August 25, 2014


was the dog the driver? pickup truck + ditch + winter = accident
When you’re looking for insurance on your home or vehicle, you may be tempted to pick the lowest price or buy from a convenient place. More important is whether your claim will be paid.

When disaster strikes, you find out how good your car or home insurance really is. Many customers were shocked after Hurricane Sandy and the Western Canada floods. They found they didn't have the protection they expected. Some insurers stepped up to make exceptions. That's the type of insurer you want if you ever have a claim.

How Premiums Get Set

Actuaries make guesses ("projections") of future claims based on past data and future trends. If actual claims are higher, profits are lower. That leads to pressure to restore profits. (Factors like expenses and investment returns also affect profits).

Raising rates isn’t easy unless competitors do too. Another solution is to quietly cheapen the ingredients.
Example: Since strawberries are expensive, Starbucks coloured their Strawberry Frappuccinos with natural red dye from cochineal beetles. Consumers found out and weren’t pleased. Starbucks wasn’t prepared to use real strawberries but compromised by switching to dye from tomato extract.
Cutting Back
Insurance gets cheapened by cutting back on the protection --- transferring more risk to you. Coverage which was solid last year might deteriorate this year. For car and home insurance, the terms can often change each year when you renew your protection. You might face
  • more exclusions
  • bigger deductibles
  • smaller benefit limits
The Alberta floods showed that premiums may have been similar but some insurers were denying claims their competitors covered despite similar contract wording. Now insurance policies changing after the $1.7B in flood payouts --- even for customers who weren't affected.

Note: Life insurance, disability insurance, critical illness insurance and long-term care insurance are different. Rates are often guaranteed for life and contract wording can’t be changed.

After Hurricane Sandy, about 23% of claims led to no payment. The two main reasons: exclusions and high deductibles. Did these buyers know they weren’t covered? Who advised them?

Since insurers decide which claims to approve and how much to pay out, they can improve their profits by denying claims and/or reducing payouts. Since each claim is assessed separately, trends are difficult to spot. You may recall Hurricane Sandy victims getting short-changed on their flood insurance benefits by the claims adjusters who the insurers trained and employed.

Taking Precautions

There are three keys to getting claims paid for any type of insurance: select an independent advisor who works through an independent distributor and offers products from insurers which keep promises.

If you buy directly from the insurance company, who’s on your side during a dispute? You might get stuck dealing with a by-the-script call centre representative located far away.

If you buy through an association (or group), don’t count on lower prices, stronger guarantees or more lenient claims adjudication. The  association likely receives big financial incentives since insurers compete to get access to the members. As the association becomes dependent on the revenue where are their loyalties? 

Bank of America had buying power with QBE Insurance but inflated the cost of insurance they forced homeowners to buy. The result is a $228 million settlement. Other banks had similar schemes and also got caught.

Apples or Avocados?

Unless you're very patient (or a lawyer), you may have difficulty comparing one insurance contract with another. How do you know what's left out or what's weak? An independent advisor can help. You can contact more than one.

Generally speaking, prices are similar among companies when you're making a fair comparison. Be wary if you find big price differences. What are you giving up for the apparent savings?

Money Saving Tips

With property insurance, there is a component to protect you from liability claims. If you have both home and car coverage, you're getting liability coverage in both places. You may save money by getting both plans from the same insurer, reducing the liability coverage and buying an umbrella policy for the liability.

Look At Corporate Governance

When disputes occur, you benefit from having an insurer that ranks high in corporate governance (a measure of keeping promises). They’re more likely to treat you well and make exceptions. For example, TD was reversing decisions on Alberta flood claims and lost $170 million. That's better for customers than shareholders.


PS As the summer driving season ends and schools re-open, please pay attention to the most dangerous part of driving.

August 17, 2014


math puzzles
My client’s annual statement for universal life insurance showed a tax-free death benefit of the face amount ($2,000,000) plus the investment returns ($317,079). Do the math and what’s the total? I get $2,317,079. The insurer showed $3,317,079 — an extra million dollars. I contacted them and got a quick response. They’re issuing a letter of apology and a corrected statement.

Luckily, my client didn’t have whole life insurance where the lack of transparency makes mistakes almost impossible to spot.

Big insurers have big resources but even leaders in corporate governance make mistakes. That’s because computers are programmed and the limited testing is generally done internally. The systems are expected to be 100% functional when launched. In contrast, Gmail was in beta for from April 2004 to July 2009.

Time bombs

When I developed products, we focused on launching new offerings. We maximized our resources by delaying work which could be completed later. For launch, we needed
  • marketing tools: an announcement, PowerPoint presentations for the marketing directors to use with advisors, computer-based tools for advisors to prepare proposals for their clients
  • administration support: printing the policy contract (basics like accepting premiums, paying compensation etc were already part of the administration systems and rarely required major modifications)
To speed up times, we minimized printed materials like marketing guides. They looked nice but added costs and created delays. We then had leeway to make “last-minute” changes.

Month-to-month, universal life insurance policies operate much like bank accounts with deposits (premiums, investment returns) and withdrawals (mortality charges, administration charges). The major calculations took place on policy anniversaries. That meant we had almost a year to get ready.

Other capabilities like inforce illustrations (projecting performance after purchase) could be delayed for years. Manual calculations could be done in the interim, if necessary. I once got approval to add two unbudgeted head count. During a hiring freeze. That’s because we could no longer defer some work.

The Human Element

Staff leave. Staff forget. Staff are under pressure to meet deadlines. Miscommunication occurs. Documentation may not be comprehensive enough or clear enough.

Administration systems change. Older products might be on legacy systems. Migrating them to the latest system is much more difficult than upgrading from a version of Windows (see challenges in trying to upgrade to Windows 8 or from 8 to 8.1).

Be Vigilant

Mistakes occur. You might not be sympathetic but you can be vigilant. You don’t need a PhD in mathematics or to be an actuary (though both help). Instead, be a detective. Question what looks odd or what you don’t understand. You’re entitled to ask.


PS Your advisor should be looking for mistakes on your behalf.