Failure means different in various situations; however, this article will discuss insurance business failure, and here, it means nothing but insolvency. For an insurance company, insolvency occurs when it fails to meet its liabilities, and there can be several reasons ranging from underpricing its products to unexpected claims.
According to a study conducted by the Society of Actuaries and the Canadian Institute of Actuaries, insurance company insolvencies were at a peak in the US during the 1990s when more than 50 companies had become insolvent within 1992 only. However, the number has not been exceeded ten annually in recent years.
Although insurance is a highly regulated sector, insurance companies may fail for various reasons; let’s discuss some of the most common or possible ones in this piece of writing.
Most Common Reasons behind Insurance Company Failure or Insolvency
1. The Trust Factor
Gaining potential customers’ trust is a massive challenge for insurers, especially when the when people already have low confidence in insurance companies. These trust issues can be liked to extremely high consumer expectations, higher awareness about how policies operate, and a lack of clarity in policy binding documents.
2. Over-reliance on Reinsurance
One of the main reasons behind insolvencies in the past was over-dependence on reinsurance opportunities. Although this strategy most times works well, things may go wrong if a reinsurer refuses to pay due to some possible reasons such as:
- The reinsurer has become insolvent.
- The reinsurer’s retrocessionaire (a reinsurer that insures another reinsurer) has not made the claim payment.
- The reinsurer has claimed that the primary insurer did not write the particular business they had expected or did not provide enough details that should have been there in the documents.
3. Poor Customer Service
Customers will always have questions, especially about their claims, for which they expect answers without having to wait on a phone call for several minutes. So even if a company has an insurance BPO firm to have its back for dealing with customer queries, it still needs to ensure high-quality standards when providing customer support. Because, otherwise, unsatisfied customers won’t take much time moving on to another insurer.
Customers who get a terrible claim settlement experience are likely not to renew their policies. If the number of these customers grows, there are chances the insurance company can go insolvent.
4. Free Market Conditions
Sometimes, free-marker forces that many insurance companies can not control are the reason behind failure. For example;
- Large insurance companies taking over smaller ones
- A new concept suddenly trends, replacing an old one
- An unexpected event that is too huge to settle losses
- Customers seeing lower prices superior to benefits
- The economic environment not being suitable for making a profit
Combining these and several similar factors can be the reason behind an insurance company’s failure in a free market.
5. Expansion into New Horizons
An insurance company can also fail if it cannot handle expanding into areas in which it does not have expertise. This can be anything from expansion into new product lines to opening more offices in other geographical regions or diving into a whole new business in an industry other than insurance.
The point of concern is that the company seeking expansion should hold the knowledge and expertise required to manage the expansion successfully. Otherwise, challenges can grow big and go out of control, leading to failure.
6. One or More Unforeseen, Heavy Claims
The 9/11 terrorist attack on the World Trade Centre can be taken as a suitable example describing how an unforeseen event can take insurance companies to failure. It was evident that the claim against the damage incurred in the case of the WTC, New York, was way higher than the premiums collected. At that time, many companies faced massive losses, with at least one facing insolvency – Taisei Marine and Fire Insurance.
7. Underpricing Insurance Products
Underpricing can be a big factor contributing to insurance company failures of both higher or lower levels. Charging lower premiums consistently for extended periods can give an insurance company less capital than required, resulting in insufficient funds to operate, pay for salaries or claims.
One big reason behind this can be the inefficiency of the underwriter, who had written the policy but could not perform the loss assessment effectively and ended up setting inadequate premium rates. This might be the reason why insurers are increasingly moving to reliable insurance BPO services for underwriting, policy administration, etc.
Moreover, underpricing is usually coupled with other significant factors, for example, charging lower premiums but paying out more for an unforeseen disastrous event that left nothing but reserve-draining claims.
8. The Failure of Marketing Plans
Insurance businesses with a dedicated budget for marketing and branding tap on more opportunities to cover a larger market share. First, however, there has to be a solid marketing strategy and a wise, straightforward approach to fully utilizing marketing budget and human resources to get impactful outcomes. But in some instances, even in the insurance sector, poor marketing strategies can indirectly contribute to business failure due to various reasons, out of which some are discussed below:
- Not performing branding practices consistently
- Under utilizing digital tools
- Focusing more on selling rather than educating customers
- Not having a unique content strategy
- Not leveraging social media platforms
- Too much investment in paid marketing & advertising
- Lack of an influencer marketing plan
Besides the points discussed above, there can be many other reasons behind the failure of an insurance company. But now, what more important is to find solutions. So let’s discuss what you can do to ensure your insurance business doesn’t go insolvent.
Tips for Insurers to Prevent Business Failure
1. Experience Matters in Finance Management
Consider having an expert at the management level (for instance, a CFO) who can responsibly monitor and oversee the finance functions of your insurance business. A finance leader with vast relevant experience can reduce the chances of your company getting insolvent.
2. Solid Internal Controls Can Help
Improving internal controls will ensure that only authorized persons get the authority to perform financial transactions and access relevant data. That way, you can reduce the risk of fraud. In addition, handling financial reporting accurately and on time will help identify financial red flags that you can address to safeguard against business failure.
3. Expand Wisely
When entering into a new business or even a new insurance line, carry out a comprehensive research about it and explore industries or products related to your current business segment. Doing this is essential to minimize the risks of failing.
4. Branding Keeps the Business Coming
The insurance business runs on customers’ trust, which is why an insurance company’s focus should be customer-centric. Therefore, you need to build a brand image by providing high-quality services to your customers, making them stick to your company and refer it to their knowns.
5. Enhance Customer Journey
You need to deliver excellent customer service to enhance your customers’ experience with your company. To ensure your company remains afloat and customers keep returning to you, you need to meet customer demands at all points of the customer journey.
6. Superb Claims Management
The way you handle claims speaks a lot about your company. For customers, claim settlement is usually when they decide between staying with the current insurance provider and moving to another one. Hence, claims should be appropriately managed so that you can comply with all the promises done while marketing and sales and secure your company’s reputation in the marketplace.
7. Have a Capital Reserve
You might already have a dedicated bank account that your company uses to pay out claims. In addition to that, you may consider having a capital reserve. This can help ensure your company does not run out of cash if unforeseen events occur or financial obligations arise out of nowhere.
8. Consider Outsourcing & Delegate Duties
Functioning departments of an insurance company are divided into different aspects such as sales, underwriting, policy issuance, policy renewal, etc. If we see these as individual service areas, we realize that all these tasks can be performed and handled using external support. Outsourcing some of your insurance back-office services can turn out to be cost-effective. You can utilize these savings by investing them somewhere you can high returns, leading to your company’s stable financial position.
Unsure of securing your insurance company against a failure?
It’s not common for insurance companies to fail; however, the chances are always there. Therefore, when you seek solutions to save your company from getting insolvent, you may consider partnering with a reliable insurance outsourcing firm for back-office services to increase capacity, boost productivity, increasing the chances for success, definitely not failure.
At Insurance Support World, we are a team of insurance experts providing insurance outsourcing services to insurance agencies and companies across the globe since 2008. Our customized insurance solutions can help optimize your insurance business processes and streamline the workflow across departments.