Sour Lemonade

lemonade

We’ve endured an unseasonably hot Memorial Day weekend here in Michigan.  A nice, refreshing drink of lemonade would seem to be ideal for the early arrival of July-like heat.  Right on cue, my personal email inbox included a message from insurtech firm Lemonade this morning, announcing that their refreshing brand of homeowners and renters insurance is now available in Michigan!  Woohoo!

Being a naturally curious insurance geek, I took the bait and began navigating Lemonade’s “easy” process for obtaining a quote.  Indeed, it is easy.  A few clicks and without many mental cycles consumed on my part and I soon had my monthly premium quote.  Then again, loading a gun is easy.  In the case of a Lemonade insurance quote and a loaded gun, the real danger lies in what you do next.  The untrained and uninformed can do great unintentional damage to themselves and others.

Now hold on… Yes, I realize that no one is going to die from obtaining or acting on a Lemonade insurance quote.  The comparison to a loaded gun is purely metaphorical for the financial harm that can result from making naive insurance purchase decisions.  I am admittedly painting an extreme analogy here.  I also should point out that I am no insurtech neophyte.  My resume is replete with RMI technology consulting experience – so I am by no means anti-technology or anti-innovation, especially when it comes to the insurance industry.

So how did my Lemonade quote experience go?  As I said earlier, it was easy.  In fact, it was fun.  The results, on the other hand, were underwhelming and alarming.  After watching the Lemonade engine at work (it took only a few seconds to “crunch the numbers” as it checked various “municipal databases”), I noticed that it rated my property pretty low for fire protection.  And yet, I am only 2.5 miles from the fire station and have a fire hydrant literally in my front yard.  Lemonade also suggested an insurance limit to “reconstruct my home” that I know to be woefully inadequate.  It also suggested a liability limit of only $100,000.  Far less than I currently carry, and truthfully far less than any middle class homeowner should have in this litigious era.  All of this for a premium 75% higher than I currently pay for my much broader homeowners insurance policy with a well known A++ rated insurance carrier.

Yes, I can manually adjust Lemonade’s offered limits upwards, but the cost goes up accordingly.  How many unwitting Lemonade buyers would do that?  Most of the insurance consumers attracted to Lemonade’s simplicity and slickness are likely to accept the suggested limits, implicitly trusting Lemonade’s obviously flawed artificial intelligence to have their best interests at heart.  After all, Lemonade (unlike those greedy legacy carriers) is the insurance carrier with a heart and a social mission, right?  And how do I go about adding my trust as a named insured since the home is actually owned in the name of my trust?  It also looks like I can add my scheduled property (e.g., jewelry, electronics, collections), but it is clearly a more convoluted process.  Over the years, I have invested time in conversations with my insurance agent, asking questions and discussing coverage options in order to assemble insurance protections that fit my unique risk profile.  I have purchased coverages that others have not, and removed coverages that I did not need.  What the general public (and hype-laden insurtech startups) often misunderstand is that insurance is not a commodity and individual risk profiles are not cookie cutter.  You simply cannot automate the nuances away with artificial intelligence – at least not yet.  And Lemonade, for all its slickness, still has a long way to go.

In the meantime, Lemonade’s marketing hype preys on the blissfully ignorant  insurance-buying public (and smartphone-dependent Millennials in particular) who are lapping up (no pun intended) the Lemonade platitudes.   How many others “take the bait” and without having an insurance background as I do, they bought the Lemonade policy and left themselves insufficiently protected with inadequate limits and perhaps inadequate (or unnecessary) coverage?  If my experience is typical for Michigan, then perhaps the overpriced, inferior coverage result will prevent many from buying the Lemonade insurance product.  But perhaps my quote was an anomaly and other Michiganders are out there today, receiving attractive prices from Lemonade and switching their insurance protection without the benefit of any professional insurance knowledge or assistance – except for “Maya” the friendly and spunky automated “agent” in the Lemonade emails and website.  Sorry, Maya – your Lemonade is way too sour for me.

 

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Michigan Auto Insurance Reform (maybe)

The Michigan legislature is making another run at reforming the state’s beleaguered no-fault auto insurance law.  Despite the major selling point of no-fault (i.e., lower costs by eliminating most litigation that may arise from auto accidents), Michigan drivers pay the highest auto insurance premiums in the nation.  Why?  Two reasons…

Michigan is the only state in the country that mandates unlimited lifetime personal injury protection (PIP) benefits on every auto insurance policy.  Sounds great, until the bill comes due.  Speaking of those unlimited lifetime medical benefits, if you’ve ever visited a Michigan hospital emergency room with an injury you have likely been asked by the staff checking you in: “Are your injuries the result of an auto accident?”  Why does that matter? Because an affirmative answer means you/your auto insurer will be charged higher prices for the tests and treatment you receive.  The x-rays, MRIs, and whatever other services you receive will be billed at rates that may be 2-3 times more than they would be otherwise.  There are no fee schedule restrictions on what providers can charge auto accident victims.  Sweet deal for Michigan Hospital Association members – not so much for all of us who pay the premiums to cover these inflated charges.

The latest auto insurance reform proposal attempts to reduce the cost of Michigan auto insurance by giving drivers the option to choose a limit on their PIP benefits ($250,000 or $500,000 at last check) or keep the current unlimited benefit.  Naturally, the premium paid will reflect the choice made by each auto insurance consumer.  The reform proposal also places a limit on what providers may charge by capping the fees based on Medicare fee schedules.

Naturally, the hospitals and medical providers are apoplectic about reform that endangers their auto accident gravy train.   There are indignant howls that the reform will leave people with serious brain injuries out in the cold… how cruel, how heartless.  Enough.  Let’s be genuine about this… there will be resources for those seriously injured in auto accidents to receive the care that they require.  Health insurance benefits may kick in after the auto insurance PIP benefits are exhausted.  Medicare or Medicaid will apply in some cases.  Some argue that all this reform accomplishes is cost shifting.  Well, yes.  The cost of caring for seriously injured auto accident victims is going to be paid somewhere by someone.  As a society, Michigan must decide if it wants to continue the current system where the entire cost is borne by drivers and the cost is inflated by the inequitable fee structure of the medical community that is taking advantage of the current system, or have some of the cost be spread among the broader health insurance and social insurance system with some equity imposed upon the fee structure.

This is a political question which is why the lobbyists are out in full force.  That is also why previous reform attempts have died.  Will this one succeed or will Michigan drivers continue paying the highest premiums in the country to subsidize the medical providers with inflated fees? Your guess is as good as mine.

Here We Go Again

Well it was a nice lull while it lasted.  For better than ten years following the chaos caused by Katrina and other mid-2000s hurricanes, North America has enjoyed pretty tame hurricane seasons, with the notable exception of Superstorm Sandy in 2012.  Then along came Harvey last month.  Now we’re staring down mega-hurricane Irma about to descend on Florida.  As if two major hurricanes in only two weeks isn’t bad enough, Jose lurks out there in the Atlantic though it looks like we may dodge that bullet.  All of this and we’ve still got more than a month left in the hurricane season.

Cue the media hysteria.  I realize that we live in the era of the 24-hour news cycle, and Jim Cantore would be an utterly lost soul if he weren’t firmly ensconced at ground zero of every major storm.  We’ve had never-ending 24-hour coverage of Harvey’s development, Harvey’s landfall, Harvey’s aftermath, Irma’s development, preparations for Irma, and we’ll be hearing about Harvey and Irma for the next several weeks.  I do not intend to minimize the human tragedy of these storms, but I am wary of the indictments that will inevitably flow from all this media hype.  We’re already seeing it…

Predictably, climate change is already being linked with the current roster of storms, such as in this doozy of an article from Newsweek.  The article relies on alleged climate data manipulator Michael Mann.  I hope all of you Florida evacuees heading north on I-75 realize that you’re setting the stage for the next Irma as your internal combustion engine idles in the traffic jam.  Talk about a Catch-22.

The Wall Street Journal recently highlighted hurricane deductibles as the reason that many hurricane victims will find themselves shouldering 1-2% of their hurricane loss.  The slant of the article (and others like it) portrays insurers as greedy companies looking to stick it to their policyholders at every turn.  Let me see if I have this straight.  My beautiful Florida home suffers a $500,000 hurricane loss, and I’m distraught that I have to cover $10,000 of that loss out of my own pocket before my insurer covers the remaining $490,000?  Sure, $10,000 is a chunk of change, but would I have really wanted to pay the actuarially-mandated premium to have hurricane insurance with first dollar coverage (assuming I could even find such coverage)?  Nope.  Even a $10,000 hurricane deductible is a fair price to pay for living in a beautiful coastal home in paradise.  Or at least it should be.  The hurricane deductibles were a necessary component to keep the private hurricane insurance market from evaporating after Katrina thus giving us yet another incarnation of the notoriously underwater (pun intended) National Flood Insurance Program.  NHIP anyone?

Speaking of flood insurance.  There are also hundreds of articles and reports on the uninsured and underinsured flood losses from Harvey, and more will follow from Irma.  Yes, the NFIP is woefully outdated and in debt.  Even for the minority of homeowners and businesses who purchase flood insurance, the program limits (e.g., $250,000 on a home’s structure, no business interruption coverage at all for businesses) leave many underinsured.

Although a certain amount of media attention is helpful in calling attention to problems that need solving, I fear that what we have in most of today’s media hype is politically motivated hyperbole that exploits the actual victims of these natural disasters in order to advance an agenda (e.g., climate change, anti-capitalist, etc.) It would be nice if we could just tone it down a bit and focus on genuine problem-solving instead of slanted accusation.

In the spirit of genuine problem-solving, insurance guru Bill Wilson recently blogged about the concept of mandatory flood insurance coupled with strict loss control.  Is that an idea whose time has finally come (or perhaps is long overdue)?  The logic is compelling, but then we’d better be prepared for another batch of media reports on how outrageously expensive mandatory flood insurance has become, how unfair the tax penalties are for those who can’t/won’t buy mandatory flood insurance, how onerous are the loss control requirements, and how the flood insurance exchanges are suffering from unexpected losses and need to be taxpayer-subsidized, and the whole flood insurance system is in a death spiral.  Sound familiar?

My sincere thoughts and prayers are with you Florida, and Texas.

 

Back to School

We’re back.  Summer was great, but the academic year is officially underway and there is no shortage of events and topics to consider.  Of course, the devastation and tragedy brought about by Hurricane Harvey is heart-wrenching.  Coincidentally, it was almost exactly one year ago that I blogged about flood insurance and the Louisiana floods.  Harvey leads us back to many of the same issues that I wrote about last year.

Risk and insurance headlines continue to debate the future of auto insurance as the reality of driverless automobiles draws closer.  Cyber-security, ransomware, and data breaches still demand considerable risk management attention.  AIG has a new CEO with considerable industry chops and he’s already making big moves.  Drones are playing a large part in the claims process following Harvey.

Contrary to popular belief, risk and insurance is anything but boring.  These are just some of the weighty issues that Ferris State University RMI students will be exploring in the months ahead.  This is going to be fun.

RIMS 2017 – Here we come

Bright and early Sunday morning, I depart with four Ferris State RMI students to attend the 2017 RIMS Annual Conference in Philadelphia, Pennsylvania.  I confess that at this stage of my career – having endured 30 years of planes, trains, and automobiles – business travel has little appeal to me.  Yet, I am enthused to accompany four students to this very large and impressive industry event.

It’s difficult to convey the vast scope of the RMI industry within a classroom.   Some things just have to be experienced and witnessed firsthand.  The immensity of the RIMS conference, with its thousands of attendees and vast array of exhibitors that includes many household names of the insurance industry, certainly drives home the point with students.  The educational sessions show the students that there is much more for them to learn and a cornucopia of career opportunities awaiting them.

My first RIMS conference was 26 years ago, and I still learn something new every year.  I am truly excited for the opportunities awaiting my four students.  I know that they will meet new and interesting professionals at the conference events, learn of concepts that will spark their interest, generate new ideas for their careers and personal ambitions, and yes, have some fun.

It’s going to be a great week and I will relish the opportunity to watch my students take it all in.  It may even make the planes, trains, and automobiles tedium of business travel worthwhile.  Maybe.

Heads in the Sand

Are U.S. homeowners burying their heads in the sand when it comes to their homeowner’s insurance coverage?  A 2016 survey commissioned by Trusted Choice and the IIABA seems to suggest that they are.  The three big conclusions from the survey results are that many homeowners have inadequate insurance coverage for their loss exposures, do not understand the coverage they do have, and lack enough personal savings to cover the uninsured costs of a disaster that may force them from their homes for a month or more.

It seems that a large portion of homeowners have very high expectations for the homeowner’s insurance policies they are purchasing, and very limited understanding of what it will actually cover and to what extent.  This creates a false sense of security, which relieves the homeowner of any sense of urgency toward establishing their own savings plan to get through the uninsured or under-insured aspects of a disaster.

For example, many homeowners fail to understand the difference between replacement cost and actual cash value coverage, and blindly accept what is typically the default (and less expensive) option: actual cash value coverage. Similarly, many policies provide a limit for off-premises living expenses following a covered event, but that limit is usually only 10% of the dwelling limit.  That could be woefully inadequate if a homeowner had to live elsewhere for 2-3 months after a major fire or storm damage.  Lastly, flood insurance is not even considered by many homeowners who think it cannot happen to them or believe that they have no flood exposure.  Last year, I wrote about the Louisiana floods which included this amazing statistic for a state that has a long history of floods: “…more than half (55%) of the state’s residents living in high-hazard flood zones did not purchase flood insurance.  Even worse, 88% of those living in low-to-moderate hazard zones (which were affected by this particular flood) did not buy flood insurance.”

So what’s the problem here?  Are homeowners just burying their heads in the sand, and adopting the “ignorance is bliss” approach to their most valuable asset?  Or is the insurance industry not being diligent enough in our role as personal risk managers to these homeowners?  I know many insurance professionals who are very dedicated to their clients and genuinely want to make sure these clients are adequately protected.  But I also know that there are three harsh realities:  (1) There are only 24 hours in each day, (2) there are clients who simply don’t want to know (or pay), and (3) there are a minority of insurance agents who have stopped caring, probably as a function of the first two realities.

Therein lies the rub.  The limits of time and the limits of client interest/attention-span/willingness-to-pay can cause even the most dedicated insurance professional to become cynical.  We’ve all had clients who don’t want to understand.  It’s either too complex or too scary for them, and they mentally shutdown and hope for the best.  Many Americans are taking a similar approach to their retirement savings, but that’s another story.  Alternatively, some clients understand the coverage concepts and ramifications but then choose the cheaper coverage option. Better. At least they made an informed choice… or did they? Can we be sure that the client fully grasped the magnitude of the self-insured exposure they just accepted and have a plan in mind to prepare for it?  The TC/IIABA survey suggests otherwise because few take that next step of establishing personal savings to get them through the disaster costs that they just decided to self-insure.

As insurance professionals, we cannot just dismiss the results of the TC/IIABA survey as the symptoms of our clients putting their heads in the sand.  If they are putting their heads in the sand, it could be because we’re not doing our jobs as risk management advisors as well as we should be.  Perhaps we’re being too scary or ominous in our coverage explanations.  Perhaps our coverage terms are overly complicated.  Perhaps we’re being too cynical or too rushed in our client interactions.  My suggestion is that we take the survey results to heart, look in the mirror, and ask ourselves: How do we fix this?

Scholarship Season

scholarship_money

Spring break is upon us!  Over the next few days, Ferris State students will scatter to various warm climates for spring break next week.  When the RMI students return in mid-March, they will be facing several imminent scholarship deadlines.  The amount of scholarship assistance that is available to today’s RMI student is impressive, uplifting, and dare I say, overwhelming.  The ever-growing list of RMI scholarships certainly reflects the industry’s urgent need for young talent, and that should speak volumes to those students and parents still contemplating an academic and career direction.

Many of these scholarships have springtime application deadlines so that awards may be made during May for the upcoming 2017-18 academic year.  This time of year, I receive multiple scholarship opportunities each week that I pass along to my RMI students.  As I have blogged in the past, there are also several online resources (including our own partial list) that will help students to find RMI scholarships.  There is absolutely no reason that a diligent student cannot find at least some scholarship assistance for their RMI education.

All of this is good.  Or is it?  Let me return to my prior use of the word “overwhelming” as it relates to these scholarships.  There are so many scholarship opportunities from every type of RMI organization imaginable, that students seem to be “freezing up” when it comes to applying for these scholarships.  With so many opportunities, it becomes difficult for the individual student to discern which opportunities afford them the best chance of receiving an award, and with limited time to crank out scholarship applications, they can apply for only so many.  In fact, this is beginning to be noticed by the awarding organizations as I have begun to receive queries from some scholarship sponsors as to why their application numbers are lower than expected.  To be clear, I don’t think that’s a universal condition as many of the established and well-known scholarships continue to receive plenty of applicants and award their scholarships only to the most deserving students.  It seems to be the newer, lesser-known scholarships that are struggling to find applicants.

This is a real shame because these sponsoring organizations have funds to help students, and they really do want to bolster the young talent coming into the industry.  I hesitate to say that there may be an over-supply of RMI scholarships because that almost feels blasphemous.  How could there ever be an over-supply of such a fantastic thing as scholarship money when tuition and book costs continue to rise?

I have an idea.  What if some of these scholarship sponsoring organizations who are struggling to generate applicants diverted those scholarships funds for a few years?  Instead of begging for student applicants, put the funds into the hands of the collegiate RMI programs to use for program marketing and enrollment growth initiatives.  More RMI students enrolled at schools equals more future scholarship applicants.  Now, you might argue that the scholarships themselves should be a powerful recruiting tool for boosting RMI enrollment.  Absolutely true, but there is much more to the student decision to major in RMI and I believe that the individual RMI schools are in the best position to convey the overall value proposition (including abundant scholarship opportunities) to prospective students – but not many schools have budgeted funds specifically for marketing their RMI academic programs.

This could be an interesting short-term tactical shift for some scholarship sponsors that pays off with a long-term strategic success of awarding more scholarships to the most deserving students (however each awarding organization may define that) a few years down the road.