Imagine you run a shoe shop. You have been trading for many years and have many very loyal customers who come back year after year to buy from you. You have a great relationship with them.
But it's a competitive business - there are three shops on your street and a big discounter has just moved in and is pressuring margins.
One day one of your best customers comes back a week after making a big purchase and asks to swap the shoes she bought for some boots. The shoes she wants to return are worn and you know you will not be able to re-sell them if you take them back and issue the more expensive boots in replacement.
You think it through and politely say no.
Then comes the response: "but they let you take anything back at the new place down the road."
Now what do you do?
It's very hard to run a business when you think you have booked a profitable sale only for it to unravel into an unexpected loss-maker.
In this respect I have great sympathy for the strong position take by John Charman over the ice damming aggregation dispute reported in yesterday's edition.
In his shop if you buy some shoes you get shoes - if you want some boots you'll have to put your hand in your wallet - no coming back and changing your mind. The shoes have been priced competitively as shoes - calculations have been made and margins loaded. Business taxes, suppliers, staff and shareholders all need to be paid from that sale.
In Charman's mind to do otherwise is unprofessional and what's more it is not acting in the best interests of one's shareholders.
He is absolutely right. Leniency and ex gratia payments devalue the product, particularly as in this case the customer knew that boots were more expensive and turned down an initial opportunity to buy.
As our business becomes better professionalised and more heavily regulated - on both the buy and sell side - flexibility may also become more difficult to allow. Fiduciary and prudential concerns may trump the rules that govern conduct. Put simply, freebies may become harder to dish out, even if we want to.
Increased securitisation is also going to make for much more retailing 'by the book'. There is no way that bondholders are going to allow ex gratia payments or even the slightest bending in the interpretation of their solemn contracts. Litigation will be the unsatisfied ILS client's only available remedy.
Now all the above is very well in theory, but it is very hard to put into practice.
The problem is that in the real world, along with 'new' and 'improved', the most powerful word in the marketer's lexicon is 'free'.
Everyone loves a bargain and everyone adores free stuff. In the real world the nice retailer down the road is going to win your customer. In the real world you have to make a hard-nosed calculation as to whether she is worth keeping.
When the legendary Cuthbert Heath uttered the famous 14 words: "Pay all of our policyholders in full irrespective of the terms of their policies," he secured Lloyd's reputation in the hearts and minds of (re)insurance buyers in the world's biggest market.
Was he a reckless fool? When he made his promise was he even qualified to know whether he had the resources to fulfil it?
Ultimately it doesn't matter if he was right or wrong. It worked a treat because the customers loved Lloyd's for it, and they still do to this day.
John, blame Cuthbert Heath...
To read the second of our Baden-Baden dailies, please click here.
Mark Geoghagen,
Editor-in-Chief
The Insurance Insider