Insuring Trust | Kim Garland and Glen Marr

Dani Ng-See-Quan: Hi, I’m Dani Ng-See Quan, and this is Trust Faster… A Clearspeed Podcast.

Insurance is an old idea… like, really old. In some societies, it even pre-dates money. For example, in barter economies you still had the idea of mutual aid through things like guilds and cooperatives. Ways for people to help one another when times are tough.

And when money is involved? Those kinds of insurance agreements have been codified since at least the first Babylonian Empire. No joke, there are laws about insurance contracts in Hammurabi’s (HAMMUR-ABI) code.

So, suffice to say, people have been thinking about insurance and making laws and policy and regulations about insurance for about as long as we’ve been thinking about anything.

And the general principle has always been the same: again, it’s mutual aid. Everyone agrees to pool resources, so that when something bad happens to one of us, those collective resources are there to help out.

So fast forward a few millennia.

We’re just wrapping up Q1 of the 21st century, and the system that we’ve been building on since time immemorial feels like it’s starting to show some cracks in the foundation. Premiums keep rising, customer satisfaction keeps dropping, the income gap keeps growing, regulations keep tightening, the cost of doing business keeps skyrocketing, and so on and so on.

Add on to all of that the very real effects of climate change, the fact that the average life expectancy has increased by decades, and… I mean you can’t see me but I’m just kind of gesturing broadly at, well, everything else that’s going on right now.

It’s a tough time to be a consumer, a provider, and probably a regulator too. And the one thing that everyone seems to agree on is that there’s a lack of trust between all parties involved.

People have been studying this trust gap in the insurance industry for decades. And, no surprises here—it’s real, and it’s growing. It’s affecting auto insurance, health insurance, home insurance… you name it.

So… what’s at the root of this trust gap? And is there a way that the insurance industry can adapt to rebuild trust with customers? Those are some of the questions we’re going to get into on this episode of Trust Faster. And I have two experts with me to help make sense of where the industry is, and how it got there.

Glen Marr is a Director in the Financial Crime division of PwC UK — one of the biggest professional services companies on the planet. He brings over 30 years extensive experience in mitigating insurance fraud around the world. Prior to entering the private sector, Glen was a decorated UK Police Officer.

We also have Kim Garland - he’s a member of Clearspeed’s advisory board, and has been in the insurance industry for more than 35 years. Kim got his start at GEICO, where he moved from customer service to actuarial to management roles. From there, he went on to executive positions at AIG, SafeCo, and State Auto.

What all of their experience really means is that Kim and Glen have been through it - and are very aware of the challenges facing the industry today.

I started off our conversation by asking Glen a simple question: how did we get here?

Glen Marr: I think contrary to popular belief with consumers, insurers do trust their policyholders far more than people realize. There's…sort of enshrined in insurance is this principle of utmost good faith, where both the insurer acts properly and openly and transparently and lives by what it's committed to do in the contract. But the expectation is also there for the person taking out the policy, whether open, honest and truthful.

It's at the point of claim where if there's an opportunity for trust to break down, it's right there. And when somebody makes a claim on the principle that the vast majority of people are genuine, then the insurer should have a fast track process. It should be able to identify in the behaviors of the person making the claim, using the right technology and using experience - who should go through the fast track green route with minimal disruption?

And who should go down another route where there is far more scrutiny applied ultimately. Insurers sit on large amounts of data where they can see the trends and patterns of the good and the trends and patterns of the ones that display anomaly. So, you know, if you're asking too many questions, if you're probing without good reason, if you're asking for information that, you know, is really not going to take you much further because I think you should trust what's going on with all that experience there. I think insurers should be pushing claims through quicker. And of course we're now in the digital environment here, certainly here where there was quite a big push on straight through fast track processing. You make a claim on your phone and they aim to settle it, settle the claim in about three minutes without human interaction. Now that's a big change for an insurer and probably unsettles people.

But we're in the on-demand world where if you want to buy something online, you buy it, and it turns up the next day. If you want to order food, it comes online. You know, it's the same with insurance, that people that are currently living their life on mobile phones and other gadgets, especially the younger generation that's there, they're the future insurance customers. So they want to have that digital journey.

DNSQ: These are giant companies with a million moving parts… and it’s hard for them to change. But for Kim, changes to the way insurance works seem inevitable—he believes the industry has to move to a more trust-centered model.

Kim Garland: The first issue that comes is the inputs that go into the cost of insurance become so high that people can't afford it. You got regulation costs, you got lawyer costs, you got consumer advocacy costs and all those things. People can choose to have them but they all cost money and that they have to go into the price of insurance.

Eventually, the cost gets super high. And sothe inputs that go into the cost of insurance become so high that people can't afford it. That's issue one that has come to the fore that makes the system break.

When costs get so high, like people call, they yell at the Department of Insurance. The Department of Insurance doesn't like to get yelled at. And so the Department of Insurance says, I'm not going to approve these rates that you're asking for. And so all of a sudden now, the system is not allowing for the cost of the inputs to be reflected in the price of insurance. And so insurance companies are faced with one of two things. I can write insurance and lose a bunch of money, or I could pull out of the market and not participate in the market.

And so you have two things here. The cost got so high that lie it was not affordable for people. And then you have the regulators and the system not letting insurers or the risk barriers get adequate premium for that. And if you don't, you have to walk away. And so you got tons of people who are uninsured. It's really horrific.

It's a system design issue and if you ask what level of trust is between different participants in this type of system, it's either none to crazy low.

Building a trusted ecosystem, building a trusted carrier um means turning what's been conventional wisdom for 30 years on its head in and ah across a number of dimensions. ah But it's what you got to do because By having a trusted ecosystem, it automatically implies there are non-trusted people in the system or non-trusted parts of the system.

And if you're going to build a trusted system, you have to keep the non-trusted parts out. And so there's ins and there's outs. And insurance companies have not lived in that world for 30 years. and to become and they're not trusted because of it. So again, as I said, somebody's going to go down that less traveled path at some point and they'll get criticized and then they'll be wildly successful.

DNSQ: Kim actually can point to an example from a few decades ago that seemed to offer customers a better experience than what a lot of them report today.

KG: I think the best example, closest example I've ever seen was USAA in the late 1980s and early 1990s. It was for military officers and their families only super exclusive. Right. And somehow they had the lowest rates, the highest profit margins. They trusted their insured. Their retention rates were 97%. Their customers were like, you have that discussion with your friends about USAA insurance, like it's a love fest. I'll try not to go too long, but I'll tell a story. So my wife's dad was military. I've been married 36 years and 36 years ago, you still asked a father for permission to marry their daughter. And so I asked Diane's dad for permission to marry his daughter. And he said, I give you permission. There is one requirement. You have to keep USAA insurance after you get married. I am like, all right, I can do that. That's super weird. But that's how much military officers loved USAA at that point in time, right? Which is just sort of like irrational. And you would never think about that for an insurance company,

DNSQ: Kim’s story seems irrational in the current insurance ecosystem, but I think it’s more useful to think of it as an example of what’s possible…but only if the industry is up to the challenge. Take its approach to fraud, as an example.

KG: Insurance companies, you cannot underestimate the amount of inertia that they have. Like, we've done it this way, we're going to keep doing it this way. If I combine what I call hard fraud and soft fraud, like 25 % of claims have something with them that if you had a very efficient way to do it, you would find something. And that number will just sort of short circuit insurance executives’ heads. They're like, I can't, we're not set up that way. And so I'm going to have to completely retool everything. And, people, know, people don't like change of processes. And if I dig a little deeper on 25 % of my claims, like customers will get upset, there's friction in the process, blah, blah, blah. Right. And so there's a lot of excuses, but I think the main reason is insurance companies, if you raise rates, it covers a lot of sins. And so that doesn't hurt the insurance company. If there's this amount of fraud, if they can raise rates sufficiently to like pay for the amount of extra fraud that is in the system. So in that scenario, fraudsters win, like a customer loses from higher rates and the insurance company comes out neutral. They're making the same profit margin if they can give them rates. If you took away like, and I think we're probably getting close to that point because at least in the U S people have had 15, 20 % rate increases every year for the last three or four years. They're getting to the point where they can't handle the rate lever continuing to be pulled.

And if carriers can't pull the rate lever anymore, then all of a sudden, they're going to have to do some of these other things, but because they can just increase rates, it allows them to say too hard. I'm not going to get that much benefit from it. I'll just raise rates. So that's why I think it happens.

DNSQ: Glen agrees with Kim - there’s a lot of inertia in the industry, especially when it comes to changing its approach to managing fraud.

GM: The large insurers are like super tankers. If you want to turn five degrees to the left or five degrees to the right on a supertanker, that takes some doing. And in that supertanker, there are huge amounts of complexities. There are legacy systems, especially when insurers buy each other. You could have multiple policy systems, multiple claim systems. They may not talk to each other. You may have, you know, two insurers merged together, different cultures.

So that's a complex entity and if you start talking to them about, it can find you more fraud, they somehow have to manage that, especially if you want to talk about technology. So I think you've got a real mixed bag. It also changes country by country. You know, some insurers are much, much tougher in other countries. But then again, there are insurers here that are very tough on the subject. You know, we'll openly talk about what they're doing in the media, openly talk about prosecutions. And in the UK, you know, the insurance industry is funded. The first, I think it's the first ever, dedicated fraud investigation team run by the City of London Police. Those are police officers that act independently, but are funded by the industry to pursue enforcement action across the country. That's the sort of commitment they're throwing at it. And that kind of underlines they're serious about it. But I just want to reference that if customers are paying for this through rate increases, it's not a great position to be in.

DNSQ: Glen and Kim both agree that one of the biggest issues is the long-accepted lore about how much fraud is actually taking place.

And that has implications for how insurers tackle - or DON'T tackle - the challenges they face. Kim says that a lot of what gets passed around the industry isn’t really based on any science or research.

KG: So if you're in insurance a long time, there are certain things that are just sort of conventional wisdom that everybody talks about. and at some point, like people stop listening, but if you actually listen, these things sound weird. And so, you know, some conventional wisdom, at least in the, the U S personalized market, people will always say there are 10 % of all losses have fraud associated with them. And so that's the cost of fraud in the system. And then in the next breath, they say, you know, if we refer for 2 % of claims to our special investigations unit to look for fraud, that's a good number. And if you're just sitting there, you're like, so there's 10 % fraud and you're referring 2 % of the claims, like, it feels like you're not catching a lot of fraud.

And, it's amazing how that is just accepted. Like people do things and the ones that go to SIU are probably like the harder fraudsters, if you want to call them that, but it's shocking that goes in, that goes into the rates. Everybody has to pay for that. And I would say the biggest thing that I've seen over the last 30 years that has changed. We'll probably talk about the terms of hard fraud. Somebody's intentionally committing fraud. Then there’s this thing called soft fraud; people just exaggerate how much their claim is worth or something that has happened. And 30 years ago from my chair, the amount of soft fraud, like there was a little bit, but not a lot. And today soft fraud is just sort of widespread. I would guess probably a quarter of claims have some type of soft fraud associated with them. And I don't think insurers have done a really great job at sussing that out because if it's a $4,000 claim and there's 15 % exaggeration, that's another $600. Like, it doesn't give you a lot of dollars to go chase that. Hey, it's just $600. But if you add all those up, it costs tens of billions of dollars and everybody has to pay for that.

GM: I think that number 10 % of claims... I think I first heard that over 30 years ago when I joined the insurance sector in a fraud role in Sydney. And every time I hear it, I cringe because I can find no science behind it. I used to hear once that 10 % of claims in motor were fraud and 15% in property. No science behind it. Every time I hear someone saying that, I always say, one thing I can assure you is, you are not detecting as much fraud is going through. That's a fact of life.

But it's interesting when you talk about an insurer, how much fraud they have. I can recount a conversation two weeks ago at lunch with an executive from an insurer. He was saying, how can you help us tackle the fraud? You know, we need to know where are we going to invest the technology around through all the technology available from us and others. And I said, before you go ahead and rush ahead about thinking tech, you have no idea about your fraud risk exposure.

No, you don't. Can you deal with this? said, well, why don't you just hand over three years of your claims data, the known frauds you've got in there. In other words, the ones you've detected and let us use analytics, including AI to try and identify the claims you've missed that display indicators of fraud that you then validate. then have a better handle on what you've got in there. We can then help understand how your tools and processes are working. And then you can look at, know, what is the size of the prize if you go chasing it.

And how do you get from A to Z? And I said, you'll already be doing some great things, but if you're doing it even greater, you'll get better benefits. And the best thing I can help you do is achieve more fraud detection, more savings without increasing your resource. And part of that is efficiency. And that's what's changed over the last 30 years, which is the tech. Technology has gone from something relatively crude a long time ago where insurers weren't sharing data.

They were working in silos... There's controlled data sharing. There's controlled data sharing in the U S in some other countries. We've we're applying a lot of technology here. AI is starting to properly embed itself here with fraud detection. Gen AI is starting to pick up the pace there. It's a fundamentally different sector, but not everybody is embracing that tech as quick as others. And they'll lack, there are laggards in there. And ultimately, customers who pay their premiums do suffer from this.

KG: Yeah, I could not agree more with Glen of like there is way more, way, way more than carriers find. And he mentioned something that just makes me want to poke my eyes out every time I hear it. Like a carrier will say, like, I have this much resource to go find fraud. So give me this much stuff to go investigate. And you're like, if you just 3x the amount of resource to go find it, like every dollar you spend in resource to process it or handle it or look for it probably gets paid back 10x, like spend more here. It will pay back. There are lots of places and insurance companies where you add expense and it doesn't pay back. This is not one of them. Like I can almost say without exception. If every carrier increased the amount of resources they spend on fraud, it would be a good investment for them. Period.

GM: I agree. And then if you throw in using tech to make them more operationally efficient. they're not dealing sort of with administrative tasks that are not investigative. Then the results will go through. And certainly I've encountered a lot of insurers where they are looking at technology. Right at the beginning, I'll say, this is going to find more fraud that you're managing. And you sit and make a quick rough calculation on your phone and say, it's going to find more than you have resource. So how are you actually going to deal with it? So you have to kind of get them thinking about that business case of the tech is going to find more. And exactly as Kim said, well, for every one person, can actually look at the, we call it return investment. What you spend on the salary plus the on costs, you can track it. And I've never seen anybody in a fraud team, not as individuals. You look at a fraud, I've never seen it where you can't have a compelling ROI for people that handle fraud. I've yet to see it.

DNSQ: Again, it’s a turbulent time to be involved in the insurance industry on any level - consumers, providers, and regulators are all facing unbelievable pressure to make the system work.

And, at a certain point, trying to dissect who exactly is to blame for why the system isn’t working starts to feel like that meme of three Spidermans pointing at one another. It’s a distraction that keeps us from figuring out a better way of doing things.

So, to that end, I wanted to wrap up our conversation by asking Glen and Kim if they thought that we had reached, if not an actual breaking point, at least an inflection point.

KG: All right. Inflection points for insurers. It's really hard to say something is an inflection point in insurance because change happens at insurers really, really slowly. And so an insurer can always make it through the next quarter or the next year or that, that sort of stuff. And so, you know,

A lot of times when you think of inflection points, you think, it's going to be really rapid or whatever. So if you look over a period of a quarter or a year, you don't necessarily see that. But then when you look back over a period of like 10 to 20 years, you'll see who's winning today versus 20 years ago and why they're winning can be very different. Right? So I think we're at an inflection point, but it's a very slow one.

As I mentioned before, whatever problem an insurance company has, their tendency for the first answer is, I'm going to raise rates. And raising rates covers a lot of sins, a lot of problems that you don't have to, underlying problems you don't have to deal with. And so everybody's fine and I still made my profit margin and the earnings call went well.

But more and more you hear insurance premiums are getting so high, people can't afford the premium. It's not worth it. You know, some level of homeowners premiums are getting kind of close to what the mortgage payment is. And that's kind of like crazy to think about. And so at some point like that, like that go to move stops working and

I hate to say like, we're at the point where stopping it's not working anymore, but I think we're at the point where people are not going to be able to use that over and over again. And so there's going to be pushback and they'll go to regulators and regulators want to prove it or whatever. And so the inflection point then becomes like, I can't raise rates, but I still have to hit my profit margins. Else investors get mad at me. What am I going to do? Right.

The other thing that I think brings us close to an inflection point, and I hope this is not just hopeful thinking is I get a sense that there's a lot of people who like follow the rules and are honest, but they see in society as a whole, like, like, you know, you're, you're, you're the sucker if you follow the rules, like people who don't follow the rules, that nothing happens to them. They get away with it. They get whatever. And I'm having to cover for all of that. And I think the people who are honest and follow the rules are getting more frustrated and like, this isn't right. And so to the extent that tide turns and like the rule followers carry the day, it's going to like make insurers deal more with some of that.

For the inflection point to happen, I think you need two things. One of which I think Glen talked about, like you have to have the technology and tools to make a lot of this happen. They have to exist, but I do believe that they exist today, right? For the most part. Can they be better and will it get better? Yeah. But I think you have what you need to do this today. I think the second part of the equation is, an insurance company and a carrier needs the will to implement these things because it will be followed by criticism.

Like, why are you checking me? Why do I have to go through this? To have the will, it starts with the CEO and the senior leadership team, right? They have to, they have to buck the conventional wisdom, right? When Glen said for 30 years, he's heard fraud is 10%. Yep. I've heard the exact same thing, right? And those types of conventional wisdom are strewn throughout the industry and leadership teams, generations of them now have lived by those things. So for a CEO and senior leadership team to say, all those things aren't actually true, we're going to do something different is, is actually quite, quite rare. But the upside opportunity for a carrier who does this is unbelievable and somebody at some point is gonna have the guts to do it.

GM: I talk about technology, but one side about technology is the non positive side is that if you try and automate too much without the human touch and bear in mind, you know, there is always a proportion of people that want to talk to insurers. My mother's one of them. She wouldn't do it. And she's quite, she's in her eighties, but she's quite digitally savvy. There's a number of people doing that. But if you just take out sways and sways of people outside an insurance company, you're cut.

Your price and expenses down that Kim raised earlier on, and I agree, some of those figures are scary, but you, you just lost that personal human touch that people want. People do want to talk to people. You shouldn't treat them all the same in terms of they will all deal with it automatically online. And there was some circumstances in a claim, which is the pressure point where it's not appropriate to automate. That is one where there's a human interaction. should give people choices.

So I don't know whether it's inflection point or whether it's getting to the point where it's recognizing that, you know, these newer, younger insurers are cropping up and they're doing smart things and they're starting to retain customers more. And here in a digital age where you can go onto one of the price comparison websites on your phone, typing your details, your vehicle details within a few seconds, you get up to 120 insurers returning prices to you.

The quickest ones will come to the top of the list. You tend to look at the brand you may recognize, but also you look at the cheapest and then you renew. A lot of people don't stay with the same insurer year in year out here. They swap and then the loyalty issue comes in. You're chasing the cheap price there. And it's very hard for the insurer because they get to know and they understand their customers and then they lose them. And then another one goes on. So the industry's got customers that are flowing around different products out there. And, you know, in my days when I joined insurance, it didn't happen. You've insured an insurer and unless there's something drastic that happened, you didn't move. You insured your car, your house, whatever it is with one insurer. I know in the U S it's probably more common to stay with one insurer, but here, you know, you, it's to hear it. And you have financial commentators in the market, sort of consumer champions saying, don't just accept your renewal, go back. And that's the whole pricing issue. And that kind of encourages people to shop around, which is a, which is, which is a great thing about the online model. can just look around to say, well, if you can save yourself 250 pound a year, and it's exactly the same cover, why wouldn't you move?

I think there are changes, some of the changes, it's going to be incredibly difficult, for big insurers to move with. And I agree with Kim, they can take a long time to change, but some of them really, really want to change.

DNSQ: I mentioned at the top of this episode that on its most basic level, insurance is about mutual aid; it’s a way for people to pool resources and help one another when the unexpected happens.

For Glen, this idea that insurance is there to help is central. And, as someone who’s worked in the industry for decades, he’s seen it change lives… for the better.

Someone I know, very close, had an horrific vehicle accident about three years ago. They were driving their car. There was an incident with a motorcycle.

And I'm a motorcyclist, so it's close to my heart. And the motorcyclist was extremely seriously injured. And this driver I know could see everything unfolding in front of him, helicopters landing in a very serious incident. And I won't go into the injuries involved there, but they wanted to contact the insurer. So I helped them report it to the insurer. Very pleasant, even rang you back the next day as supervisor to say, how was that experience when you first made the claim. It wasn't perfect, but they took the details and they said, look, we're going to give you, we're going to give them some help now.

And it was all around, we'll find you a lawyer, we'll help the police are going to prosecute, et cetera, et cetera. And they handheld this person all the way through. The lawyer was exceptional and the police were very good about the hand, how they handle it. And then I was talking to his person. They said, who's going to pay for all this treatment for this poor motorcycle student badly injured. I said, your insurer, because you were at fault. The insurer will pay that. And they said, what if that person is confined to a home or hospital the rest of their life? Said the insurer will cover that. Great. And for example, they may need to make modifications to where they live. And they were quite surprised. And they said, really? And how long will that go? We’ll want to compensate them by putting them back in the position they were before the accident and have them go forward.

Now, when I was going all through that, you can see their faces not recognizing it. And you look at the premium, which they hadn't, they weren't paying for it. You can see their faces thinking, crikey. And then you have a similar conversation with someone else, we take that, know, grudge purchase, waste of money. And I said, let me just give you a little story here. Now, how do you feel? And they go very quiet and go, “How much of this?” I'm not an insurance salesman, but having been sat on the inside, the insurer came to say, I've seen catastrophic in this where the insurer has worked marvels actually to look after the person in claim and get their life sorted. And I've seen inter-parties coming to the insurer and actually thank them for it. So, just huge amount of good is done by insurers, maybe not promoted, or advertised enough. And I think they could probably sell the good they do rather better. They're not perfect, no business is, but there's a lot of good in there that I think would help with this consumer insurer relationship.