One of the most costly open secrets of the American economy is how much people pay for brokers who sell them an over-priced product that the government requires them to buy if they want to own a car or a house.
The product in question is so-called personal lines property/casualty insurance, and there’s a good chance you are among those who are paying insurance agents a whopping $50 billion in commissions to sell you.
Now Google and WalMart are among the companies that are trying to take a bite out of that enormous inefficiency.
Before getting into the details, let me disclose my interest in this concept. Back in 1995, when my consulting firm was getting off the ground, I had an opportunity to pitch a new business idea to a trio of partners at Boston’s Bain Capital.
After having spent the previous four years working for a Boston-based property-casualty insurance company, I knew that the business of selling auto and home insurance was inefficient. Of the many opportunities here to cut costs, two were most glaring.
First, most auto and home insurance was sold by insurance companies through agents. For every dollar in insurance premiums that a person paid, about 20 cents went to agents’ commissions. According to the Insurance Information Institute, that figure had dropped to about 10.4 cents by 2013.
Second, while government mandated that people purchase insurance if they wanted to buy a car or home, rates for that insurance – and regulation of the industry more generally – were set through a process managed by regulators in each state, rather than a single federal regulator.
My pitch to Bain Capital was a simple solution, I thought – sell car and home insurance over the Internet. This would eliminate the need for consumers to pay the agent commission, and most of the savings could be passed on to consumers in the form of lower premiums.
Bain Capital was intrigued by the part of my presentation that highlighted the industry’s float – a concept well-promoted by Warren Buffett regarding the huge amount of capital that property/casualty insurers get from customers who pay for insurance well before any claims are paid.
But Bain Capital did not want to take the start-up risk that would be involved. In retrospect, I can see the wisdom in their decision. First, Bain Capital was primarily a financier of buyouts of large companies, and, second, building my idea into a real business would likely have taken a long time.
Just how long is clear from the Jan. 19 New York Times report on efforts by Google and WalMart to implement a version of the idea I pitched 20 years ago.
The property/casualty insurance industry is a huge pot of business opportunity. In 2013, premiums for auto, home and commercial insurance totaled $481 billion, of which $50 billion went for agent commissions.
In my mind, that $50 billion could be reduced to around zero. After all, if I buy a car, I know that I need to buy insurance. Why should 10% of my insurance premium go to pay someone who sells me that policy? Why not subtract that 10% from my insurance premium and let me buy the policy online after comparing vendors based on price and service quality?
It appears as though Google is trying to come to the rescue for consumers. Google operates a search engine for auto insurance prices called Google Compare. According to the Times, Google Compare “has been operating in Britain for two years, and Google is working on something similar for the U.S.”
Google can sell insurance in about half of the U.S. and has formed a partnership with an insurance comparison site. According to Forrester Research analyst Ellen Carney, Google is licensed to sell insurance “in about half of the states.”
Moreover, Google partnered with Compare, an American auto insurance comparison site owned by Britain’s Admiral Group, a car insurance company that has operated a European price-comparison site for more than 10 years. Through the joint venture, Google will access insurers in Compare network, the Times reports.
For the last 20 years, Allstate, which is the largest publicly traded property/casualty insurer and ranked third in the industry by sales in 2013, according to the National Association of Insurance Commissioners, has been doing pretty well. Since June 1993, its shares have risen 389%, and as of Jan. 19 they stood at a record $70.59.
People buy Allstate insurance through agents, which means that, if they could buy lower-priced insurance free of agent intervention while still getting good quality of service, the value proposition could cut into Allstate’s revenues.
But it remains to be seen whether Google will succeed. As I see it, Google Compare can generate significant revenues if it does the following:
- Offers the same coverage at lower rates than rivals such as Allstate and others that sell through agents;
- Delivers consistently excellent claims service; and
- Generates enough public awareness of the superiority of its value proposition to induce consumers to overcome their emotional bonds with their agents to switch to Google’s insurance.
Google would be facing off against the likes of Geico in trying to convince people they can save money by buying directly from a company rather than through agents. Back when I was pitching Bain Capital, direct selling accounted for about 14% of industry revenue – but by 2012 that had risen to 28%, according to A.M. Best.
As a consumer I would love to see Google succeed in this quest. But given my experience trying to get financing to implement it, I would not be surprised if the golden chalice of low-priced auto and homeowners’ insurance sold online remains elusive for decades.