Insurance Policies are like Swiss Cheese and Pokemon Cards
Part 4 of the Insurance Onboarding Series; explaining why insurance policies are so damn long and confusing.
We have explained insurance as though you are a five year old.
We have considered how one American encounters different insurance products across their lifetime that all work different ways,
Next, we’re actually going to talk about insurance policies, not to get into the weeds, but to get them out the way.
Insurance policies are basically giant contracts full of “if this, then that”-style legal language. They are written primarily to be interpreted by lawyers and underwriters, then the insurance-educated broker or agent, and last; the buyer of the policy.
They might start with a pretty cover page, then a “declarations page” (typically shortened and pronounced “deck page”), maybe a page with some state-mandated warning labels kinda like a pack of cigarettes, and then comes the actual policy.
One of the most confusing things about insurance to me, was the organizing structure of the actual policy. And in time, two analogies and one made-up word emerged that made it clearer in my head. That’s what I’d like to share today.
Insurance policies work like Pokemon, the card game
(Or Magic the Gathering, Yu-Gi-Oh, or whatever collectible card game the kids are playing these days)
At Vouch we sold business insurance specifically crafted for technology startups. Those startups could buy any combination of 10 offered coverages, but those coverages came in industry standard groups. For example, a Business Owners policy might include two individual coverages; (1) General Liability and (2) Business Property.
If a founder purchasing insurance wanted to get the first but not the second coverage, they would receive, after purchase, a policy document that included reference to both - but also included a magical page that “excluded” the second coverage. That turned that coverage off. Negated it entirely.
To remove something from a policy, you had to add something.
Weird, right?
As we just outlined, a policy document might reference multiple coverages. Those coverages are made up of a bunch of individual “subcoverages” which is a word I made up so that my head wouldn’t explode, and Vouch employees could continue communicating effectively instead of just saying “coverage” for everything.
The same mechanism outlined above holds true for “subcoverages” too. If a founder wanted to purchase Business Property coverage, but not the Business Property subcoverage about floods, the policy document that they purchase might actually be one page longer with an “exclusion” page for floods tacked onto the end.
Sidenote: Subcoverages are actually called “endorsements” by insurance people, but when you are learning how an insurance offering fits together and trying to understand how to present it to customers in a simple way, it’s easier to use intuitive, hierarchical labels. At Vouch, that was policy, coverage, and subcoverage.
Now for that pokemon analogy;
Just like you might play a Pikachu in a Pokemon card game, and then add on a card to double it’s attack strength, and another to remove your competitors ability to use some kind of counter, the answer is always add another friggen card - another piece of paper - to achieve the desired result. Cards that introduce new characters, cards that include new capabilities, cards that multiply, cards that exclude, cards that cap damage - that’s how an insurance policy is structured.
This may not be true in all insurance products, but it’s important to wrap your head around early because it's a common way that contracts behave. It’s also why policy documents are stupidly long and confusing.
Another analogy that might be useful is one created by a coworker and incredible Director of Product, Vouch’s number two hire, Evan Roman.
“Insurance is just like a block of Swiss cheese and then they sell you the cheese holes.”
Remember our definition of insurance from Part 1? “Insurance is how you take a precious thing you own, and protect yourself from the cost of fixing it, should it be damaged in a particularly rare or expensive way.”
Imagine a policy designed to cover every single way the precious thing you own might be damaged. Nothing could happen that wouldn’t be covered, and paid back to you in full so you could preserve your precious car, health, life, business - you name it.
But that would be insanely expensive, and most people want to roll the dice on some risks that they believe are too unlikely to waste money covering.
That all encompassing policy being described is basically General Liability coverage. It’s the baseline. The everything-coverage that someone purchases first. But what might seem like a block of cheddar based off the coverage name is actually Swiss cheese, and whole categories of risk are carved out and sold separately.
You could read that and think “see, I knew insurance was scammy!” but what you’re witnessing is the same bundling and unbundling dynamics in play in any consumer-driven industry. Do you want all of the channels in the cable package, or to just stream the shows you love? Do you want a three course, pre-fix menu at the restaurant, or do you want to skip the main and dessert to just get two orders of fried Brussels sprouts for dinner? (It’s a pro move you’ll never regret.)
The truth is, it’s probably a little bit of both. It's the insurance industry being a little icky, and consumers wanting more choice.
—-
And so policies are long, and weird, and not really for the buyer to read. But if you choose to get involved in an insurtech or older insurance carrier, you can at least go in with some understanding of how the policy document is organized.
Pika pika,
Carrie