Aligning Interests Between Insurers and Policyholders
November 30, 2013
Rough Notes - 01/01/14
By Ross Buchmueller
While private banks are offering their clients over-the-top perks like private lessons with professional athletes, classes with renowned photographers and coveted seats at the season’s fashion shows, more and more of these discerning families value the alignment of interests over any perk when selecting financial institutions. Among the world’s high net worth consumers, transparency, the elimination of conflicts and the alignment of interests is becoming “table stakes.”
In a clear sign of this trend, successful families are increasingly switching from commission-based wealth managers to fee-based firms whose success is tied to the growth of their clients’ assets. A report published by Tiburon Strategic Advisors in January 2013 categorizes fee-based financial advisors as the fastest-growing financial services market and distribution channel. In a recent article published in The Journal of Wealth Management, Rob Elliott of Bessemer Trust writes about the importance of alignment of interests, stating, “if wealth advisors require any additional motivation to do the right thing to regain client trust, they need to look no further than building a better, more lasting, and more profitable business.”
How does this trend translate for the insurance industry? Over the last decade, there have been improvements in the design of agency compensation systems and disclosures. While agents and brokers may carry the greater fiduciary duty, there are many things that insurance companies can do to demonstrate alignment with their best customers. And while mutual, reciprocal and other policyholder-owned companies have an inherent advantage over their stock company counterparts when it comes to creating alignment with their policyholders, there are things that all carriers can do.
Put Your Best Clients First
Most businesses focus relentlessly on creating great value for their target consumers, often rewarding long-term customers for their loyalty and encouraging continued patronage. Yet many insurance companies treat their most loyal and profitable policyholders far worse than new applicants or less responsible customers.
Over the years, specialist insurers have “enhanced” the coverage for jewelry to lure more buyers of this highly profitable line. An extension was granted that, in the event a customer had not maintained proper values (or there was a sudden spike in values), an additional coverage grant up to an additional 50 percent of the insured amount was made available. In essence, the best customer (who maintained exquisite documentation and up-to-date valuations received little or no coverage or savings benefit, while the person who failed to maintain current appraisals benefited from higher coverage at no cost.
Perhaps you’ve noticed your cable TV or cellphone service provider offer discounted rates, free devices or other incentives in order to entice new users to join their network. As a current customer, you may feel deceived by these marketing tactics, but you’re probably not surprised given your low expectations for these providers. These categories of providers aren’t ones we associate with labels like “trusted advisor” and “fiduciary.
When an insurer is looking to grow on top of its established base of profitable business, it will often utilize a new, more competitively priced writing company that is not actively promoted to its existing customer base. This enables it to appear more attractive to new customers while preserving its historical profit margins. A New York Times article published last year sheds light on the prevalence of this practice in the auto insurance industry. In the article, Thomas Mitchell said he was offered auto insurance from a company, other than his own, for nearly half of what he what he had been paying. After calling his auto insurer to report that he had been offered a significantly lower rate with another carrier, he learned that he could effectively re-join his existing company at an even steeper discount. If Mr. Thomas, a loyal policyholder for nearly 40 years, had not called his insurer to detail the lower rates he had been offered by a competitor, he never would have been informed of his carrier’s new, reduced premium—whereas new policyholders likely would have received discounted pricing from the start.
A system that subsidizes new and untested business at the expense of responsible and loyal clients may attempt to preserve profits, but runs counter to the principles of alignment. Consumers may become more cynical and these methods can serve to alienate long-term, profitable customers. Turning loyal policyholders into enthusiastic ambassadors is a far more effective way of growing a profitable insurance company.
Creating “Brand Ambassadors”
When you deliver an exceptional experience, enthusiastic customers will reward you with loyalty and referrals. Bain & Company observed what might seem obvious:
“promoters”—the loyal, enthusiastic customers who love doing business with you—are worth far more to your company than “passive customers” or “detractors.” Bain created the Net Promoter Score® (NPS) to help companies measure customer enthusiasm and build strategies to improve it. By converting more customers into promoters, insurers will realize stronger financial performance due in part to higher retention rates and increased customer referrals.
Insurance companies can create promoters in ways well beyond the handling of a claim. If we help policyholders prevent losses, save time and feel smarter about their insurance decisions, we can create exceptional financial results, along with powerful and valuable ambassadors for our brands.
In the pursuit of profit, carriers may develop techniques and strategies (like new business writing companies) that risk alienating their best customers. When the customer is at the center of one’s focus – and when interests between client and firm are aligned – there is ample evidence to suggest that insurers can actually grow faster and be more profitable.
Consumers are becoming smarter and more demanding every day, particularly in the high net worth segment. The commitment to a stronger alignment of interests is a smart business move for anyone who wants to serve this niche.