Progressive Name Your Price Auto Insurance

Progressive has fired another shot in the auto insurance wars, as the company introduced "Name Your Price" this week. It is similar in concept to Allstate's Your Choice program, as Name Your Price gives the customer some control over the tradeoff between coverage and price. (I know, I hear you chuckling "I would like to pay $0." Very funny.)

While Allstate has you choose from a menu of packages (e.g. Silver, Gold, Platinum, etc.) each with its own price, Progressive's program allows you to vary the price almost continuously, by using a cool little slider tool. As the price goes up, the coverage goes up as well. You can also choose between paying all at once or in installments. (Hint: If you have the money, pay all at once - the "service charges" are effectively interest payments for the "loan" the company is making you, and have very high (20%) effective rates.)

So, is Progressive's program a good deal? I think it can be, but only for someone who wants to "fine tune" their coverage. I'm sure that the rocket scientists that set the prices set each option to have the same profit margins (or at least the margins that they want - if they want more "full coverage" customers, then they might cut the price a little at the high end of the sliding scale.)

Like I always say - don't settle for one quote, get several quotes from good companies and take the best deal from there.

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Allstate Enters Massachusetts Auto Market

There must be something in the water in Massachusetts, as Allstate is the latest major auto insurance company to announce that it would be entering the state. Allstate is hot on the heels of Geico, Progressive and Ameriprise, as the new, more liberal (in the classical sense, not the political) regulatory system has made it much easier to do business.

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Hartford's P&C Business for Sale?

The shuffling continues in the insurance industry, as AIG's announcement of the sale of 21st Century Insurance to Zurich/Farmers was followed up by rumors that Hartford Financial Services was putting its property casualty insurance companies on the block.

If the rumor comes to fruition, then this would be a much larger deal than the sale of 21st Century. Hartford's P&C business has over $6 billion of capital, and it sells home, auto and commercial insurance. The auto and home insurance business is perhaps best known as the company behind the highly successful AARP affinity program.

The Hartford has been struggling lately, although the source of its problems have come from the life and annuity side of the house, not P&C. Should Hartford get anywhere near $7 billion, it would go a long way toward filling the uncomfortably large hole in the life business's balance sheet.

There aren't many companies that are big enough to swallow this business, so the suitors would be limited to companies like Travelers, Allianz (which owns Fireman's Fund) or Warren Buffett's Berkshire Hathaway (which owns Geico), among others. Stay tuned.

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Zurich FINALLY Buys 21st Century

After a lot of speculation and rumors, the worst-kept secret in insurance land finally came to pass. Today, Zurich Financial announced that it is buying AIG's auto insurance subsidiaries for $1.9 billion. The main asset in this transaction is 21st Century Insurance Company, but Zurich also gets the former AIG Direct business and the AIG Agency Auto business (which sells through independent agents.)

Now, the transaction isn't that cut-and-dried. Zurich isn't keeping these companies directly under its umbrella. It is turning around and selling them to Farmers Insurance Exchange for $1.4 billion. Why is Zurich doing this? Zurich doesn't actually own Farmers (it is structured as a reciprocal insurance exchange, which is owned by its policyholders) but it owns the company that manages Farmers (for a nominal fee, or course...) This way, Zurich gets more fee revenues from Farmers, while, Farmers gets...what do they get, anyway?

Well, Farmers's management thinks that its captive agent force (similar to State Farm, Nationwide and Allstate) will be able to cross-sell homeowners insurance and related products to 21st Century customers, since 21st Century only sells auto insurance. Sounds a little farfetched to me, but hey, what do I know? Do 21st Century customers - who chose to buy their policy over the phone or internet - really want to get calls from Farmers agents? I'll let you be the judge of that.

What Farmers (and therefore Zurich) will get is a very strong presence in California. Farmers is based in Los Angeles, and 21st Century also has a large market share in the state.

What about AIG? Well, the $1.9 billion will help, but it still has a lot of work to do to pay down the $80 billion or so it owes to the government. It's still trying to combine all of its remaining property casualty subsidiaries into "AIU," which it hopes to spin off someday (with the government's help) leaving AIG Financial Products (which caused the mess in the first place) less able to spread its troubles to the "real" insurance companies.

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Michigan Court Overturns Ban on Credit Scoring

In a rare victory for insurance companies in Michigan (which is not considered an insurance-friendly state), a Michigan judge overturned an administrative action by Ken Ross (the state's insurance commissioner) that effectively banned the use of credit data to price auto or homeowners insurance policies.

Of course, insurance companies just know it won't be easy to keep their hard-won gains. Mr. Ross is not a friend of the insurance industry, and will continue to fight the ruling, saying

"Michigan consumers lost big today— but the fight isn't over yet," Ross said. "In spite of this ruling, I intend to press our case on appeal and continue to use every administrative tool at my disposal to ensure that each rate filing fully complies with Michigan law."

Personal lines insurance companies have come under a lot of pressure in this down-on-its-luck state, where the government is looking for every avenue to either a) balance the budget or b) keep costs low for its beleaguered residents. Since beating up insurance companies won't hurt a politician's career, they make easy targets. Too bad they keep fighting back...

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Ameriprise Follows the Gecko Into Massachusetts

Looks like the regulatory changes in the Massachusetts auto insurance market have sparked another positive development. This week, Ameriprise announced that it has filed to sell auto and homeowners insurance in the Commonwealth. This announcement comes close on the heels of Geico's announcement that it was entering the state as well. See what happens when you encourage a little competition? While my personal driving experience in Massachusetts leads me to believe that insurance rates will remain relatively high, drivers will at least have the ability to do a little shopping around.

I don't know much about Ameriprise's auto insurance program. Most people see the company as a life insurance/financial advisory firm (that runs those weird ads with Dennis Hopper babbling something about a "road"). The auto insurance division's main claim to fame is its partnership with Costco. Costco is a pretty classy organization and has a lot of great partnership/affinity programs (I almost bought a car through the company and was impressed with the process), so I imagine customers are getting a pretty good deal. Now, Costco customers from Springfield to Cape Cod will have another potential way to save money.

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Coral Insurance Shuts Down

Sorry for the long "pause" in my postings. Lots of busy days at work means not a lot of energy left over. Hopefully, I can get back into a more regular routine.

Anyway, I saw that Coral Insurance Company, one of the many financial juggernauts now writing most of Florida's homeowners insurance business, has been ordered to shut down for at least 6 months. The company's capital has fallen well below (as in more than 50% below) the minimum required level of $4 million.

I don't know about you, but $4 million isn't much to work with as an insurance company - especially one that insures houses in hurricane-exposed areas. If I wanted someone to insure my house, I might be better off signing a contract with some rich guy. He might have more money than a lot of these Florida companies. Commenter "yoyoma" has a good point:

Did anyone ever consider that State Farm, Nationwide, and Allstate might have be telling the truth when they said they needed rate increases?

Even Citizens Property Insurance Corporation (the state-owned homeowners insurance company) is beginning to admit that it needs to raise rates, and the legislature is running for cover.

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Geico is Coming to Massachusetts

Looks like Geico intends to enter the Massachusetts auto insurance market. According to the Boston Globe, Geico could get approval to sell insurance in the state as early as six weeks from now. For those of you who are not involved with the insurance industry and/or don't live in Massachusetts, this is a watershed event in what has been one of the few "feel good" stories in recent years.

Massachusetts had historically a bizarre, communist-like auto insurance market. Companies did not set their own prices - all companies sold policies for the same price, which was set after a long bout of horsetrading between the insurance companies, the insurance commissioner and the Attorney General in highly contentious hearings. Likewise, the agents were all paid the same commission per policy (I think it was $150.)

But it gets better. Since insurance is mandatory, the state had a very strict "take all comers" rule, which forced insurance companies to issue even horrible drivers a policy. To reduce the risk to the insurance company, the state made all of the insurance companies in the state form a reinsurance company that took some of the risk. However, these high-risk policies weren't doled out by market share or some other equitable method - they were determined by what agency processed the application. Soon, the politically-connected companies (such as Commerce Insurance Company - which is probably not happy with Geico's announcement) "cherry-picked" the agents in areas with few bad drivers, leaving their unlucky competitors stuck with the worst of the worst.

However, a few years ago Julianne Bowler (the insurance commissioner at the time) fought a brave battle in the legislature (with the support of Mitt Romney) and got the wheels in motion to finally liberalize the system. Once the groundwork was laid, the current governor and insurance commissioner (Duval Patrick and Nonnie Burnes) actually followed through, instituting more liberal pricing rules as well as a high-risk pool that actually made sense. As a result, the exodus of insurance companies ended, and the trend has actually reversed.

Score one for common sense!

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People's Trust: A Fine Replacement for State Farm

This article in the Miami Herald (which has provided some excellent coverage of the continuing insurance soap opera in Florida) caught my eye. It seems that People's Trust Insurance Company - one of those young, enthusiastic homeowners insurance companies that are going to save the state from evil State Farm - has been pushing the envelope a bit with its sales and pricing practices. The company has been offering too-good-to-be-true prices (sometimes 50% lower than the competition) to potential customers, some of whom are paying thousands of dollars per year in premiums.

There's just one (or two or ten) catch(es). The unlicensed(!) sales agents leave out the little details about the 10% wind deductible (which is double the average deductible) or the bare-bones contents coverage. Even if the policy was a good deal, I would still be a little concerned that the company would have trouble paying claims following even a moderate hurricane.

Remember, in the long run, you get what you pay for with insurance.

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An update on AIG

I'm sitting here watching "March Madness" (North Carolina will beat Memphis in the finals - my bracket says so) and I'm thinking "I bet all these other people watching the game want to know what's going on with AIG." I'm sure that most people have seen the unfolding debacle with the bonuses, with all of these self-righteous congresspeople spouting "outrage" over the "greed." Well, Mr. Congressman (and I'm talking about you Chris Dodd), you put the bonus provision in the stimulus bill, so deal with it!

Okay, that felt better. However, the bonus issue does not directly affect an AIG/21st Century policyholder, since the AIG subsidiaries that actually sell insurance (and not crazy financial derivatives) are in good financial health, and are not the reason why AIG is in the position that it's in today. However, the various auto, home life and commercial insurance companies are indirectly affected by what's going on with the dysfunctional derivatives shop, since AIG (the holding company) owns them all.

AIU

Right now, Ed Liddy (the former CEO of Allstate who was thrown into this snakepit) knows that the current structure of the company is a problem, so he is attempting to separate the healthy property casualty and life businesses from the unhealthy financial products side of the house (which has turned into a big black hole.) The company has succeeded in selling some divisions such as Hartford Steam Boiler (which insures...steam boilers), but is having a hard time unloading the larger pieces such as 21st Century (whose rumored sale to Zurich seems to have stalled) and the foreign life insurance companies. Absent a sale, Mr. Liddy is trying to bundle these remaining companies up and spin them off as a seperate company, called AIU. AIU (which would probably have partial government ownership) would then be able to stand on its own two feet again.

The Clock is Ticking

Every day that goes by continues to hurt the company, however. The largest amount of pain has been felt in the company's commercial insurance businesses, Lexington Insurance Company and National Union Fire Insurance Company of Pittsburgh (which is based in...New York.) Commercial insurance companies depend on the knowledge and connections of their underwriters, who run their own little empires and control large books of business. They have been leaving in droves, taking their business with them. If this goes on much longer, these companies will simply dissolve away. (The customers won't be affected, because they will just go with the underwriter to the new company.)

The personal lines side hasn't been hit as hard, because these companies (such as 21 Century) have thousands of employees that do similar jobs (customer service, claims, etc.) While I don't doubt that there have been some employee defections, the business usually stays put. What should you do if you have an auto or home insurance policy? First of all, don't panic. 21st Century is a financially healthy company that can pay its claims. I would probably start looking around, though. Talk to an agent, or get some competing quotes from some direct writers - it doesn't cost you anything. If you sense that you aren't getting good customer service, then you will be prepared to move quickly and easily to a company with better service, and maybe a lower price as well.

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Pay As You Drive Building Momentum

Insurance Journal pointed me to an interesting development in the state of Washington, where legislation has been passed in the state Senate that allows what is called "Pay as You Drive" (PAYD) insurance. This does not necessarily mean that you have to deposit quarters into a slot in your dashboard every ten miles - the bill allows insurance companies to charge higher premiums for people who drive more miles.

This makes perfect sense for auto insurers, since people who drive more would have a higher chance of getting in an accident. Insurance companies are always looking for better indicators of risk, so they can match revenues with expected claims costs. Most states already allow charging higher rates for high-mileage drivers. The key part of this bill (and similar bills in other states around the country) is verification. Right now, you could walk into an agent's office and ask for some quotes. Maybe you don't like the quotes, and get up and start to walk out the door. "Wait a minute," says the agent (who is watching his commission check walk out the door with you). "I must have mis-entered the miles driven code in the system. You said 5,000 miles per year, not 10,000, right? In that case, your quotes just got $100 cheaper." There's no way to currently verify mileage, so auto insurers have not been able to fully utilize this factor due to the sloppiness in reporting. Key language in the Washington PAYD bill opens the door to true verification however, with the addition of the following passage:

"Recording device" includes event data recorders, sensing and diagnostic modules, electronic control modules, automatic crash notification systems, geographic information systems, and any other device that records and preserves data that can be accessed related to the usage of that motor vehicle.

Big Brother is watching you now. For people who don't drive a lot, this could be a good thing, since they could get a bigger discount than they usually get. Obviously, high-mileage drivers (and the unscrupulous agents who fudge the numbers a little bit) get the short end of the stick here.

Why would a liberal state like Washington help out the evil insurance companies after all? The environment - no more, no less. Since people will now have another added cost for every mile driven (on top of increased gas and maintenance costs) they would theoretically drive less, and spew less CO2 into the air. The legislature will also probably butt heads with another traditional left-leaning organizations, the civil-liberty folks like the ACLU. While I have not seen an official statement from this and other "anti-Big Brother" organizations, I believe that they won't be happy with companies planting tracking devices on everyone's car. After all, if they track mileage, they can also look at speed and destination. Minnesota and California are also considering similar legislation, so this probably won't be the last we hear of it.

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National Flood Insurance Program Extended

Two days ago, Congress voted to extend the National Flood Insurance Program (NFIP) until September 30, 2009. That doesn't seem like a very long extension, but it beats the original one-week extension that kept it alive from the original March 6th expiration date to March 11th. This program is deep in the red, and it is slowly turning into a congressional chew-toy, as our venerated elected officials jockey and horse-trade their way through what is going to be one of the largest budgets in history.

Now, I have my views about the NFIP (i.e., the "National Free money Insurance Program"), but I believe that Congress did the right thing to keep it alive, even for another 6 months. For all of its current faults, killing the program would pull the economic rug out from under a lot of communities, many of which are lower-income. The banks would not be very pleased with the loss of the program either, as they require flood insurance to back mortgages in certain zones.

Of course, I don't hold too much hope for the painful adjustments needed to keep the program solvent, such as using actuarially-sound rates and relocating homeowners out of high-risk areas. Raising the cost of living for your constituents during a deep recession is political suicide, and forcing people to move out of houses that have been in their families for generations (and rebuilt several times with flood insurance payments) doesn't look very good on the six o'clock news. After all, what's $15 billion of government money between friends?

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Claims claim the top spot for customer dissatisfaction

The National Association for Insurance Commissioners (NAIC), which is an umbrella organization that tries to coordinate the crazy quilt of different state insurance regulatory practices, conducted a study of the leading causes for formal customer complaints filed with state insurance departments in 2008. All lines of business were included in the survey, but auto and homeowners complaints were almost half of the total.

Claims at the top of the list

Not surprisingly, the top three categories all had to do with claims handling. “Delays” had 19% of all complaints, followed by “denial” with 18% and “unsatisfactory settlement” with 14%. “Premium and rating” was a very distant fourth place, with only 4.7% of the “vote.” So, over 51% of all the negative experiences of dealing with an insurance company have something to do with claims.

Is anyone surprised by this?

Prompt and fair claims payments are the ultimate promise that insurance companies of any type make to customers, and are really the only reason why people buy insurance. Furthermore, people don’t get into car accidents or suffer through hurricanes every day, and aren’t prepared for the disruption that losing the use of a car/house/arm can cause. Therefore, an insurance company has to really be on its toes, but also has to walk a fine line between throwing away money on frivolous (or fraudulent) claims, and exhibiting bad faith. Sloppy claims practices can do a lot of damage to an insurance company, so they try to “optimize” the process, in order to minimize repair costs, medical bills, etc. This “optimization” doesn’t always mean an “optimal” customer experience. Also, insurance customers’ primary methods of dealing with insurance companies involve a) the initial buying process and b) paying the premium. Everybody buys and pays for insurance. Therefore, insurance companies put a lot of work into improving the buying process and sending out bills.

Everyone buys insurance, few people have claims

The competitive landscape also explains why people report their company to the state when claims are involved, but not nearly as much over customer service or pricing. Why get mad if your bill gets messed up? Why complain if you feel you were “overcharged?” Just call up one of the other 50 companies that are ferociously competing for your business and move on. However, the policyholder is backed into a corner with a bad claims experience, because they need to work with their insurance company to get the situation resolved, and may feel that the only recourse is the state insurance department.

Where am I going with this? For the insurance buyer, look carefully at the company’s claims record and financial rating (my World Famous Rating System takes this into account), since that is where the heartache will be if you choose wrong. For the insurance seller, don’t underestimate the power of providing an excellent claims experience.

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American Family Reports a Loss

It's March, and that means that insurance companies have tallied up their results and reported them to either their stockholders, policyholders, and regulators. The publicly-traded companies such as Progressive and Allstate have already submitted their filings to the SEC a while back, but the mutual insurance companies (which are only required to submit reports to their state regulators and policyholders) have a little longer to do so.

American Family, an 80 year-old mutual insurance company based in Wisconsin was one of those companies, and its results reflected the tough times that many Midwestern insurers went through in 2008. Overall, the company lost $298 million in 2008, vs. booking a $82 million profit in 2007. Hurricane Ike (which surprised everyone by tearing its way up the Midwest after flattening Galveston and flooding Houston), harsh Winter snowstorms and tornadoes took their toll. While the company took in a whopping $5.8 billion in auto and home insurance premiums (it's one of the largest auto and home insurers in the country), it paid out $4.4 billion in claims and $2.2 billion in salaries and agent commissions. This means that American Family lost money on every policy it sold. Even $560 million of investment income and a small profit from its life insurance business wasn't enough to put the company into the black for the year.

Of course, the company is not going out of business anytime soon. "AmFam's" net worth totals over $4 billion, and the company has more than $11 billion of cash and investments available to pay claims. Policyholders may not be celebrating, however, as the company will want to avoid a repeat performance in 2009, and may try to raise rates, or at least become more picky. This situation is interesting, since policyholders literally own the company - they are imposing rate increases on themselves. Now, American Family policyholders probably don't feel like owners, and don't have the foggiest idea how to run an insurance company - that's what they hire management for - but people who are writing their PhD dissertations on game theory could probably find a rich trove of material here.

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