August 22, 2010


rejected and crumpled 500x735
"A pocket full of mumbles such are promises." 
— Simon and Garfunkel,
The Boxer
Your insurance contract is an expensive but worthless stack of paper if your claim isn't paid. A promise broken. As Warren Buffett says, promises vary greatly in their quality. You know that.

You can boost your chances of getting your (legitimate) claim paid with
  1. an insurer with excellent corporate governance
  2. an independent distributor with leverage with the insurer
  3. an independent advisor with leverage with the distributor
These keys maximize your leverage when you need it most. The cost is minimal.

The Right Insurer

Corporate governance deals with companies keeping promises. This measure looks to the past but is a reasonable predictor of the future, especially for publicly-traded companies. Due to competition, picking a well-run insurer rarely costs you much more. The Globe and Mail prepares rankings.

The latest global financial crisis shows that bigger doesn't mean better corporate governance. Investors and taxpayers around the world learned this tough lesson. So you won't automatically pick the company with the highest score because other factors also matter.

If your advisor is independent, you'll likely get proposals from different insurers. Ask about the selection criteria. Was corporate governance a consideration?

The Right Distributor

Insurers are growing through acquisition to reduce unit costs, increase market share and eliminate competitors. You're stuck with less choice but may not get lower prices.

Fortunately, the independent distributors are growing too. They're  often called Managing General Agents (MGAs).
An independent distributor promotes products from different insurers. A dependent distributor is generally owned by an insurer to promotes its own products.
Insurers don't like dealing directly with advisors — too many points of contact. The distributor is the intermediary. Also, the insurer can recover advisor debt from them.

Some independent distributors have better reputations and more clout with the insurers. Here is the just-released 2010 Report Card from Investment Executive. This link shows the main chart in PDF format. Don't worry if you don't recognize the names.Your advisor picks the distributor. Who did they pick and why?

The Right Advisor

Through your advisor, you'll get the distributor and access to the insurers. You want your advisor on good terms with all parties. If not, you lose by association when you need a favour.

You have full control over who you pick. Get this decision right and you don't need to worry much about the others. Here are three decision criteria to consider: chemistry, credentials and generosity.
Avoid an advisor who's a "squeaky wheel". Insurer staff don't like them. Who would? You may  face unwelcome delays and anguish during the claims process. Your advisor will likely blame the insurer … even though they picked the company.
Since insurers set the premiums, you don't pay extra for picking a particular advisor. You simply need to be careful. Your decision affects everything else.

Exceptions Prevail

Insurance is an intangible promise on a piece of paper. You're dealing with people and ambiguity. A claims adjuster uses judgement to decide if you're disabled or have suffered a critical illness that qualifies under the terms of the policy contract. So requests for exceptions are routine. Some lead to changes in procedures. Others are special one-time arrangements. Many are rejected.

The nicer advisors and the larger advisors get more exceptions.

That's no surprise. That's how life works. You want the leverage on your side. An advisor who knows the inner workings of the insurers can help the distributor frame requests in ways that are more likely to get results.

Cutting Back

You've experienced the effect of companies trying to make more money. You might face higher prices, smaller sizes, slower delivery, tougher return policies, smaller selection or less service.

An insurer maximizes profits if clients pay premiums but make fewer claims than projected. Some of those savings may be passed on to you. For example, term life insurance is inexpensive because so few die. Getting you to cancel your coverage helps too. So you find incentives like a return of your premium if you cancel your critical illness insurance. The insurer wins because they keep all the investment returns and didn't pay a claim. You may gain more by keeping your coverage. Since you're older, you're more likely to make a claim.

If you or your advisor pick the lowest price, do you think that company is taking lower profits or are they making money by cutting back somewhere else? As a shareholder, what would you want them to do?
Bell Canada Enterprises owns Bell Mobility, Solo and Virgin Mobile. They share the same network. If there are network problems or enhancements, who gets top priority? Probably customers of the flagship brand.

In the world of acquisitions, bigger insurers are more likely to survive and to give their own clients preferential service. What's worse, experienced staff from the acquired company are often cut to reduce costs. So picking the right company at the outset is helpful — though you can't be certain which company is the right one. Your advisor can help in reducing the chances of guessing wrong.

Sad Cases

Here's a sad story about an insurer that delayed a death claim for 11 months. Imagine the family's anguish. Even then, intervention by Ellen Roseman seems to be the catalyst for payment.

There's the cruel world of bank mortgage insurance. You may think you're covered because you've been paying premiums for years. How would you feel to be told you never qualified when you file a claim?

External pressure from a journalist may help if you have a solid case and exhaust other options first.

No Guarantees

Insurers are likely to pay "obvious" claims. Otherwise you'd see articles in the media regularly and pressure to reform their practices. The government might even intervene.

The challenges occur when there's ambiguity. Human judgement isn't perfect and there may be financial pressure to deny claims — maybe not today, but in the future.

Insurance is about peace of mind. Why not boost yours with simple, inexpensive steps?


Podcast Episode 80 (7:46)

direct download | Internet Archive page

PS Visit the links for more, including touching examples.

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