Although 2023 has given me a lot to be thankful for, it has also been an interesting year in a not-so-good way. I've found myself involved in an unusually high number of Workers' Compensation Insurance audits where I observed behavior (on the part of both insurance companies and insureds) I consider unethical or fraudulent.
Simultaneously, I have been reading a book recommended to me; "Honest Money" by Gary North. It is an easy and very interesting read that gave me something to consider while thinking "what is going on with this industry?"
The Disease of Inflation
Obviously, we have been experiencing a historically high inflationary environment. In addition to the impoverishing economic effects that inflation has on businesses and households apparent to all of us, Honest Money explains the corrupting moral effect of monetary debasement. I never before really considered the morally corrosive effect that inflation has on a society. Nor have I considered its explanatory power for unethical behavior I observe directly.
Consider the example of a winemaker operating in an inflationary environment where the currency, let's say the dollar, has experience 100% inflation over a period of time. So, 100% inflation would mean the dollar is worth half of what it used to be worth.
Options available to the winemaker include:
1) Continue to sell her wine at the same price and "eat" the loss. The winemaker loses a lot of profit margin or possibly all of it and goes out of business.
2) Doubles the price to keep up with inflation. This has the real risk of driving away customers who don't want to pay twice as much and who will try to find good producers selling at a discount or a less expensive alternative.
Inferior Goods and Services
So, the winemaker is faced with a couple of unpalatable options where she will certainly, at least, lose money. But, she can choose a 3rd option:
3) Debase her product. Same price, reduced quality. Start using inferior products and/or water down the wine. The winemaker can now sell at the same price and maintain the same profit margin.
This works in the short term as the winemaker is operating under its established reputation. And, it may continue to work in the long run even as customers start to catch on if competitors, facing the same pressures, adopt the practice. "Can't beat'm, join'm."
The morally corrosive effect of inflation snowballs as industry after industry debase their products and services to keep up with inflation, pay their employees in inflated dollars, spend those inflated dollars back into the economy, etc. The process also creates, en masse, increasing numbers of morally compromised individuals.
Inflation Effects on Sales Practices?
The Insurance Industry is no different than any other industry. It is not immune to the detrimental effects of inflation, and the industry experiences its economic pressures as much any other.
Work Comp policy contracts are standardized by law, so, claims management is the insurance carriers service/product. This is where you'd observe debasement of the "product" if it occurs; diminished claims management and outcomes. This is not to say that insurance companies would look for savings in the quality of care. That would be counterproductive in too many ways to mention here.
And What Of Insurance Sales Practices?
In our role as premium auditors we don't work with the claims handling or claims management. We are auditing premiums (pricing). So, what of the insurance companies sales practices? Could the pressures of an inflationary economy corrupt the marketing of insurance products? The workers compensation insurance audits I've performed this year have left me with the feeling that this illness, inflation, has certainly infected the sales side of the insurance industry as well.
One of the things making my phone ring this year more than most are prospects who have just received first-time work comp audits with a new insurance company. And, these insureds are upset with the aggressiveness of the audits and the additional premium bills.
The circumstances are always similar. The insurance company comes in at Final Audit and reclassifies a lot of employees/payroll under higher rated (more expensive) classification codes. Then, it issues an endorsement to the renewal policy, already in force, to make the same changes.
All in contrast to the way the insured has been historically rated.
As a result, an unexpected additional premium bill for last year is generated and higher installments for the current year.
Keep in mind that an insurance company has the right to perform a Preliminary Test Audit to confirm these "exposures." In other words the Underwriting Department can confirm and verify what they are insuring before offering coverage. And, an insurance company is allowed by contract to perform an audit at any time during the policy too.
Fraud?
The first definition of fraud on my Google search says:
"Wrongful or criminal deception intended to result in financial or personal gain."
If the insurance companies are knowingly approving incorrect, less expensive classifications with the intent of "fixing" it at audit, I'd consider it fraud. In this case they'd be presenting an artificially low price to win the business with the intent of raising the price retroactively (after the policy expiration date).
In fact, I'd consider it bait-and-switch. Wikipedia says bait-and-switch is "a form of fraud used in retail sales but also employed in other contexts."
Take my word for it please. There are more examples of rating problems this year I haven't seen before that'd make you say "what?!"
The question is whether or not economic circumstances, namely inflation, is causing what I believe to be unusual pricing activity. Inflation is putting pressure on the bottom line of every business. I don't believe that's in dispute.
But, is that pressure leading insurance companies to take "short cuts" to winning new business? Short cuts that, at a minimum, would not be considered ethical?
I can't say for certain what is going on. But I have been asking the question all year. By chance I started reading Honest Money which gave me one possible (plausible even) explanation for the unusual activity I've witnessed while performing Workers Comp Insurance Audits. And, I think it's a compelling reason.
If nothing else though, I'm definitely a more cautious consumer with historically high inflation infecting our economy. The debasement of the currency through inflation undoubtedly puts pressure on individuals to implement morally questionable options they otherwise wouldn't.