Insurance Bonuses: an Inherent Conflict of Interest

I was recently given the opportunity to meet with one of the foremost experts in the insurance industry. We discussed compensation for insurance adjusters, specifically bonuses. When I worked for an insurance carrier, the bonus structure for all employees was a two step process. First, like most industries, individual performance must merit a bonus. The second step, however, involved a favorable combined ratio, a measurement of the insurance company’s underwriting profitability. It factors in premium dollars written, operating expenses, and claims dollars paid. The lower the combined ratio, the more profitable the company is.

It doesn’t take a rocket scientist to figure out that if you want a bonus, you need to do your part to help lower the combined ratio. I learned this very quickly, as do most insurance company employees. It really is the first step of the indoctrination process where the company aligns your interests with its own. This creates a major problem in the claims department. The only way claims employees can contribute to lowering the combined ratio, is to pay as little as possible on each and every claim that crosses their desks.

If you ask a claims adjuster to describe the profession, you will likely get the company response that it is to assist the insured through the claims process. As an example, Farmers Insurance Group’s website states that their “Claims Professionals… will guide you through the claims process – inspecting your property or vehicle if necessary, determining and investigating covered damages, and helping you better understand your policy and its endorsements.” This sounds great; its sounds like their commercial; it’s the reason you bought the policy; and it is the agreement you thought you made.

But when you look at this situation through the adjuster’s eye, the whole game changes. The adjuster, who the company advertises as your guide though the claims process, has an incentive to pay you as little as possible. It is usually an unspoken directive, but the message is clear. Managers will give a presentation on the bonus structure and then will give an update as to the current combined ratio. The unspoken message could not be any more clear; the more money the adjuster can save the company, the lower the combined ratio. The lower the combined ratio, the better chance the adjuster has for a bonus. It is a perverse conflict of interest that cannot be cured without a monumental shift in the way the insurance industry operates.