As I watched a large part of southern California being consumed by flames a few days ago, I could not help but wonder how a similar catastrophe would affect people in other countries.
Over the years we have all witnessed on TV the devastation of monsoons, typhoons and earthquakes in places like India and Pakistan, and observed the grief suffered by the people there. From an environmental perspective, I suppose the results of their destruction are akin to our own. Nature heals slowly and it will be years before forests and chaparral will regenerate here and agricultural areas are fit for cultivation in other lands inundated by monsoon seawater.
But there the comparison ends. The contrast in economic impact upon individuals here and over there is stark. While victims of Californias fire have lost personal items, like photos and heirlooms that cannot be replaced, the economic impact will, in the long run, be mitigated, whereas the loss suffered in many overseas calamities is total insofar as individuals are concerned.
The difference? The availability of insurance and our widespread use of it. The Insurance Information Institute estimates losses from the California fires will produce payments to individuals and businesses of $2.5 billion to $3.5 billion. And the remarkable thing is that these losses, coupled with an additional $8 billion to $9 billion of other catastrophic losses experienced this year will be managed readily by the insurance companies with no defaults or insolvencies likely because of previously accumulated reserves.
Insurance is truly a marvelous mechanism for the management of risk that would be difficult for individuals or businesses to bear alone. One of the ironies though is that insurance is so appreciated when it is needed but often vilified and abused at other times. One of my worries has been that the mechanism is so often abused I fear we may either lose it or see it priced beyond the means of the average person. And then what?
Absent insurance, people would not be able to obtain a home mortgage or finance a car. It does not take much imagination to visualize what that would do to our economy. Suffice it to say, we all have a much larger stake in a healthy and affordable insurance mechanism than generally is realized by the public at large. And that is the nut of the problem. Our system too often is taken for granted as more and more people believe they are entitled to a totally riskless society. One law firm is bragging in its advertisements that it has won more than $700 million in claims for its clients. You can bet most of that comes from the same insurance companies that it berates at every opportunity.
Our public image also is punished as we raise premiums on health insurance and other lines of insurance to cover claims boosted by irresponsible juries and rising health care costs. This creates such a fury in the minds of policyholders that a recent survey revealed that many, if not most, people feel consumer fraud against an insurance company is justified. We seldom are viewed as simply the messenger delivering bad news that was created by others and largely beyond our control. Rather, we are perceived as a very large business, possessing very deep pockets ripe for picking, as evidenced by impressive home office buildings.
I have believed for a long time that this perception cannot continue to go unchallenged. Those of us within the insurance community understand perfectly the fallacies underlying the negatives in our public imagebut the public does not. Negative ads by predatory law firms, biased media reporting and political opportunists all are taking a toll and it is time we did something about it.
The public, to state it in its simplest term, does not understand the mechanics of risk management. People do not realize that the assets of an insurance company are, for the most part, a pool of their money being managed for the benefit of the policyholders. Any unjustified raid on the pool means more has to be paid in to make up for the loss (high premiums). A rise in the cost of the item being insured, such as health care, also depletes the pool requiring additional contributions.
I dont want to beat this theme to death, but it is important for the long-term health of our business that the public better understands the basics of what we do. I believe people are more interested in how fairly we administer their funds than how magnificent the structures are that house our operations. I also have been told by PR experts that displays of affluence by companies, more than anything else, bolster our “fat cat” image.
Perhaps we should look at the language we use and how our nomenclature may convey a wrong impression. For example, the term “cash value” often has been a problem and a tool for critics who ask why people should pay interest on their own money if they borrow it. Such questions never arise in Denmark, because rather than cash value, people use the term “repurchase value,” which has an altogether different connotation. Subtleties are important.
My point in all this is that we have a marvelous instrument that serves our people better than they realize. To the extent that we are misunderstood or even misperceived, we are precarious, and we need a strategy to deal with the problem.
Business as usual is not a strategy for survival.
Reproduced from National Underwriter Life & Health/Financial Services Edition, November 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.