九色

Is traditional insurance an outdated and unaffordable risk management strategy? Essentially, the answer is yes. Traditional insurance is a dying tool on many levels.

I’ll probably get a thousand readers arguing that I’m wrong, citing the industry’s continued growth. That growth hides reality because it is rate growth, which supports my point that traditional insurance is a poor tool.

Poor Risk Management Tool

I must credit this point with an email from the insurance guru Bill Wilson. His point leads to my conclusion, so I’ll begin with his point.

Insurance is a poor risk management tool, especially for property, because risk mitigation is nearly 100% possible. Risk mitigation is cheaper than insurance over the life of the property, as owned by the insured.

Property rates in many parts of the country are unaffordable. I’ve read that as many as 25% of homeowners are foregoing homeowners insurance. Yet insurance companies still do not make money on property, especially homeowners, which has a 102.5 combined ratio, per AM Best’s Aggregates & Averages, over the last 10 years, and 105 the past five years.

This awful result supports my point. The people who embrace quality property risk management have minimal risk. The only reason they would buy insurance is due to loan requirements. Maybe the remaining 75% of homeowners are adverse selection? If so, this proves my point that insurance is not the best solution and may only have a lifeline because of bank requirements.

Risk management tools are plentiful. Quality roofs that can be retrofitted to withstand 200 mph winds exist. Water leak tools and shutoff systems exist. Wildfire mitigation is widely available and typically costs nothing but some personal labor. Retrofitting roofs to avoid flammable materials, using stucco/concrete exteriors, eliminating wood fences, and so forth eliminate significant wildfire risks. Good accounts take these actions. Virtually hail-proof roofs exist (and carriers barely give a credit for them).

Risk management tools increase the value of the property. If I have good risk management, I don’t really need insurance. And given the price of property insurance, risk management is often the better choice.

If insurance companies want to remain relevant to the better insureds, carriers had better begin reducing rates commensurate with the level of risk management applied. They had better quit blanket underwriting and charge their underwriters with thinking through risks, or at least critical thinking (this is not meant to be a snide remark but a reflection of reality).

In a line where the insurance companies cannot make money and insureds cannot afford insurance, no future exists.

Overcharging Good Risks

Insurance companies are overcharging good insureds.

Property and casualty premiums have increased 254% while GDP has increased 91% (unadjusted for inflation) and 282% adjusted for current dollars. (In other words, inflation accounts for almost two-thirds of GDP growth. On a chained basis, the increase is approximately 120%.) Inflation has totaled approximately 106% in constant terms. Insurance company combined ratios have decreased from a relatively consistent five-year running average of 105 to 109 between 1995 and 2005, to 100 between 2011 and 2024.

As rates increase and risk management becomes more viable, the good insureds realize they’re being overcharged. This is a little easier to measure in commercial lines because we have estimates of alternative solution value. Different studies suggest that over half of all commercial premiums are now outside the traditional market. And these are not the good accounts leaving for alternative solutions.

Any good account left in the traditional market is paying too much for insurance because the traditional market’s percentage of adverse selection is slowly increasing.

Another good method of adjusting for the camouflage of what is happening is to separate premium growth by line of business.

The one line of business that is exceptionally difficult to avoid purchasing and to find alternatives for is private passenger auto liability. In the last 10 years, private passenger auto premiums have increased by 83%, and it is, by far, the largest single line of insurance, with 37% of all premiums. Homeowners insurance has the next highest share at approximately 15%.

Other lines have grown faster. For example, commercial auto liability has increased by 116%, but premiums are only 17% as large.

Other than the aberration caused by the COVID lockdown resulting in rebated premiums, followed by nutjob driving resulting in huge claims, combined ratios in private passenger auto are profitable at approximately 100 over the last 10 years (adjusted for the COVID factor). Carriers make plenty of money at a 100 combined ratio.

One reason for these good results–and probably with Progressive’s results (my guess with zero inside knowledge)–is the advent of quality predictive modeling (i.e., artificial intelligence). Models exist that can accurately predict who is most likely to have an accident, and possibly even predict the year. The Law of Large Numbers is dead. This means insurance is not the best tool.

Given the gulf that exists between the best private passenger auto writers’ results and the also-rans’ results, I guess that some insurers only write the right drivers, enabling them to charge more than may be required but less than what less capable companies must charge for all the adverse drivers they’re writing.

Until laws and mortgage requirements change, insurance companies benefit from a free ride. It’d be great if the law required everyone to buy my services. I have to work to convince clients that my services will benefit them.

Outside of those requirements, risk management is the better solution today. And when risk management is combined with insurance, when insurance is truly required, the client gets the best of all worlds. For agents, you get to do more good for the world, and your competition is minimal because few agents have the mental wherewithal to compete in this space.

Possibly, the best outcome is that you are less dependent on carriers’ whims, uncertainties, and illogical actions. You and your client are back in control.