A recent research report published by Cliff Gallant and Matthew Rohrmann of Nomura Equity Research concludes that spending on advertising beats spending on insurance agents. Once again, Wall Street gets it wrong.
Their logic is flawed. The authors choose to focus only on advertising spending in 2013 and limit their analysis to the top-10 auto insurers. They then compare the advertising spending to premium growth that year. Because GEICO spent the most on advertising and had the largest premium growth, the authors conclude that advertising beats spending on agents.
But one year of advertising spending does not account for GEICO’s 2013 premium growth. The company has spent decades building its brand awareness. Since the mid-1990s, GEICO has spent billions of dollars to become top of mind as the company to consider if you want to purchase cheap auto insurance (a.k.a., “1-800-cheap insurance”). If GEICO stopped advertising, its growth would stop because it has almost no other way to reach the consumer (“almost” because even the king of direct-response insurance has 150 insurance-agent locations.)
Instead, other important factors account for GEICO’s performance in 2013: namely, its strategy to grow premium even if unprofitably. GEICO can afford to grow unprofitably because its owner, Berkshire Hathaway, is more interested in generating funds to invest than in consistent profits. In 2011, for example, GEICO saw its profits plunge 48% while its advertising costs increased 9.4%.
A better way to evaluate whether to advertise or invest in agents is to look at the costs of acquiring and retaining customers.
While GEICO scores high in initial consideration, it lands in the middle of the pack when it comes to the actual insurance purchase, according to the McKinsey 2012 Auto Insurance Customer Insights Report. It costs GEICO relatively little to get a consumer to make an inquiry, but a lot more to have someone buy a policy. And agent-oriented insurers score much higher in retention than GEICO and other direct-to-consumer auto insurance companies do, according to the McKinsey report.
The high retention numbers for agent-based insurance companies demonstrate that companies that underinvest in their agents do so at their own peril. Local agents build long-term relationships with consumers. Advertising doesn’t.
With the advent of the Digital Age, companies can generate bigger returns on their investment in agents. This goes against conventional wisdom. However, cloud computing, digital marketing, and social media let agents compete against the industry’s “brand behemoths” in their local community. Forward-thinking insurance companies are designing programs for their agents to leverage these new capabilities. These companies are finding they get a much bigger return on investment than with traditional advertising spending.
Consumers want choice today, and they expect to do business with companies that can provide a multi-channel experience. A local agent whom a consumer can visit, call or access via a website provides the experience that today’s consumer demands.
Insurers that focus on investing in their agent distribution channel will win. Pressure on companies to increase their advertising led to the insurance advertising wars of the last decade, and many companies diverted dollars from their agents to pay for increasing their advertising. But that trend appears to be changing as companies realize the power of agent-based distribution in today’s auto insurance market. For example, Allstate recently announced a renewed commitment to grow its agency distribution channel after years of neglect.
A strong agent-based distribution channel creates a long-lasting and compelling strategic advantage. Blindly ramping up the ad budget is a simplistic, ineffective solution. Spending on ads just creates an indistinguishable commodity product where price and a cute mascot are the only differentiators.