Algorithms do not have good faith: Roger Flaxman on the state of the insurance industry

Roger Flaxman

Faced with a costly loss of property, asset or business how much can we afford from savings or credit card capacity? “Not a lot and not enough”, is usually the case.

Prudence has long dictated that our valued assets, our home our valuables our businesses, are best protected by insurance policies but if they do not pay up enough or on time what can we do about it? The sea-change in the insurance industry from a ‘people business’ to a ‘tech business’ has gradually replaced the knowledge, experience and humanity from the service with algorithms that are a proving to be a poor substitute. The result increasingly leads to disappointment by the policyholder at a time they most need the strength of the insurance policy around them.

This article has been prompted by the unhappy experiences of the founder of Finito , who although prudently and properly insured, was subjected to unimaginable delays, obfuscation and stress by the insurance industry practices, processes and pedantry that are some of the unintended consequences of replacing competent people with often incompetent technology. There is no going back to ‘the old days’ of a an entirely people-based service but if the experience, knowledge and good faith that had built up over some three hundred years is consigned to the ’the shredder’ the insuring public will soon lose faith in insurance as the best alternative to an irrecoverable loss.

Insurer integrity

It must be said at the outset that the insurance industry is not ‘rotten to the core’ and thousands of claims are paid with no problem but the percentage of rejected claims is variously reported as between 18% and 24% ,and is rising, because as technology removes human experience and judgment from both the underwriting and the claim process there is no safety net for the algorithmic failures to recognise all the essential relevant factors relied upon for making a final decision.

Many a seasoned insurance company practitioner is as frustrated with the direction of the industry as are many customers but technology cannot be ignored or denied. The art of achieving a successful transition to the ‘new normal ‘is to develop the technology in tandem with experienced human capital; but that is expensive, and therein lies the ‘the rub’ and the risk to the public in ‘buying insurance blind because the transaction is so easy, on-line.

The competition for business in the UK is fierce and much of it comes from ‘new venture’ insurers, often from overseas or offshore locations, whose premiums are typically very attractive because they are breaking into a well-established domestic market. It is impossible from the name alone to judge the status and reliability of an insurance company and the only people that know more about the market are established insurance brokers. They are worth consulting.

Algorithms do not have ‘good faith’ in their ‘DNA’ and therein lies a story that needs to be told.

Insurance is an economic necessity for people with any wealth, a family, responsibilities and assets that are too expensive to replace from cash reserves. Whether in a consumer-domestic capacity or as a business owner there is no comparably inexpensive alternative to a well written, understandable, comprehensive insurance policy issued in good faith; but how can you tell if your policy is one of them?

You cannot – until you put it to the test in a making a claim. We do not expect to test the buoyancy of the life jacket the first time we fall overboard in a storm. But that is exactly how we test an insurance policy. There is no alternative, no pre-purchase or post- purchase test, and so we have to have trust in the integrity and good faith of the insurance company. How do we measure that?

We cannot. The best we can do is trust the good faith and integrity of a recognised brand or take the recommendation of another customer.

So, what will make a difference to our success in getting paid quickly, fairly and in good faith when the bullet with our name on it strikes our home, our business or our loved ones?

You can increase your chances of successfully navigating the insurance market’s perilous unchartered waters. Knowing how the modern insurance industry works in practice, behind the theatrical advertising inducements to trust a cuddly animal and caricature entertainments will give you the best chance of getting what you paid for.

What can go wrong?

Here are some examples of the fallen:

Harry and Jill’s home was flooded by a blocked culvert 100 yards up hill from their home. Their insurers, an inexpensive European company, refused to pay the claim because Jack had declared in an on-line web page, unwittingly, that the home was not within 200 meters of a river or watercourse. But it was, in the valley way below their home and which could never have flooded the home. Harry and Jill were not even aware of the culvert’s existence. It cost them (with help from friends and family) over £100,000 to recover their home.

David and Jenny, with their four children, returned from holiday to their new South Coast home to find it entirely destroyed by fire. An electrical fault in a porch security light was the cause. The insurer refused to pay the claim when they discovered the loft had been boarded in, by the previous owners, and that their insurer said ‘it constituted an extra bedroom’ that they had not disclosed on their on-line application.  It was only being used as a loft at the time of the fire. The family had to live in tents in their debris strewn front garden.

Ashka and Isi owned a family log stove business. To save money they changed insurers after several years with a well-known name. A faulty stove fire at a customers’ home resulted in a claim against their business insurance. The new insurer denied cover because the stove was fitted before they became the insurer. The previous insurer denied cover because the fire occurred after their previous policy had expired. Ahki and Isi found themselves uninsured and threatened with a legal claim of more than £600,000. Plus, costs of over £300,000.

In each case the insurance company relied upon insurance policy ‘technicalities’ to decline cover. The ‘good faith’ rationale was absent from the claim assessment by the algorithmic systems and processes adopted by each insurer.

In each case , following professional representation and submissions to the insurer the retrospective application of a  ‘good faith’ rationale and an equally ‘technical’ alternative assessment of the facts of the claim resulted in the insurer revising its decision in favour of the policyholder- but it required professional insurance expertise and an understanding of the essentials of insurance practice to arrive at a fair outcome.

Disputed insurance claims

Insurance is based upon a principle of good faith between both parties. It is enshrined in over two hundred years of law and practice and the good faith element is intended to work both ways; policyholder towards insurer and vice versa.  The law can be, however, a blunt instrument and the legal interpretation of insurance policies can leave a lot to be desired where the policy’s intent and good faith is not taken into account.

Time is often ‘of the essence’ when we suffer a loss that needs replacing, repairing or reinstating. Permanent damage and loss of income, business and reputation can result from an insurance company’s prevarication and obfuscation.

Disputes with insurance companies are mandated to go through an eight week ‘complaints process’ often managed by the same people as have made the disappointing decision in the first place. Appeal from that decision leads to a complaint to the Financial Ombudsman Service (FOS) which can take up to 18 months, or more, and with no guarantee of a finding in favour of the policyholder. Insurance companies have the benefits of retained lawyers to represent their case to the FOS, but the insuring public do not.

The mandatory complaint process is not helpful or reliable in too many cases but there is presently no incentive for the industry to improve it. The reliance upon current technology and soon, AI, is putting the integrity of the insurance policy in peril and it will pay to know what to do when it happens to you.

The commodity

The sale and administration of insurance is almost entirely commoditised. Insurers recognise that adopting technology to invite and close a sale, to record and store customer data, to assess and determine the eligibility of a claim is significantly less expensive than employing human capital.

Over twenty-five years of developing ‘insuretech’, as it is called in the industry, has got to a place that is a far cry from the knowledge skills and experience of seasoned, career-minded insurance experts in both the underwriting/insurer side of the business and also in the broking community, of which there are some 2000 member firms in the British Insurance Brokers Association, alone.

AI, very much in the public eye at the moment, is undoubtedly going to influence the future of ‘insuretech’ and therefore the future insurance experiences of the insuring public.  The jury must be out on its success until there is enough experience to judge but unless AI can adopt the principles of good faith and human beings’ needs after an accident or tragedy, there will be little to commend it.

How does insurance work today?

The modern insurance industry comprises:

i.         insurers/underwriters – who ‘take the risk’ in return for a premium.

ii.         underwriting agents – sales and underwriting agents authorised by the risk-taking insurer to accept insurances on their behalf- paid by commission and profit share of ‘profitable portfolios of business’.

iii.         Claims Management companies – agents of the insurer delegated to assess and manage claims on behalf of the insurer – paid by commission and/ or fees and / or profit commission on ‘savings’ made in the claim process.

iv.         Loss adjusters -agents of the insurer delegated with assessing the quantum and coverage of the loss or damage sustained and claimed for. Paid mainly by fees fixed to a claim.

v.         Loss Assessors – agents of the insured – if appointed by you, the policyholder- to provide a counter-balancing expertise to the loss adjuster working for the insurer.

vi.         Solicitors – agents of the insurer delegated with responsibility for advising the insurer on ‘policy coverage’ and / or managing the liability claim against the policyholder.

vii.         Brokers- a) advisory brokers paid a commission and/ or profit commission by insurers for bringing them ‘profitable businesses. b) non- advisory (transaction only) brokers paid a commission and/ or profit commission by insurers for bringing them ‘profitable business’.

The Process

The ease with which technology can facilitate a sale of a complex financial service product has created a chasm of distance between the policyholder and the insurer. There can be three or more intermediaries (see above) between the policy-holding homeowner or SME and the insurer that carries the risk of paying a claim. Each intermediary claims a share of the premium.

On-line Comparison sites offer no advice or facility to ask questions about what the insurer expects and wants to know and so one is ‘buying blind’ unaware of the many trips and traps that lurk in the policy wording and well-established insurance industry practices.

Statements of Fact have largely replaced Proposal Forms. They state the ‘facts’ as assumed by the insurer- to suit the insurer’s limitations on cover in the policy. It is common for a policyholder to fail to recognise an incorrect statement of fact (See Harry and Jill’s case, above) and this can result in declinature of cover.

In turn, a declinature of insurance is disclosable information in itself, to every other insurer, for a long time to come.

The Customer – Getting Paid – Getting Fairly Paid – Avoiding a Dispute

The primary issue for today’s, tech-driven, insurance customer is the absence of being able to speak to anyone with knowledge, experience and the authority to give guidance or make a decision.

The modern insurance broker is the most useful source of insurance expertise and advice. There are broadly two kinds of broker: Advisory brokers and non- advisory/ transaction-only brokers. The advisory broker has a primary duty to the customer and is regulated by the Financial Conduct Authority. You can find a broker at  https://www.biba.org.uk/find-insurance/. The web site directs you to the kind of broker suited to your insurance needs.

It is no more expensive to use a broker. You will not necessarily get a ‘good deal’ from on-line insurance. Talk to a few and ask them for comparisons.

The Bottom Line – Top Tips

1.     There is no better financial alternative to insurance for protecting you against unexpected loss, crisis, tragedy.

2.     Choosing a policy by price alone will not guarantee you the best outcome, even if it is the most expensive on the market.

3.     Algorithmic insurance technology does not have your interests, at heart.

4.     You cannot legally make a profit from an insurance contract- don’t try.

5.     You will need early expert insurance advice – if you find your claim being disputed or rejected.

6.     Do not make a formal complaint until you have taken advice from an insurance professional or expert.

7.     Beware of underinsuring- not buying enough. You will not get fully paid out if you are underinsured.

8.     Get formal valuations of your property and valuables every four or five years.

9.     Never assume you are your own best adviser as to the cost of replacing the cottage or the castle – ‘that old thing’ is probably priceless and you don’t to lose it for ‘nothing’.

10.  Take the insurance of your assets as seriously as protecting your children. “Not a lot is not enough”.

Flaxmans are independent insurance-dispute resolution advocates and experts to the courts.