Skip to content

“So…you want to be an insurance man?”

April 6, 2009

 

Chris Garlasco, Owner & Managing Partner

Chris Garlasco, Owner & Managing Partner

 

So…you want to be an insurance man? This was a statement rather than a question asked by my first supervisor as he gazed over his reading glasses at me. Truthfully, I was asking myself the same question. I had two young children in diapers and needed a job, but insurance? Were all the jobs in cars sales already taken? How had I ended up in this position? I was raised by a loving family with a good value system. We were taught that integrity is everything. We went to church on Sunday and helped those that were less fortunate. My father had worked two jobs so I could become the first college graduate in the family.  I was going to repay him for all his hard work by going into the insurance profession, a world that is built on deception and mistrust. “A carpetbagger” my grandmother would have said. The fact that insurance can be a very noble profession, the backbone of any free economic system and quite possibly the most misunderstood product sold in the world today never approached my thoughts.

 

When I was approached to write this blog, my first thought was that blogging was for my twenty something kids and not for middle aged guys like myself. Then again, I never thought our industry would be consumed by cartoons and reptiles pitching products so near and dear to my heart. Fear not though, this blog will not be committed to contract language or the deep intricate aspects of coverage. I often find them as boring as you do. Besides, there are plenty of sites that litter the internet pursuing that very endeavor. This blog is designed to discuss, in simple fashion, the value and importance of our industry. It will also be dedicated to helping sort out many of the common myths and misconceptions about insurance, and lastly understanding the value proposition of the independent agency system as opposed to other forms of distribution. I promise to do my very best to not make this an ongoing advertisement for the insurance industry.  I will share my opinions from the inside of an industry, one that I have been associated for nearly twenty five years:  the good, the bad, our successes and our failures. Your individual opinion is very important and will be taken seriously so please feel free to share them with me. This blog, however, is not designed as a forum to offer advice about your specific insurance situation.

After all of these years, I am still amazed that the very concept of “spreading the risk or  insurance”, is still so misunderstood. What it  means and what it doesn’t mean. Misunderstood by the public and politicians alike, our industry has often times done a poor job at offering those explanations. We also have to face the fact that it’s a product that offers very little excitement, is intangible and can be at times expensive.  Insurance is not very likely to drive folks to new heights of interest. I need and like my dentist too, but I hardly look forward to frequent visits.

Let’s start with a basic understanding, in simple terms.  What is the concept of insurance as it relates to auto, home, life, dental, health and business? The concept is the same, but often times that is where the similarities end.  Each line of insurance has its own unique variations and challenges. 

I will begin my explanation with a question: How much does it cost to drive your car, from a risk standpoint, if you own a home or other assets? In other words, what potential financial exposure do you incur every time you get behind the wheel? Depending on the size of the claim, it can range from a few hundred dollars to hundreds of thousands of dollars. As a general rule of thumb, $300,000 is a safe place to start. This is the actual cost that each driver is exposed to just for getting behind the wheel of a car going to work, school, your favorite movie etc. So, we can protect ourselves one of two ways: We can put aside the amount that we are exposed to in a coffee can in our bedroom closet. My grandparents did that; they didn’t trust the banks, go figure! Or we can pay a much smaller amount of money to an insurance company and let them take on that risk on our behalf. I often times hear clients complain that they have paid in for years to get nothing in return. That is often times true, which is what the spread of the risk is all about.

The mysterious actuary

There are folks sitting in insurance companies with Buddy Holly style glasses taped together in the center frame, pocket protectors, scuffed shoes and computers for brains.  They are called actuaries, and although they can be a bit introverted, they generally shine their shoes! Actuaries spend their entire day trying to figure out what the cost of all of this year’s claims and expenses will amount to. They then take an empty pot, and divide that by the number of policy holders that they have and they assign a dollar amount that each policy holder must contribute to that pot in order to cover that total exposure. This is exciting stuff! As I mentioned above, they also have to take into consideration the expenses of running the company such as paying employee salaries, benefits, computers, buildings etc. I know that some of you are thinking, how about their jets? In some cases, that too!  Each policy holder is paying their slice of the pie into that pot. In the case of most insurers, the poorer risk must contribute more to the pot. Because the insurance company knows that not everyone will have a claim, the amount charged to you, the policy holder, is far less than your actual exposure. In the case of expenses, competitive forces in the market place have driven expenses down by over 40% in recent years. If company “A” has an expense rate that is five points higher than company “B”, company “A” will have to reduce expenses, i.e. the jet, in order to stay competitive and keep customers.

The sum total of the company’s claims plus the total of the company’s expenses equals what is commonly referred to as a combined ratio. In most cases, a company selling auto, home or business insurance hopes to have a combined ratio somewhere in the mid nineties. Thus a company, after paying all claims and expenses, with a 95% combined ratio is making 5 cents on every dollar before investment. They are paying out the other 95 cents in claims and expenses. Surprised? Many folks seldom realize how small the margins actually are! However, 5% to a company bringing in a billion dollars of premium is $50,000,000 dollars. It sounds like a huge amount of money, and it is. But the key point here lies in the margin. Since the margin is so small, an insurance company is walking a fine line between profit and loss. A large storm like Katrina or Andrew can very quickly put a company in the loss column. A shift in the legal or political wind can create a loss for which there has been no premium collected, disrupting the projections of the actuaries and quickly throwing the company into the loss column. Like any other business, frequent losses mean an end to the business’ existence. I will talk in future blogs about the effect of an insurance company stuck in the position of losing money has on you, the consumer. 

I invite you to come back if you enjoyed this first blog. I invite you to come back if you didn’t but need a cure for insomnia!

 Either way, thanks for spending a few of your valuable moments with me!

Chris Garlasco

 

 

 

 

 

Advertisements
2 Comments leave one →
  1. April 22, 2009 8:53 pm

    Hi, Not sure that this is true:), but thanks for a post.

    • April 24, 2009 4:09 pm

      Hi;
      I am not sure which part you are unsure about, but I’ll guess it has to do with the company margins. They are truely that small. There are actually a large number of companies that are not even running that margin. But don’t forget, they are also making money on the investment of your premium and on fee’s. But it is all true…cross my dark, dark insurance heart and hope to….
      Chris

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: