The Human Factor

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Paul Martin and Colin Rooke look at the importance of not relying solely on analytics in the insurance industry.

Listen to the full episode here, or read the full transcript below.

Paul Martin:

Welcome to Risky Business, Commercial Insurance with Butler Byers. This is Paul Martin, the business commentator on CKOM. And joining me today, Colin Rooke, the commercial risk reduction specialist with Butler Byers. Colin, here we are, six weeks, eight weeks into the new year. And it’s that I guess, a traditional time for people like me who came out of the newsroom and the journalism side. You always look forward to this kind of year because now we’re starting to get the experts weighing in on the year in review that we’ve just completed. So you finish the year and then they start digesting and dissecting all of the data and then they start writing their pieces. Those are starting to come out for your industry now for last year and it would be safe to say in all of our conversations, last year was pretty tumultuous. And you can add COVID, you can add hard market, you can add natural disasters, and this has been choppy waters. And I’m curious as to what are the experts saying about the year that was 2020?

Colin Rooke:

Yeah, that’s a good point. 2020 was certainly not the first year of the hard market globally in the insurance industry. But I would say for everyone, it was the first full year where it would have impacted almost everyone. And then you add in the, I’ll call it the COVID business interruption crisis to the mix. And so it is pretty interesting and all of those reports are starting to come out now. For a future show, we do get a report of the top requested coverages, for example. And I usually don’t talk about those on this show, but I can guarantee pandemic insurance is number one, without seeing that report. But it’s really interesting. And a recent document came out really about the state of the industry and what brokers need from their underwriters is sort of the high level.

And global CEOs of top brokerage firms were interviewed and they, they developed this report. And really the message is there’s a lot of investment around technology and analytics on the side of the insurer. The challenge there, and of course they’re trying to be more efficient. They’re trying to minimize their own risks. They’re trying to keep costs under control and they’re trying to look for the business classes that are going to produce for them. Now that might be eliminating some or stricter underwriting criteria, higher deductibles, higher rate. But what’s happening now moving into this, or I guess as we carry on to this hard market, the analytics are declining darn near everything. And so you invest in this technology and the idea is that it’s going to protect each and every insurance company, but now you have businesses that would have never considered themselves as high risk.

And they could be claims free 30 years, best in class. And suddenly the analytics are saying, “Well, we had a $600 million loss in your industry at the other side of Canada, and therefore you can’t get coverage to date as a result. The analytics say you’re too risky.” And so it’s a big problem when you remove the human side of the underwriting process, right? If you talk to industry veterans, those that are either looking to retire or on their way through a succession plan, they would say “Back in the day, you’d call your buddy Paul, you’d explain the risk. You talk about it, and Paul would comp with a price on his gut and on the relationship that we had with the broker and we would get it done,” so to speak. And now when I call Paul, a computer tells him he can’t do it, and it’s a real problem.

Paul Martin:

It’s a fascinating, fascinating aspect of what you’re talking about, because I guess the analytics are designed to protect the insurance company. And it sort of says, “Knock off the bottom 10%, which are the high risk, we don’t want to deal with them,” kind of accounts. But by extrapolating that, theoretically the analytics would over the course of time, eliminate all your clients because I got rid of the bottom 10% this year, I get rid of the next bottom 10% next year until I’ve got nothing left.

Colin Rooke:

And they do it. Even if that was the case on a individual basis, you could say, well if the bottom 10% aren’t going to work on risks, they’re not going to make risk management a priority, maybe they should get declined. But they’re doing it by class of business. They’re saying, “We are going to remove every restaurant from our book because the analytics say that that segment is too risky for us, or darn near every restaurant.” And so the problem, as insurers invest in technology and analytics, it is going to get worse. Now in the same article, the question is asked, “What do you want and what should the underwriters do about it?” And the plea of course, is we want to go back to the old days where there was more, a human side tied to the decision-making.

We want underwriters that are going to look at the analytics, but then use their gut and work with us and come up with an appropriate price. However, and we’ve talked about this on the show a lot, if you are the underwriter and you know the industry has changed to analytics and you know that the analytics are based on the insurance application and all the information you’re getting is the insurance application and you’re compensated based on your own loss ratios, why would you take any personal risk when the format’s the same and the analytics say, “You’re not a great risk”? the analytics say, “Maybe they haven’t had losses, but when they do, you’re going to be upside down on a loss ratio. And that’s the challenge in our industry on the broker side. And we’ve done that to ourselves.

Paul Martin:

It’s a fascinating concept because it is so current in this context of every business, every industry, every economy is looking for ways to replace the human element with the mechanical element or the machine, the online application. And in this case, human underwriters being replaced by tools do analytics and I guess just trend lines, right? And so there is no human aspect to this, there’s no judgment call. It’s just black and it’s white.

Colin Rooke:

They do have the ability to sort of dust off their underwriting cap and dig in and really look into it. But as an industry, if you’re presenting the risk the same way as the analytics are designed to look at it, why would they do that? And so we’ve talked at length about the story that’s being told to the insurance market, or looking at your business as a customer of the insurance market. What are you doing different? If I call an underwriter and say, “I want you to have another look at this client. I don’t think it’s fair you’ve declined it, or you won’t offer renewal terms,” and the underwriter says back to me, “Why? Why are you any different?” And I say, “Well, here’s the insurance application,” or “I’ve known the guy a long time.”

What does that mean when a computer that’s able to process data a lot faster than 10,000 underwriters can is saying, it doesn’t matter. Statistically across Canada, this is a loser for us. So if you’re not looking at your business and you’re not saying “Well, who is telling my story?” And honestly, what am I doing to improve my operations that are going to have us look more favorable to an insurance market? Yes, if you’re working on risk, you’re having conversations around reputation and lean systems, it’s going to improve operations. However, really the secondary purpose here is to say, “Take a look at the real account here, but here’s why you should, here’s the argument.” This is something that you can present to head office. When you’re dealing with underwriters, out of the branch that you are used to dealing with, they always say, “I have to refer this.” They mean, I don’t even have the ability to make this judgment, regardless of what I think. So if they’re referring it on to someone else and that’s going to be the deciding factor, you have to have your story straight. That’s the presentation.

Paul Martin:

We’ve got to take a break here, Colin. You’ve kind of teed me up for the conversation I always like to have about storytelling. So we’re going to take a little break. We’ll come back after this. You’re listening to Colin Rooke, the commercial risk reduction specialist with Butler Byers. This is Risky Business, back after this.

Welcome back to Risky Business. Paul Martin here and joining me Colin Rooke, the commercial risk reduction specialist with Butler Byers. Just before the break, Colin, we were kind of talking, I guess, about trying to make sure that we humanize our application for insurance coverage, because increasingly in today’s world, it’s being vetted through analytics. And so it’s a machine that’s making the judgment call. And you’re saying the way to separate yourself from the rest of the pack in your industry is don’t just fill out the form, actually tell the story and make a compelling story of that.

Colin Rooke:

Absolutely. I was on a call with, SGI for example, and we were discussing the idea of loss control. And the funny thing is, and it’s our job as brokers to explain this, but a lot of clients see that loss control as negative. Whereas SGI says, “This is value-add.” We go into your business and we take a look at everything we can see and provide constructive criticism so it ultimately doesn’t burn down or flood or the roof collapses and kills people. However, there’s this view that it’s a negative thing. Someone’s going to come tell me how to run my business. However, if that’s your attitude, you’re probably not going to fall into that class that’s going to have an appropriate story to tell and earn yourselves lower premiums or in this case in a hard market, earn yourself the ability to find full coverage.

If you’re saying, “I want to know what I’m not doing well. I want to know what’s too close to a heat source. No one tells me where the fire extinguishers should be.” And on another note, if you hired your own loss control inspections, depending on the size of the file, it could be in the tens of thousands. And we have the insurance company saying, “Well just look at it.” But it’s those attitudes that lend itself to this algorithm, analytics, technology approach to purchase and placing commercial insurance.

Paul Martin:

I guess if you are skeptical of this, all you need to do is watch a few TV commercials and you see these online quoting services that you just go in. I saw one ad that said, “Now you can buy insurance on your phone,” and it’s home insurance or something like that. Or you see these life companies that are, “You automatically qualify.” These are online tools that are really kind of pervading the industry. And you’re saying it’s now starting to work its way into the commercial sector.

Colin Rooke:

It is. And not so much for complex risk, but even if you say, okay, I’m a small office exposure. And those are easy insurance packages to write, not a lot of info, the pricing is all fairly similar across insurance companies. So you think what a perfect tool for automation. However, then we enter a hard market and then we throw COVID into the mix and global loss is through the roof. And suddenly, you punch in your little office space and maybe you are considered unprotected, or maybe your neighbor next to you is considered risky, the one you shared a wall with. And you punch it into this quoting system, and it comes back with nothing. We went to every market that any broker would have, and we came back with nothing.

What do you do at that point? Who do you call? And that’s what this article is referencing with the issues in our industry. It’s not really against automated quoting, but what do you do when everything’s turned upside down and what was considered traditionally good business is a very hard to place class. For example, snow removal. There are some very large snow removal companies out there, but a lot of them are very small, like one or two, three person, looking for growth. And certainly when they start out, they’re small. That is one of the hardest industries to find coverage for today. And if you’re in snow removal, if you’re not doing landscaping on the side, that’s a very, very seasonal business. And what if you’re saying to yourself, “My insurance premium is 30% of what I even hoped to take in.”

Paul Martin:

Yeah. That doesn’t really work. I guess we should draw the link here between what’s going on with the hard market. And as a consequence, insurance companies are raising premiums dramatically for many accounts. Some are saying, “Sorry, you’re out of luck.” And as a result, you as a broker, are being instructed by your clients, take it to the market. Let’s see if we can’t get a better rate. So you’re swamping the market with requests for quotes. And the industry is responding by saying, “I can’t manage this volume. So let’s automate.”

Colin Rooke:

Right.

Paul Martin:

And so the hard market’s actually accelerating this process.

Colin Rooke:

Yeah, absolutely. So traditional underwriters are out of time. They’re automating and suddenly the results aren’t favorable to the client or our clients anyway, their customers. And so you’re faced with this decision of, I mean, really it perpetuates the problem, right? So you send it out to as many markets as you think you need to, you get declines, you send it out even further, you get more declines, you send it out. So costs for absolutely every aspect of that channel are increasing, which also doesn’t help rates. But the reality is, we need to get back to the point and stop bothering or blanketing the market, choosing a few markets that you know are looking for this type of business and then having a story to tell.

Where did they come from? Where are they now? Where are they going? If you just covered that. We had a brief conversation, I got a company history, and I know where they’re going. I know some of their philosophies. That’s a leg up. But just imagine if you have a step-by-step detailed risk management plan where we’re uncovering everything and we share the good and the bad. Not everyone’s perfect and we don’t want to claim that every single client that Butler Byers works with is perfect, but we let them know we’re working on it. And that allows that sort of gut instinct to kick in.

Paul Martin:

I’m just going to wrap this up because we’re out of time, by just making a bit of an editorial comment.

Colin Rooke:

It was just getting started.

Paul Martin:

Just as you’re seeing the need for the human element in the underwriting, you’ve just underscored the reason for having a human broker too. You, as a client, need someone like Colin running some interference for you with this industry that’s getting more and more complex every day.

Colin Rooke:

Absolutely.

Paul Martin:

Well listen, Colin, as always very informative, very instructive. So thank you for this. You’ve been listening to Colin Rooke, the commercial risk reduction specialist with Butler Byers. I’m Paul Martin. Thanks for joining us with Risky Business. Talk to you next time.