Why everybody hates insurers

Daisy speaks to Mark Geoghegan, Editor of The Voice of Insurance, about why everybody hates insurers, how to survive after a meteorite strike, and how insurance both requires and feeds a good reputation.

We dig into why economies - and countries - need and want insurers and how insurance can speed up the journey to net zero. And then we discuss if you can insure against reputation damage.

Find all of our episodes - and full transcripts for each one - at https://www.buzzsprout.com/1121639

Transcript

DAISY POWELL-CHANDLER

Welcome to Why Everybody Hates You, an audio support group for reputation professionals. If you have any responsibility for how people talk, think and feel about your organisation then you are in the right place. I’m your host, reputation coach, Daisy Powell-Chandler

I’ve been thinking for a few years that we should get someone from the insurance sector on to the podcast. It may not sound like the most glamorous of topics but it is deeply interlinked with reputation. How much doe the reputation of your organisation affect your insurance premiums or even your ability to get insurance in the first place, which might completely close down your business venture? And how much do the actions of your insurance company impact your reputation in turn? Well luckily after years of asking around, a friend introduced me to Mark Geoghegan, who understands more about the insurance industry than anyone I’ve ever met. I started by asking him how he came to be The Voice of Insurance.

MARK GEOGHEGAN

I wanted to speak Spanish for my career. Then I got married to a Spanish person and I don’t need to have that in my career anymore, and I became a journalist which was what I had always wanted to be. And I ended up, 17 years ago, I became an insurance journalist. And so I have done insurance and I’ve been writing about insurance for a long time. I was the editor of a trade publication called the Insurance Insider. And now the last couple of years, I've branched out on my own, and I've got a podcast called The Voice of Insurance. So I spend most of the time talking to CEOs of insurance and big insurers or big insurer brokers generally. And it tends to be the sort of insurance that crosses boundaries, that tends to be difficult insurance, insurance of really big things, weird things, or just slightly odd, you know. Cyber insurance, or the sort of insurance that covers an earthquake, or a hurricane or something, or a skyscraper, or an airliner crashing into the side of a mountain and killing 500 people that kind of thing.

DAISY POWELL-CHANDLER

All the exciting insurance from the sounds of it. 

MARK GEOGHEGAN

Yeah. When I was a kid, when I was just a young graduate, you go to all these parties at random people's houses (this was in London) and they'd ask you. You know, it was a real such a turn off. People would say “Oh, do you work in insurance?” and they say “Oh, Mark, what do you do?” “I work in insurance” and some people just literally walk off. And I said “Oh no no, I'm doing more interesting insurance, things that explode, space rockets” but they'd already gone. It was too late. 

DAISY POWELL-CHANDLER

Too late. Well tell me then, why does everybody hate insurance? 

MARK GEOGHEGAN

Well because, well there’s lots of reasons. One, it's not a desirable purchase. You don't get up in the morning and say, “I want to buy a new insurance handbag.” It's not desirable, is it? And also, sadly, a lot of it's compulsory and who likes doing things that are compulsory? You know, “I can't do it without the insurance. I can’t drive. I have a lovely car outside on my drive. On no, but I haven’t got the insurance. So I have to get this blooming insurance, and it's going to cost me £500, £1000,” or whatever it is. And, you know, some of it's quite expensive. It’s time consuming. And you have to give them all your personal details. You have to sort of swear on the Bible that everything you say is true, and you never know. 

And also, because it's an intangible product. When you buy a handbag, you've got a handbag. And so I like that handbag and that's because it's red, and it's shiny, and whatever, it goes with my dress. But if you buy insurance, you don't really know what it is until you have a claim. And you may never have a claim. You know, I haven't had a car insurance claim for a really long time, touchwood. But I'll only find out whether that insurance was any good if I actually use it. And that's by crashing my car into a tree or whatever it is. 

DAISY POWELL-CHANDLER

And so you’re already in a stressful situation.

MARK GEOGHEGAN

Yes so then if it doesn't perform and, of course, it's that sort of asymmetrical thing as well. If it performs then that’s what it's supposed to do, it does what it says on the tin, and it's sort of unremarkable. And then of course, if it doesn't perform, then it becomes newsworthy. It’s a bit like the air traffic control syndrome when they upgrade their IT systems. And of course, air traffic control works all around us all the time. None of these planes seem to crash into each other or fall out of the sky. Yet once every 10 years when they upgrade their IT system, of course, there's some terrible… something happens, someone forgets to plug in the right widget or whatever. And then there's a delay, and then everyone's delayed on their holidays and there's queues around Heathrow and everything else. And suddenly it becomes newsworthy. And sadly, it's only newsworthy when these things don't work. 

Or like with, (us journalists are all kind of culpable in this) you have a company, a big company which employs 100,000 people. It hires probably one person every day, or two or three a day, for years. And then of course, it finally has to rationalize some production facility somewhere, and it fires 5000 people on one day, and that's news. Of course, hiring one person every day for five years is not news. But firing 5000 people all in one go is big news. And sadly, it skews the news sometimes towards the negative. And the same, insurance suffers from that same problem. 

DAISY POWELL-CHANDLER

Although there does seem, (I can't decide whether I think it's a handy trick or totally reputationally disastrous) it does seem that, whenever the insurance industry gets itself into a real pickle, it manages to offload a load of its responsibilities onto the government. What is that? Is that a great trick or is it a disaster? 

MARK GEOGHEGAN

Oh I don’t know. I think it’s just that some thing's are almost uninsurable? Because they're systemic risks. So those are just the risks you know, if a meteorite destroys the earth then are you going to care whether your insurance paid up or not? I mean money won’t really have any value anymore. We'll just sort of barter and you’ll just need guns and tins of butter under the stairs or whatever you need to survive, and fresh water if you can get access to it. So it won’t really matter that much. 

But a lot of things are very difficult to insure. The way insurance works, you're spreading around that risk. You've got a one in 10,000 chance that your house will burn down or one in 100,000 chance and your house is worth, I don’t know, £400,000 pounds to rebuild. And that means it's great that you can charge someone something reasonably affordable to spread that risk. If you can insure 100,000 houses all at £400 each or £300 each, that's reasonable. That covers all your costs and you can rebuild the one in 100,000 house that burns down. It’s only if the whole country is on fire at the same time, then you suddenly realise that that's not what insurance is really good at and obviously insurance companies will become insolvent at that point, and they won’t be able to function by spreading the losses of the few with the premiums of the many. And at that point, yes that is what governments are for. 

We’ve had similar things with things like terrorism, where suddenly the problem becomes so systemic. You know, that was certainly happening in the UK in the mid 90s at the height of the IRA bombing campaign in London, that happened, and that does happen. The state and the insurance industry are in a sort of merry dance with each other. Yes, because the ultimate insurer of last resort is always the state, things always go back on to the state. In the end, if there's no insurance, the state will have to pick up things. Obviously, it's up to the state to encourage insurance and to make the playing field simple and efficient for insurance to work. Because if there isn't insurance… there is a huge value to the economy of insurance functioning really well. 

It's one of the sad things when you compare wealthy countries which have high insurance take up with poor countries after a natural disaster. You compare New Zealand to Haiti (they really don't compare that well in the day to day living sense) but Haiti still hasn't recovered from any of these earthquakes because it only had about 2% insurance penetration. And that's just not enough. Whereas in New Zealand, like I said, 90% of people have insurance. And that means that within two quarters, they had a recession, because of what happened, and then within two quarters their GDP was humming along because of all this construction activity. And in fact, their balance of payments had a deficit because it was all the money coming in from foreign insurance. And reinsurance, there was actually a really good balance of payments deficit because the rest of the world was chipping in with what we call reinsurance for these big events. The local New Zealand insurance companies bought reinsurance for this big earthquake, and then it all paid out and billions of dollars were being spent on rebuilding the economy and, within a year you just see the thing as a little V shaped blip. That's part of the financial resilience event of an economy. And so it is an essential role. But when it doesn't work, that's where the state is always going to have to be there.

DAISY POWELL-CHANDLER

So that must mean that that relationship, the reputation that insurance companies have with the government, and vis versa, must be incredibly important to CEOs and the rest of the leadership of the insurance industry. Is that something that they spend a lot of time working on, or is it kind of taken for granted on both sides?

MARK GEOGHEGAN 

Well actually, it's funny that the insurance industry has always felt it was the poor relation to banking, and then the global financial crisis happened, you know, more than 12 years ago now 13, 14, 15 years ago, and the insurers came slightly higher up the pecking order because they're still producing profits and therefore contributing to corporation tax revenues. And so the Treasury suddenly woke up and said “So hang on a minute, these banks have made so many losses that they're going to have tax credits for the next goodness knows how long and they're never going to be paying tax for another decade. And who are these nice insurers? They seem to be quite solid and dependable.” And of course you can’t have a run on an insurance company in the same way you can with a bank. This is on the non-life side of insurance that I look at – that’s not pensions and life insurance but anything that's insuring physical things or the liabilities of corporations. You can't really have a run on a company because you pay your £300 quid premium and if you cancel it, well you haven’t got any insurance. You can't withdraw that credit, in the way that if you deposit money in a bank, you're scared about the bank, you can queue outside Northern Rock on the High Street, pull out your money, and then you cause a problem for the bank. You can't have a run on an insurance company in the same way.

So they’re quite solid financial institutions. Obviously they take a lot more risk, they take risk at the front and not on the asset side of their balance sheets. So they invest in very boring, very liquid, mostly government bonds, sovereign debt, because they need to be able to sell that. If there's a hurricane tomorrow, they need to be able to sell all that really quickly into a liquid market and pay that claim in cash quite quickly. So they have to be quite liquid. That means they tend not to get into too much financial difficulty through doing silly things on trading and the sort of things that might get a bank into trouble. 

DAISY POWELL-CHANDLER

So being boring as a reputation asset there. 

MARK GEOGHEGAN

Because they’re doing dangerous things on the other side. Because ensuring an airliner or ensuring an oil rig against exploding is kind of quite hairy enough, if you see what I mean. So they take the risk the other way. Whereas the banker hates that kind of stuff and wants a sure thing and that's where the insurance comes in. 

But insurance really fits in perfectly well into the economy and it’s a massive multiplier effect. The bank won't lend to you unless you get the insurance on the house but then, once you've got the insurance, that means the bank will lend to you at a lower rate or lend you more. And that happens with so many things. 

That happens with things like green projects. A lot of the good things happening in the economy are helped, are being sort of leveraged, by the positive effect that having insurance in the equation can bring. For example, people building farms of solar panels, the bank will lend a certain amount of money. But if you can get insurance against those solar panels to insure their efficacy over the 15 year period that this debt is being arranged with the bank to help finance the whole project, then the bank will lend twice as much or maybe lend at a much lower interest rate. And that means you can build twice as many solar farms with the same amount of capital. So it’s about leveraging things and so nothing really happens without insurance. It’s only when the insurance is wrong. 

DAISY POWELL-CHANDLER

Well on the flip side, if you can’t get insurance for your coal mine, or your oil well, presumably that puts a big damper on that project. 

MARK GEOGHEGAN

Absolutely, absolutely. Because, particularly if those are really valuable projects that's often where now we’re getting the environmentalists that have really got insurance in their sights, they’re starting to pressurize insurance to say “right, no coal whatsoever, no, this or that or high carbon economy.” And some of those risks are now being retained by the governments of those local countries, because they're still strategically important to those economies. But then, actually, are those governments good at insuring things because they need to spread that risk, really. Some of these values are very, very high so if you need 5 billion of insurance, that's not very good for a small, developing economy to have to shoulder that. It'd be better if they were able to spread it around, it's much more efficient. Because what if it did blow up? They probably couldn’t afford to pay for it and may need to raise taxes to pay for it. 

So insurance is just getting its head around ESG at the moment, and it's doing it at an institutional level, it's doing it at a regulatory level (of course, it's a regulated industry). So the regulators are starting to put frameworks around things - that's fitting in with everything that's happening on the global sustainability front, as well. But its in a difficult position. It is key to making the transition happen, actually. Certainly the way that the industry is looking at it is to say: “We've got these high carbon clients, we need to one, believe that they're definitely on the transition to net zero by X amount of time, and we need to see progress on that.” At the moment they're going to start scoring them on ESG. Ones with higher scores (if higher is bad) they’re going to have to pay higher premiums. But as they green their businesses over time, they will be getting the benefits.

So insurance, of course along with other finance, is forming that kind of good cop bad cop routine. Insurance is playing the bad cop of disincentivizing new investment in high carbon. Because, say if you want to insure a new opencast coal mine and you go to an underwriter in Lloyds of London, they'll just put all their hair out and say, “I'm sorry, have you not read the papers? We don't do this anymore. Or if we do this, we've got some very, very specific conditions under which we can do it. And what I really want to see is the plan where you actually shut down this opencast coal mine. Don't come to me telling me that you're actually building a new one? No, I mean, that's too late. That was the last century.” So there is far more incentive to do wind farms or solar farm do something, anything but high carbon. 

DAISY POWELL-CHANDLER

Yeah and I can say it's been great to see the insurance industry sharing some of that data, and allowing us to really see that better ESG scores are also correlating with fewer losses for the insurance industry as well. 

MARK GEOGHEGAN

If you're a business that's big enough, that buys enough insurance to have someone or effectively needs to have someone at Director level who is in charge of buying all the insurance (because they spend millions on insurance) then those are called risk managers. They’re the sort of people who make you watch a video before you lift a heavy box, the slightly laughable sort of videos that you watch when you're doing an induction at a new employer, that kind of thing. That’s what a risk manager looks after. They also spend a lot of money on insurance. These people have got a hell of a job. And it’s all about that leverage effect of insurance again. Again, if you want to do something high carbon then fine. But if you want to borrow money to do it, the bank is going to charge you more and the insurance is going to cost you a lot more. And it's going to be much much harder to do as time goes on. That can only be a good thing. And it helps move things quicker. The disincentive is really there and insurance is part of that disincentive, that big financial disincentive that we're seeing now. So it's a good thing. 

DAISY POWELL-CHANDLER

What's interesting to me about that is not only that it seems like a really positive step, but it also strikes me that insurers are effectively having to care about the reputation of the companies that they're insuring. Is that a correct interpretation? 

MARK GEOGHEGAN

Oh yes, of course they do. So again, if you've got a good risk, you’ve got a well managed company – one will sweep the floors and one won’t. And then one will have lots of dust that’ll get into something, and then that'll overheat and it'll cause a fire. And one will make sure you have permits for doing any kind of welding work, and others won't. And if they don't then some of them will have sprinklers, and that costs money to invest in having sprinklers. So good risks get better premiums and that good risk management is rewarded. 

Yes the reputation, absolutely. One of the major insurance products is Directors’ and Officers’ insurance. I'm sure a lot of your listeners will know all about it because if you're Director of a company, you need this. And if you're a Director of a public company, even more. And if you're a Director of a financial institution, then you really start to worry about these things. And the thing about Directors’ and Officers’ insurance for a public company is effectively you're almost insuring against a sudden share price drop, because in a US quoted company that will trigger a shareholder class action. If you get the stock falling more than about 10 or 15 points in a day (and that’s on a big market cap business) there are plaintiff lawyers out there that monitor this and will file a suit within a few days. And it'll be the Directors fault, somehow, or certainly that will be the allegation that the Director has obviously done something stupid or wrong or illegal or whatever, or something misguided or something that's breaching their fiduciary duties. And those insurers of that DNO (Directors’ and Officers’ policy) will be picking up that tab. We’re talking about huge settlements and at the very least, enormous legal bills. And so they are very much interested in the reputation of a company because that company's reputation might take a beating. And if that’s a public company and that translates into a sudden share price drop, that is almost certainly a claim.

And the other thing on the on the green questions, of course, is that insurers are on the frontline of climate change, of the negative effects of climate change. It causes more storms, or more floods, or more droughts and all these things are things that cause insurance losses because you can insure buildings and crops and whatever else. And so insurers are also in on the actual front end of this. To say, of course I want to stop insuring coal mines, because actually these coal mines burning that coal, creating that CO2 are actually causing higher losses in other parts of my portfolio, they’re causing worse floods. And that's bad. I'm paying for those as well. So it's almost their own risk management as well. 

But yes, reputation is so important. But it works both ways. Of course, the client is beholden to the to the efficacy of that insurance company. When the chips are down, when they really need them, they need that insurance company to perform, because at that point that insurance company is looking after their reputation. You know, if I'm in my third floor flat and my washing machine leaks and it drips on my neighbour and she's got a grand piano below it, I phone my insurance company. If they're really good, they'll get someone within a couple of hours, and they'll turn off the mains, and they'll fix whatever it is and with my washing machine leaking they'll put a new hose on it. That water will hopefully never get through, they’ll repaint my neighbours ceiling and let it dry out a bit. But none of that water will cause any damage. That’s good for the insurance company because that's going to cost much less than what could happen. And it was very good for my reputation with my neighbour because she's going to say, “Oh, well done Mark. You're a nice guy and you're a good neighbour, aren't you? You fixed this problem really quickly.” 

But what if I had a really bad insurance company? It was a bit slow, it didn't have a very good claims department or a bit dopey. And the water was leaking and leaking. The next morning my neighbour says its getting worse and there’s a bulge in the ceiling and she is really worried, and my insurance company don’t send anyone round. Finally, this massive crash in the middle of the night and then the grand piano is soaked in water.  Suddenly you’re talking a £200 claim which could become a £20,000 claim really quickly. And then my neighbour's never going to talk to me ever again - that's my reputation being trashed by my insurance company. That’s where the insurance company is holding your reputation at that point, is carrying your reputation at a time of crisis.

DAISY POWELL-CHANDLER

Absolutely. So they’re a tool as well as having a stake in your reputation themselves. So, I suppose the final question really, that I feel brings this all together is: Can you insure your reputation?

MARK GEOGHEGAN

You can, but that’s all very much in its infancy, certainly. I'm sure at some point in the future it’s going to work because the insurance industry has got quite a big problem. In that, say, you went to the S&P 500 50 years ago and it would have all the assets and 95% or 90% of those assets would be actual tangible assets of sort of bricks and mortar and bits of steel would be there on those balance sheets. A bit of goodwill, but most of it will be actually tangible assets. And these days that's completely flipped. You look at Apple, and it's all intellectual property, it's all intangible assets. And with one tech company taking over another tech company, there’s huge amounts of goodwill, digital goodwill and goodness knows what else, knocking around. And so the insurance industry's got a long term battle to maintain that relevance as the relative value of physical things and even the liabilities of things goes down, the insurance industry has got to insure a lot of these more intangible things and develop ways of ensuring those intangible things over a long period of time. Because otherwise it's going to cease to exist, or somebody will eventually work out a way of doing it. So it’s one of the imperative things that the insurance industry has got to do. It’s one of its to do list. “In the next thirty years must work out how to solve this problem.” 

But at the moment is very much in its infancy. There are products out there, for example, cyber insurance is really starting to kick in and that's protecting people's reputations. And that might include the service of emergency PR and communications. If there's a big breach, and sort of communicating that breach to all your customers, to millions of customers and paying for that cost, and to help actually shoulder the burden of organising those call centres and the communication that has to go on with large numbers of customers. The insurance industry’s involved in that. But cyber really only has kicked off in the last 10 years. It was a lovely idea 25 years ago, but it never appeared as a line on anyone's profit and loss account. Whereas before they would say, “yeah I did this much in property, this much in marines, this much in aviation, this much in accident and liability insurance,” but it never appeared as a line. And now cyber, for example, is now appearing as a line. 

There is not a line anywhere in any one P&L that says reputation insurance. It will be in a tiny little bucket called miscellaneous at the moment. But there's a lot of work going on. Obviously, with technology, it has created that intangible problem for the insurance industry. But of course, it will help solve that problem as well. So there are products that are in their infancy, things which may be based around indices that are created out of your social media profile about what people say about you, all sorts of things. But they tend to be based around getting a third party that you can trust to create some sort of index, and then for you to be insured when the index goes above a certain number up until another amount of number, and it'll give you some money to help to help solve the problem. But if not, obviously your DNO insurance does kick in of course. If it’s bad enough for your shareholders to sue you then insurers are already on the hook anyway. 

DAISY POWELL-CHANDLER

Yes. But presumably, if you're then proven to have broken the law, that would invalidate your insurance policy? 

MARK GEOGHEGAN

Well, it certainly shouldn’t invalidate your defence costs. They should defend you right until the final judication, until you're led off in handcuffs and bound over. Yes, for good insurance make sure it covers that because it should cover your criminal defence. Obviously they can't get you out of jail because that's the law, and they're not above the law. But they can certainly pay for those very expensive legal bills while you're on your way to jail, and appealing and all sorts of things!

DAISY POWELL-CHANDLER

Well, there we go. Tip for all our listeners, make sure you've got DNO insurance.

MARK GEOGHEGAN

Well, yes. I really hope so. Anybody that is a Director of a company, make sure you've got that because otherwise, that's all your assets on the line instead of the insurer.

DAISY POWELL-CHANDLER

Yeah, worrying. Okay. Well, thank you so much, Mark. This has been fascinating and definitely more air crash discussions than we normally have!

MARK GEOGHEGAN

Great, well thanks so much for having me. 

DAISY POWELL-CHANDLER

That's everything from us. A big thank you to my guest, Mark Geoghegan, the voice of insurance for telling us why insurance is more interesting than we think it is and how important it is to reputation. I'd love to hear from you which lessons particularly stood out. And if you've enjoyed this episode, I hope you'll tell your colleagues and perhaps write us a review on your usual podcasting app. It really does help new listeners to find the show. Thank you as always for listening to Why Everybody Hates You. And remember, you are not alone.