk about will depend on what audience they are talking to.
I don't think it's really a bad thing for a company like Farmers to cut costs. Insurance companies are by and large pretty bloated from a cost perspective and could do to be more efficient, reduce overhead, use more technology.
It's very common for homeowners insurance companies to have expense ratios of 30-40%. So if you are paying $3000 per year thats ~$1000 EVERY YEAR that is being wasted on branches/agencies you don't visit and corporate overhead.
In general, there are 3 main parts of an insurance company that are "in house": underwriting, claims, and accounting.
Accounting isn't really something that can be automated or outsourced.
You can't automate claims, but you can outsource.
You can automate/outsource _some_ underwriting and/or parts of the underwriting process.
Increasingly, I've seen independents adjusters (IAs, not to be confused with Public Adjusters [PAs]) doing underwriting inspections. Basically, when your adjusters aren't adjusting, they are inspecting new policies to ensure that they meet guidelines.
So I am guessing these layoffs are probably from one or both of those areas.
But P&C is a different beast.
> and the value is within a certain range
This is called a deductible. We literally had a guy who got denied on a claim end of last week because it didn't meet his deductible. (He provided the list.)
Then literally the next day he re-submits with MORE STUFF. So yeah, the human element, even in a reduced form, will always be required. Stuff that he cannot prove was actually even damaged because he had "thrown it away".
I.e. Creating fraud scoring engines and auto paying claims they greenlight (usually incorporating history and total value as major signs). Essentially saying "there's not enough potential fraud value here for it to be cost effective for us to apply human review." Although someone submitting claims at an abnormal rate would be flagged.
But I'm more familiar with healthcare.
Can't speak for every avenue, but I can definitely say this is not happening with property insurance. The claim amounts are sometimes big enough that it warrants additional review or subrogation.
Obviously there will always be claims that require human assistance, but if even 50% of claims can be automated, that's still a significant savings for the insurer.
The irony of this, though, is that the quality of the underwriting risk assessment can suffer, meaning premiums will often be underpaid relative to statistical risk, and create more problems if enough of them push through.
Another money-saving trick I know of in insurance is to severely downsize the claims department. It's lawfully mandatory to process claims, but I'm not sure if there's a statute on how long to process them. One of the carriers my office hates working with can take 3-6 months to process a claim, and often will find some reason or another to not pay it.
If anyone wants a pain point, the insurance industry desperately needs a decent-quality rater/AMS: the tech and UX is hilariously ancient.
Do insurance policies get packaged and sold as financial products, or are they re-insured on the backend but continue to be held by the originator?
Related, at what point of policy origination/reinsurance are standards audited and applied? I.e. if I originate a mispriced policy, where does that get noticed/rejected?
I have my own essay that tries to summarize it[1], but the entire idea of insurance is to work with pure risk:
- Speculative risk is when you might gain from big events (e.g., VC) - Pure risk is when you will only lose from big events.
The entire job of an insurance company is straightforward: take a little bit of premium calculated by actuarial data (historically represented as a table), then pay out large checks to the people who have an unlikely event.
I have a prevailing axiom that 3-10% of the population makes it difficult for the rest of us, and insurance gets complicated for that reason:
- people lie about claim damages - claims adjusters sometimes find legal ways to not pay claims - actuarial/legal framing can allow non-coverage of something that ought to be covered in good faith (e.g., driving your car out-of-state)
Now, that's the POV of the insurance company, which sets some context I wish I had had.
The POV of the party seeking insurance is that they're transferring pure risk, then paying rent to the insurer for it. It's possible to recurse this, and an insurer can become the insured by packaging up a bunch of risks and hand it off to other insurers for a price. I'm not THAT knowledgeable, but it wouldn't surprise me if that's what insurance orgs that took on too much risk actually do relatively often when they got a bit ambitious.
The tech world could actually learn a thing or two additionally from insurance. The secret to a functional insurance company with a liquidity issue is to, effectively, do nothing and wait for customers' insurance premiums to replenish the money supply. "Do nothing" is the exact opposite mantra of "Move fast and break things", and there's a time/place for both!
I've never seen this happen. Smaller carriers carry re-insurance since most smaller carriers are limited geographically and it's entirely possible a big-enough event would cause an issue where they couldn't pay out to cover all claims. State-based carriers (smaller farm mutuals, for instance) could be VERY susceptible to this.
In Texas after Hurricane Ike this caused a slew of changes to our underwriting guidelines along along the coast with rate changes and where we focused on recruiting agents and policies. (e.g. recruiting further north and west).
> Related, at what point of policy origination/reinsurance are standards audited and applied? where does that get noticed/rejected?
A lot of policies are bound for 30 days initially and then can be cancelled if the underwriting guidelines fail for the policy. Some companies may not even bind coverage until after underwriting is completed. As an agent if you sell a policy that isn't priced correctly, MOST of the time it gets caught by underwriting. They have ranges of limits that you can go between. For instance, normally contents coverage on a house can be some percentage of the insurance home value (let's say 40% to 120%). Let's say your house is insured for $250k... but you bought a $120k brand piano. Normal contents coverage might be 80% = $200k for your clothes, computers, electronics, kitchen stuff, etc, etc. That piano would require you to either 1) exceed 120% (which would require EXPLICIT underwriting approval) or you'd have to get a rider/endorsement for a special item. (which would likely also require more underwriting approval.)
P&C companies have mandatory requirements for how long it takes to handle claims. During catastrophic events, those timelines are usually extended: because it can be dangerous and there are lots of claims.
Adjusters want to get paid and they don't get paid until the claim gets closed. So it behooves them to work quickly.
Implies that these two things could be related. Would make sense that reducing/stopping business in two very populous states could impact their workforce.
Property insurance is always in tension between actuarial statistics (estimates of ground risk) and politics (governments of various levels wanting insurance to be as cheap as possible).
I'd be fascinated to take a peek at whether actuarial models have changed in California and Florida (I can't imagine they haven't), and it might not make sense to sell property insurance there from a risk:marketPrice perspective.
On the other hand, I'd imagine the Fed boosting rates should have made the cash streams that insurance companies are more profitable?
As someone that works closely with these things, I can confirm that the approved models in question haven't changed significantly in the past few years. I know for a fact that one of the major hurricane models in use in Florida hasn't seen major changes over the past few years (just updates to incorporate the next year's worth of hurricane data).
However, two major factors impact losses to insurance companies in these states. In Florida, litigation cnan inflate losses to an absurd degree. The state accounts for 9% of all claims in the US, but 79% of the legal cases. Laws are trying to improve this, but it's a significant deterrent to writing business in the state.
California, on the other hand, doesn't allow the use of catastrophe models outside of earthquake risk. Instead, they rely on claims from the past 20 years to set rates. For a peril like wildfire (which is infrequent enough that claims data won't give a full picture of the risk), this significantly impacts a company's ability to account for wildfire risk.
[0]: https://nypost.com/2023/06/06/farmers-insurance-workers-blas...
I keep thinking the near zero interest rates messed up a lot of things, and we’ll continue to see them pop up for the next few years.
And they do not have access to the newly created 'temporary' facility to mitigate bond loss as the banks do.
Airline service, healthcare, government, etc. Take your pick, you will notice it wont work as well as it used to.
Expect more of the same. Climate change is just a part of this, the other part is end-stage capitalism. This is what it looks like when quality of life goes down for the next couple of generations.
Even 240 employees sounds like too many to me.
They serve 10 million customers. Nearly every customer should be able to use an entirely automated online form for signing up and for making insurance claims. Claims should be settled entirely with the customer uploading a 1 minute video showing what damage occurred, plus the bill to fix it.
Assume 1 claim per customer per decade, and each claim takes an average of 10 minutes to handle (check video, spot check bills, make payment), thats 100 full-time claim agents.
The other 140 employees can make a great website, policy pricing algorithm, and be in the finance/HR department.
And your plan for when clients are unwilling or unable to conform to your idealized filing process would be what? Simply don’t reimburse them? Or when they’re unsure what’s covered ? Or have some other question that’s urgent and not covered by an online FAQ? It’s a highly regulated industry, so that’s all going to go great.
Have people been so beaten down by shitty non-service from tech companies that they think this approach is normal?
The whole “why haven’t they considered that they could be more efficient ?” train of thought is tiresome. Admit that it’s a business you know literally nothing about and move on.
Otherwise I agree, there is likely a lot that can be done to make the processes more efficient.
It just doesn't make sense to spend more than 10 minutes on them.
Ah yes, the perfect recipe for fraud!
> Assume 1 claim per customer per decade
Herein lies the problem in some parts of Florida/California. If Florida gets hurricanes every year, then you're talking about a lot of payouts. This is a big part of the reason they are pulling out.
> and each claim takes an average of 10 minutes to handle
Normal claims take several hours apiece, depending on the type of claim and loss. Claims are documented. That way people can't get a new roof every 3 years and never replace it. Also, people don't actually know what their policies cover. Adjusters have to know the policies they adjust so that they can approve/deny coverage based on what the policies actually state.
> check video, spot check bills, make payment
They'd go out of business pretty quickly. People like to crap on insurance companies but there are a lot of people out there who are grade-A A-holes who feel like they should be compensated. It's amazing what some companies will pay for but it's also amazing how entitled people feel like they are.
There are a few things you can do to dramatically reduce the fraud risk.
Take the video of the damage immediately and through your own app. Now you can confirm with decent certainty the where/when of the incident and stop double-claims. You can also refuse to pay for any damage unseen in the video. No more "I hurt my back" type claims weeks later - unless you said your back hurt at the time, it isn't going to be covered.
Next, you require the user upload all the receipts they are claiming before you'll pay them a cent. This means that users will typically repair stuff 'on the cheap', rather than using very expensive repair/rebuild services that they'd use if they knew for sure insurance would be paying.
Third, you either pay avery claim in full, or not at all. If you find any evidence of fraud, you don't do a partial payout.
This would likely lead to an overwhelming wave of lawsuits. Soft tissue injuries can often have a delayed onset.
Please don't take this the wrong way, but your advice comes across as that of someone who may not have experienced either side of an insurance claim.
This noticeably doesn't stop you from purposefully damaging your home for an insurance payout. If I take a video of the damage to my roof right after I knock a tree over onto it, I would get a new roof paid for by an insurance company.
>Next, you require the user upload all the receipts they are claiming before you'll pay them a cent. This means that users will typically repair stuff 'on the cheap', rather than using very expensive repair/rebuild services that they'd use if they knew for sure insurance would be paying.
Seems like a recipe for builders to overcharge the insurance company. Unless you're suggesting that homeowners physically pay for the repairs before submitting the claim, which (for obvious reasons) is prohibitively unaffordable in most cases where you'd want to use insurance.
>Third, you either pay avery claim in full, or not at all. If you find any evidence of fraud, you don't do a partial payout.
You better have a great legal team, because you'll be getting sued a lot. In addition, you'll have very limited evidence to prove fraud (as you didn't have anyone visit the site of the damage, didn't have anyone negotiating the price with the construction company, etc.)
Combine it all together and you'll be paying out a lot of fraudulent claims. You'll also be losing a lot of lawsuits where you don't have enough evidence of fraud.
A good adjuster—especially an independent adjuster—is actually incentivized to find and pay for related damage. Not only does this (marginally) increase their billable, but it also leads to happier insureds and reduces the possibility of a subsequent claim (since those take time and money to handle—plus your deductible is per loss not like medical insurance where it's per year).
> This means that users will typically repair stuff 'on the cheap', rather than using very expensive repair/rebuild services that they'd use if they knew for sure insurance would be paying.
Except that, depending on the policy and the roof type, you may or may not be able to do that. We've seen entire roofs have to replaced due to aging or lack of the same material. Granted, it's not all policies, but it does happen. You can't get the same material due to age of it. Or the manufacturer went out of business. Or you find someone who does the work right and they find MORE damage than the adjuster originally found which requires a supplement.
People like to crap on insurance companies but I've seen them pay for absolutely STUPID stuff that they likely had no reason to pay for... but they did.
No, seriously, I know some folks are trying to reinvent insurance. I worked for an insurance brokerage in my youth. There are a few hard parts:
* sales. It's a confusing, uninteresting product, so you have to sell it. Ever wonder why you see so many commercials for State Farm, Allstate, etc? You can work around this some with independent agents, but then you have to recruit and retain them.
* risk management. You have to know how to price the risk (or find someone who can). I'm sure this can be automated to a great extent, but then you have to write or buy this software. I worked for company that built a business on finding weird risks (outfitter and guides, special events, inland boat coverage) and connecting them to people who could price the risk.
* legal understanding. Have you ever fully read a homeowners policy? There's tons and tons of legalese defining exactly what is covered and what is not. ACORD[0] does a lot of this, but you still need to know what you are doing.
Do not call insurance first.