Growing up, whenever I would tell friends and classmates that my dad sold insurance, people would immediately discuss how evil insurance agents are. I heard horror stories about insurance companies not paying out claims. Many times, people talk about their rates skyrocketing for no reason. And as healthcare has become political with polarizing opinions, the discussions always seem to revolve around awful insurance companies.
Unfortunately, most opinions regarding insurance have little to due with a basic understanding of the industry. These views come from distorting media reporting, demagogic politicians, and a broader lack of personal finance education. Because I was raised around insurance, and due to a deep background involving internships and work experience in the insurance industry, I am well equipped to explain the role of insurance agents and insurance companies.
The first major misconception about Insurance involves the role of agents and brokers. Insurance agents and brokers have a fiduciary responsibility to sell the best policy that fits the client's needs. Agents are not supposed to push unreasonable policies onto their clients just because the company they work for directs them to. The agent must always use their best judgment. An unethical agent leaves a black mark on all the honest agents and brokers.
The second major misconception is that agents control the premium prices. For example, Lenny, a client at Agency A, walks in and complains that his renewal quote for his personal auto policy went up by $100. He claims that Agency A is greedy and raises the rates for no reason. Then, he goes to Agency B and finds that his rate is even higher for a new quote. Lenny goes on and tells his friends that the insurance companies have a conspiracy against him.
Don't be like Lenny. Don't blame your agent for the higher premium. First, insurance agencies and brokers don't have any control over your rates. Premiums and quotes are determined by the insurance company. The agent will ask the client some questions that are sent to the underwriting department. The underwriting department uses the guidelines created by the actuaries, compliance, and claims departments at the company. Then, the underwriter sends back the price to the agent. The agent is merely the messenger.
You may be wondering which factors are used to determine an insurance premium. For auto insurance: your zip code, driving history, age, gender, credit score, education level, job occupation, type of car, and usage of your vehicle are all used to determine your premium. Insurance companies have found a correlation between your credit score and your driving record. They found that people that are responsible with their money are also more responsible on the road. This is why credit is such a big factor for premiums as it is in many areas of life.
As with credit, the less insurance you use, the lower your premium. People that need insurance the most tend to pay more just as people that are irresponsible with credit have higher interest rates and more difficulty with borrowing. Insurance premiums may rise in the renewal term if you had an accident and filed a claim, got a traffic violation on your record, or used the roadside assistance offered by your auto insurance provider. For most types of insurance, if you file a claim, the next term will be more costly because you are seen as higher-risk.
The third major misconception is regarding the relationship between healthcare providers and health insurance in the US. Demagogic politicians, distorted reporting, and a broad disinterest in personal financial education have led to a lack of understanding about our healthcare system in the US.
For decades, rising healthcare and health insurance prices have taken a bigger and bigger piece of our personal budget pie. It is no secret that many Americans often choose between medication and food or between surgery and the mortgage. The prices are out of control and there is lots of talk from politicians on how to remedy the problem. I am not here to advocate for one solution or another solution.
As someone with years in the insurance industry, I would love more than anything for health insurance to be affordable for all Americans and allow everyone to stay healthy. Politicians from all stripes blame the insurance companies and then the agents are blamed for factors out of their control.
The insurance companies can only operate within existing laws and regulations. Due to these existing laws and regulations, they do not have much flexibility about premiums. Insurance companies operate a business like anyone else. Therefore, they need to turn a profit to stay in business. These companies transfer the risk and medical costs away from consumers to them.
Unfortunately, the healthcare industry involving providers, pharmaceutical companies, medical technology is largely unregulated as it pertains to pricing. There are substantial overhead costs for hospitals due to bloated administration, price gauging from pharmaceutical companies, and equipment companies that charge whatever providers are willing to pay. This inflation of cost means that providers try to earn their money back through catastrophic medical bills to consumers.
The only way that the healthcare industry gets away with this type of robbery is because there is little to no regulation regarding pricing. This is why Mylan, the pharmaceutical company that produces EpiPens can raise the price from $57 in 2007 to more than $600 in 2018 for 2-pack. These types of costs are passed onto insurance companies.
Since the vast majority of Americans have health insurance, insurance companies take on up to 80% of these costs. That leaves the companies with little margin of profit. In many cases, health insurance providers have pulled out of some states or merged with larger companies to stay above water. Until the underlying issue behind healthcare costs is fixed, insurance companies will have little choice, but to pass on the costs to consumers through higher premiums, higher deductibles and less coverage.
These three major misconceptions make the average person go crazy. It is not their fault that our education system does not require personal financial education. If high schools and colleges made personal financial education mandatory, more people would be knowledgeable regarding key consumer finance issues. This knowledge would lead to better policy-making for all Americans.