Tag Archives: geico

Selling Insurance in a Commoditized World

Insurance is a complicated product. Period.

No debate used to exist relative to whether insurance was a complicated product. Complication was (is) obvious given the length of the policies, legal terminology, excessive use of prepositions and the aspects that get insurance nerds excited: inclusions within exclusions and exclusions within inclusions.

Moreover, no one wants to buy insurance. 2+2=4. That is simple, and the simple part is that, when complexity is combined with massive reluctance and resentment to purchase, this equals consumer misery.

One solution for mitigating consumer misery is to make insurance seem simple. “15 minutes will save 15%” makes insurance seem exceedingly simple. “The average consumer saves $X when switching to…” makes insurance seem simple.

The “commoditization” of insurance that has received so much press is really a misnomer. Insurance is not a commodity. A complex good, because it is complex, generally cannot be a commodity. A true commodity is a product that is always identical. Red winter wheat from one farm is the same as red winter wheat on another farm. With GMO (genetically modified organism) seeds, the product is literally identical. Silver is silver once processed.

Insurance policies and claim practices between companies are not nearly the same. This is why agents actually still need to read the policies they are selling to avoid E&O claims. This is why it matters if a policy is an ISO policy versus a non-ISO policy. Policies are not identical and, therefore, fail the test for commoditization. Is the goal the same? Yes, but the means and values are different. Therefore, the product is not a commodity, even in personal auto.

Instead, insurance is more easily sold by a certain kind of company/agent if that company/agent can convince the public that all policies are the same, and, therefore, the only difference is price. In other words, these vendors need to convince the public that insurance is indeed a commodity, even though it is not. And they are pretty good at doing this.

See also: Selling Life Insurance to Digital Consumers  

Rather than commoditization, the result is really better described by the economist Carl Shapiro in his fantastic study, “Consumer Information, Product Quality and Seller Reputation” (Bell Journal of Economics 13, no. 1 (1982): 20-35). He describes how, when a product is complex from the consumer’s perspective, mediocre vendors will always take advantage of the consumer and vendors providing higher-quality services/products.

The mediocre vendors do this by causing consumers to think they are getting the same product for a lower price. They may do this in a number of ways and, often in the financial world, will reduce a quality decision to one number. This number may be a rating, such as a rating company’s rating of an insurance company. The vendors know that insurance agents and consumers and regulators look at one number/letter. Then they work backwards to figure out how to get to that number with a product/service that really does not deserve that rating but that will qualify because they manage to check all the boxes. This may have happened many times in the credit crisis and was arguably a leading cause of the credit crisis.

I think this may be happening with some insurance companies today, but that is for another article. Relative to commoditization, the “one” number is a price. The silent message is that all insurance is the same, and the consumer should not spend any time considering the coverage differences or claims practices. Then the vendors go one step further and truly abuse the proper use of statistics because they only cite quotes that save money. For example, take the $300 saved when switching. The statistic may be correct, and statistics do not lie. The pictures people paint with statistics can mislead, though. If 100 people get quotes from this company, and 95 quotes result in premiums higher than they are already paying, but five do save money, then technically the tag line is correct because it includes the word “switch.” If instead, all quotes were included, I am guessing the average savings would be less, and the average savings of all quotes is a rather important point.

Another example is the focus on new business quotes vs. renewal pricing. This is a rather interesting point because so many companies jack renewal rates. Therefore, new business quotes vs. renewal pricing is really an apples-to-oranges comparison. Theoretically, with true actuarial based pricing, this difference should not exist. Consumers inherently get this, but the companies play to their advantage in two fascinating ways.

The first is that by advertising that the consumer is saving $X on new business, vendors cause consumers to think that new and renewal pricing are the same. The difference creates an opportunity to gain new business on price.

The second interesting play is that companies are not exclusively, and maybe not primarily, using actuarial-based pricing on either the new or the renewal. Instead, what they do at renewal is increase the price based on their price elasticity curve. A few insurance company people actually learned economics in college. They increase the renewal pricing knowing that they’ll lose a percentage of clients (to other companies encouraging insureds to switch for $X savings on average switch). The damage, if the pricing is designed well, is negligible because the extra money made with those who stay more than makes up the difference for those that are lost. Then they create stickiness in the initial sale because the initial saving is so great that consumers are likely to think they are always saving more with this company and will not shop as often, resulting in paying more than if they shopped all the time.

These companies that focus the consumer on one number and the concept that all coverages and claims practices are the same are smart. As Shapiro stated, companies that focus on causing consumers to think they are getting more quality than they really are is an inevitable outcome of a free economy.

What are the rules for successfully selling a non-commodity financial product as a commodity?

  1. The right kind of advertising is crucial. This means keeping it simple. Avoid all indication of complexity or differences between products.
  2. Barely mention “insurance.”
  3. Use bad humor employed by cartoonish actors/animated characters.
  4. Repeat, repeat, repeat, repeat, repeat, repeat, repeat, repeat, repeat. According to a report by Coverager, Oct. 16, 2018, Geico averaged 9.83 views per household of just one of their television commercials. To create enough sales and existing consumer brand knowledge, every household had to see that one advertisement almost 10 times.
  5. Spend huge amounts of money on advertising. According to the same Coverager report, citing Alphonso & Statista (TV advertising data companies), Geico spent $232 million on television advertising alone (not including online advertising) in the last quarter of 2017. It is estimated in the article that Geico spends another 20% or so online. Call it $250 million plus per quarter, which extrapolates to $1 billion plus per year. According to A.M. Best, the Geico subgroup rating unit (002933) writes approximately $30 billion in DWP annually. Advertising expense then is only between 3% and 4%. Advertising for Geico then is incredibly affordable.

(Note: I am using Geico because I have access to these data points and because the company has a successful strategy. I am not picking on them, and I am not advocating for them. With the data available, I can more easily explain the market using their data vs. other carriers, although those carriers may be more aggressive, less aggressive, better/worse, more expensive/less expensive, use all the strategies described or none. I also do not know with certainty if Geico uses the strategies described, and I do not mean to imply they do by including their specific results.)

See also: How to Resuscitate Life Insurance  

Barring a few billion dollars available, and remember those billions have to be used on high-quality adverting and corporate leadership, competing directly is not a wise decision. How then does an agent/company win with true quality and care for the consumer?

In Shapiro’s analysis, the masses are lost in these situations involving complex products. Marketing is about the masses. So the solution involves selling. Selling is about the individual. Selling is about treating people as individuals. Selling is about taking the opportunity to tailor coverage for each individual. Selling is about identifying clients who care about the right coverages (the masses are lost) and converting those who would care if someone took the time to explain why they, the consumers, should care. Selling is about matching consumers’ needs and budget with a policy that best fits their needs. Selling, in this environment at least, is about having the knowledge required to create a custom policy. The producer who does not know the coverages is like a tailor who cannot measure. The suit may not be off the rack and may technically be “custom,” but it is mostly worthless.

You can find this article originally published here.

4 Insurers’ Great Customer Experiences

McKinsey research has found that insurance companies with better customer experiences grow faster and more profitably. In 2016, 85% of insurers reported customer engagement and experience as a top strategic initiative for their companies. Yet the insurance industry continues to lag behind other industries when it comes to meeting customer expectations, inhibited by complicated regulatory requirements and deeply entrenched cultures of “business as usual.”

Some companies–many of them startups–are setting the gold standard when it comes to customer experience in insurance, and are paving the way for the industry’s biggest insurers to either fall in line, or risk losing out to smaller competitors with better experiences. Through a combination of new business models, clever uses of emerging technology and deep understanding of customer journeys, these four companies are leading the pack when it comes to delivering on fantastic experiences:

1. Slice – Creating insurance products for new realities.

Slice launched earlier this year and is currently operating in 13 states. The business model is based on the understanding that, in the new sharing economy, the needs of the insured have changed dramatically and that traditional homeowners’ or renters’ insurance policies don’t suffice for people using sites like AirBnB or HomeAway to rent out their homes.

According to Emily Kosick, Slice’s managing director of marketing, many home-share hosts don’t realize that, when renting out their homes, traditional insurance policies don’t cover them. When something happens, they are frustrated, angry and despondent when they realize they are not covered. Slice’s MO is to create awareness around this issue, then offer a simple solution. In doing so, Slice can establish trust with consumers while giving them something they want and need.

Slice provides home-share hosts the ability to easily purchase insurance for their property, as they need it. Policies run as little as $4 a night! The on-demand model allows hosts renting out their homes on AirBnB or elsewhere to automatically (or at the tap of a button) add an insurance policy to the rental that will cover the length of time–up to the minute–that their home is being rented. The policy is paid for once Slice receives payment from the renter, ensuring a frictionless transaction that requires very little effort on the part of the customer.

See also: Who Controls Your Customer Experience?  

Slice’s approach to insurance provides an excellent example of how insurers can strive to become more agile and develop capacities to launch unique products that rapidly respond to changes in the market and in customer behavior. Had large insurance companies that were already providing homeowners’ and renters’ insurance been more agile and customer-focused, paying attention to this need and responding rapidly with a new product, the need for companies like Slice to emerge would have never have arisen in the first place.

2. Lemonade – Practicing the golden rule.

In a recent interview, Lemonade’s Chief Behavior Officer Dan Ariely remarked that, “If you tried to create a system to bring about the worst in humans, it would look a lot like the insurance of today.”

Lemonade wants to fix the insurance industry, and in doing so has built a business model on a behavioral premise supported by scientific research: that if people feel as if they are trusted, they are more like to behave honestly. In an industry where 24% of people say it’s okay to pad an insurance claim, this premise is revolutionary.

So how does Lemonade get its customers to trust it? First, by offering low premiums–as little as $5 a month–and providing complete transparency around how those premiums are generated. Lemonade can also bind a policy for a customer in less than a minute. Furthermore, Lemonade has a policy of paying claims quickly–in as little as three seconds–a far cry from how most insurance companies operate today. When claims are not resolved immediately, they can typically be resolved easily via the company’s chatbot, Maya, or through a customer service representative. But perhaps the most significant way that Lemonade is generating trust with its customers is through its business model. Unlike other insurance companies, which keep the difference between premiums and claims for themselves, Lemonade takes any money that is not used for claims (after taking 20% of the premium for expenses and profit) is donated to a charity of the customer’s choosing. Lemonade just made its first donation of $53,174.

Lemonade’s approach to insurance is, unlike so many insurers out there, fundamentally customer-centric. But CEO Daniel Schreiber is also quick to point out that, although Lemonade donates a portion of its revenues to charities, its giveback is not about generosity, it is about business. If Lemonade has anything to teach the industry, it is this: that the golden rule of treating others as you want to be treated, holds true, even in business.

3. State Farm – Anticipating trends and investing in cutting-edge technology.

The auto insurance industry has been one of the fastest to adapt to the new customer experience landscape, being early adopters of IoT (internet of things), using telematics to pave the path toward usage-based insurance (UBI) models that we now see startups like Metromile taking advantage of. While Progressive was the first to launch a wireless telematics device, State Farm is now the leading auto insurer, its telematics device being tied to monetary rewards that give drivers financial incentives to drive more safely. The company also has a driver feedback app, which, as the name suggests, provides drivers feedback on their driving performance, with the intent of helping drivers become safer drivers, which for State  Farm, equals money.

By anticipating a trend, and understanding the importance of the connected car and IoT early on, State Farm has been able to keep pace with startups and has reserved a seat at the top–above popular auto insurers like Progressive and Geico–at least for now. If nothing else, unlike most traditional insurers, auto insurance companies like State Farm and Progressive have been paving the way for the startups when it comes to innovation, rather than the other way around. For now, this investment in customer experience is paying off. J.D Powers 2017 U.S Auto Insurance Study shows that, even as premiums increased for customers in 2017, overall customer satisfaction has skyrocketed.

4. Next Insurance – Automating for people, and for profit.

Next Insurance believes that a disconnect between the carrier and the customer is at the heart of the insurance industry’s digital transformation problem. In essence, it’s a communication problem, according to Sofya Pogreb, Next Insurance CEO. The people making decisions in insurance don’t have contact with the end customer. So while they are smart, experienced people, they are not necessarily making decisions based on the actual customer needs.

Next Insurance sells insurance policies to small-business owners, and the goal is to do something that Next believes no other insurer is doing–using AI and machine learning to create “nuanced” and “targeted” policies to meet specific needs.

An important aspect of what makes the approach unusual is that, instead of trying to replace agents altogether, Next is more interested in automating certain aspects of what agents do, to free their expertise to be put to better use:

“I would love to see agents leveraged for their expertise rather than as manual workers,” Pogreb told Insurance Business Magazine. “Today, in many cases, the agent is passing paperwork around. There are other ways to do that – let’s do that online, let’s do that in an automated way. And then where expertise is truly wanted by the customer, let’s make an agent available.”

See also: Smart Things and the Customer Experience  

While innovative business models and cutting-edge technology will both be important to the insurance industry of the future, creating fantastic customer experiences ultimately requires one thing: the ability for insurance companies–executives, agents and everyone in between–to put themselves in their customers’ shoes. It’s is a simple solution, but accomplishing it is easier said than done. For larger companies, to do so requires both cultural and structural change that can be difficult to implement on a large scale, but will be absolutely necessary to their success in the future. Paying attention to how innovative companies are already doing so is a first step; finding ways to bring about this kind of change from within is an ambitious next step but should be the aim of every insurance company looking to advance into the industry of the future.

This article first appeared on the Cake & Arrow website, here. To learn more about how you can bring about the kind of cultural and institutional change needed to deliver true value to your customers, download our recent white paper: A Step-by-Step Guide to Transforming Digital Culture and Making Your Organization Truly Customer Focused.

How Sharing Economy Can Fuel Growth

In our last blog of our two-part series on the gig and the sharing economy, we looked closely at how the gig or “on-demand” economy will open up new markets to group and commercial insurers. You can read that blog here.

In today’s blog, we look at the sharing half of the gig and sharing economy. How will a radically shifting market, where borrowing and lending are more prevalent, open doors for commercial and specialty insurers? More importantly, how can insurers fuel the growth of this market by making borrowing and lending more palatable?

Is the Sharing Economy real?

The sharing economy is not only real — it has enormous potential for insurers. RVs make a great example. Recreational vehicle owners use their RVs an average of 28 days per year. With 8.9 million U.S. households owning an RV, that’s nearly 2.9 billion unused RV days per year. RVs are remarkably underutilized, making them a prime market for sharing. RV sharing sites, such as Outdoorsy, help owners to profit from their RV, while helping non-owners to gain access to RV use.

Multiply this idea many times over. ATVs are underused. Boats, chainsaws and generators are underused. Cars, homes, cabins, campsites, hunting property, musical instruments, bicycles, hockey rinks and electronics are all commonly underused. The only thing standing in the way of sharing them all is… insurance to cover a new type of risk.

See also: Opportunities in the Sharing Economy  

While some personal lines insurers are making a case for insuring some of these risks by adapting their personal lines products, it is commercial insurers that may have a leg up when it comes to understanding how to price risk for niche risks or groups and how to offer innovative products to these “small – medium” business owners.

Majesco’s forthcoming consumer research report finds that the consumption of ridesharing and home- and room-sharing services has a strong and growing appeal. The year-on-year growth of these activities was between 5% and 15% depending on the activity, highlighting a growing interest and use across all generations due to the digitally enabled capabilities driving ease of use. (For a further look at sharing economy trends, read Changing Insurance for the Digital Age, a collaboration between Majesco and Global Futures & Foresight.)

Experience is a factor

The sharing economy is related to the experience economy. As millennials enter the middle class, they are owning less “stuff” and putting more emphasis on having greater experiences. The sharing economy is fostering their desire to do more by owning less. With less of their income tied up in ownership and maintenance, they have more to spend on borrowing and renting. They are concerned about risk, but they don’t want a confusing transaction to sit in the way between them and the experience. So, insurers must find ways to build simple insurance experiences into the front end of the overall experience, or hide purchase experiences within the usage itself.

Insurance is the answer to some of the sharing economy’s most pressing issues.

Before “sharing economy” was even a term, sharing was at the heart of insurance. So, it would make sense that insurance would fit well into the sharing economy. Insurance, however, has had a product focus, reflected in the organizational silos based on risks and products, by separating personal versus commercial, rather than a customer focus that shifts between different risks (i.e. personal vs. commercial) based on the behaviors or use.

This is why sharing economy insurance incumbents may find themselves disrupted by Slice, Cover Genius and Metromile and similar entities that are popping up everywhere. Optimistically, however, the sharing economy is igniting an insurance renaissance with traditional insurers like Geico, Admiral, AXA and others asking themselves how they can serve people in the on-demand sharing economy … both personally and as a “business.”

In the sharing economy, it’s all about protection for the shorter timeframes and meeting the uncommon, on-demand need … allowing the customer to fluidly switch back and forth from personal to “commercial” needs. And, it’s all about giving owners and businesses incentives to lend property or assets. Insurance can answer these issues.

Insurance will fuel the sharing economy if insurers can build compelling value propositions

Rental companies are familiar with the risk of lending. They understand what is at stake, and they price insurance into their products or create contracts to handle damage. A new round of entrepreneurs is arising, however, who are using technology to match peer-to-peer lending. Websites such as MyTurn are enabling anyone to launch asset-sharing organizations. These types of companies are unfamiliar with how insurance can offer them protection and how coverage should be handled for a broader segment of products and users. This is an area where insurers can fill a growing gap.

The insurance value proposition in the sharing economy is to make both the lender and the borrower comfortable that the transaction can occur without the threat of loss. All that remains for insurers, then, is to determine where sharing is creating insurance gaps and how they can build, sell and service sharing products.

Data is critical

Consider how data is currently used in underwriting most products. For the most part, insurers pull from traditional data sources for underwriting purposes, and, though they may have reduced underwriting time, it is rarely real-time data. The sharing economy is different. It will require hyper-short underwriting loops based on real-time data because many aspects of sharing happen quickly and in a non-uniform pattern. The whole concept of on-demand insurance assumes the flip of a switch between being uninsured and insured.

On-demand insurance products should have the capability to score based on evidence analyzed from many reliable sources. Sharing economy insurers may want at least some scoring related to social profiles and common pastimes and behaviors. These aren’t easy data points to collect, but the further down the road on-demand insurance progresses, the greater the demand will be for every type of character-based data.

Cloud platforms are necessary

In essence, sharing economy insurance requires on-demand micro duration insurance coverage and blurs the boundaries between personal and commercial insurance.  But insurers face challenges including: creating a micro-duration insurance business model; real-time pricing determination based on micro-segmentation and varied factors; mobile-first user experience; low transaction value but high transaction volume; and low-touch, end-to-end operations.

See also: 4 Mandates for Agents in Sharing Economy  

To support these new coverages requires a next-generation core platform that is a complete architecture redesign with an alchemy of data, analytics, digital and processing components; customer-journey-focused solutions; significant reliance on AI for pricing and underwriting; and a light footprint and auto-scale capabilities for high volume support on cloud.  Furthermore, there has to be a strong “find and bind” integration architecture to tap into an ecosystem of innovative services. As we highlighted in our Cloud Business Platform: The Path to Digital Insurance 2.0 thought leadership report, many of the new insurers providing these innovative products have such core platforms in the cloud to allow them agility, speed and innovation in a continuously changing market.

Agility is (no surprise) highly necessary

For insurers to grab the opportunities as they arise, they will need to understand what new technologies can do to facilitate sharing relationships. They will need to use a next-generation core platform that is scalable and allows for real-time data and agile product development. Cloud platforms will lend themselves to many of the necessary features, but expert data integration and “find and bind” ecosystems will also be vital.

For a better look at growth opportunities within the sharing economy, don’t miss Majesco’s report, A New Age of Insurance: Growth Opportunity for Commercial and Specialty Insurance in a Time of Market Disruption.

Lemonade’s Bizarre New Approach

In its latest effort at self-promotion, industry “disrupter” Lemonade has posted an article on multiple web sites. Here is the article from one source:

Lemonade: World’s First Live Policy

Below are some excerpts from the article and some observations and questions of my own.

“Then, customers would need to pay for some changes, and probably get a new policy sent to them in the mail (snail mail, of course). That’s where the red tape and long wait times come in….”

So, the changes listed in the article that Lemonade will allow their insureds to make without customer service assistance wouldn’t in some cases result in additional premium? And what carrier mails an entirely new policy for changes as described in the article? This is nonsense, and it is not an accurate nor an honest statement.

“As far as we know, no other insurance company allows its customers to modify their coverages or even cancel their policy on their own.”

This is disputed in one comment at the bottom of the article linked above. More important, if anyone actually CARES about the customer, why would they want to facilitate an untrained person to make a change that, unbeknownst to them, could create a serious exposure gap? So, Lemonade would allow, with no questions asked and no intervention by customer service, one spouse to remove another spouse even if both are named insureds on an insurance CONTRACT?

The insured, without question or counsel, can remove a landlord as an additional insured on a policy even if the lease contractually requires the landlord to be covered? How many insureds read their leases or insurance policies? How many would know the potential liability they’re incurring? Do the people at Lemonade understand this?

This is why knowledgeable insurance agents serve a purpose. Most insurance agents are required by law to pass examinations and engage in state-approved continuing education to provide counsel to consumers for these types of decisions. How is a consumer who knows pretty much nothing about insurance supposed to make coverage decisions on her own without the training that state regulators require of agents? What do regulators think about this practice?

“Even if you buy renters insurance directly from the likes of GEICO or Progressive, the only part that’s direct is taking your money and sending you a policy. Everything else requires customers to contact customer service — which we all know can be… painful. That sucks.”

What can be far more painful is the inability of an uneducated, ill-informed and unsuspecting consumer to contact customer service to obtain the counsel and advice of a properly trained and knowledgeable insurance agent.

See also: Lemonade’s Crazy Market Share  

It sounds like Lemonade is adopting a practice that saves THEM a lot of time and lessens THEIR need to hire competent insurance advisers and SELLING it as a benefit to consumers. In other words, Lemonade is reducing its workload, increasing consumers’ risks of loss and making customers thank the company for it. On top of that, because Lemonade is not intervening in the insured’s own bad judgment, is the company also insulating itself from E&O claims such that customers will have no coverage under either their own policy or Lemonade’s E&O coverage?

Who is the real beneficiary here? I think most insurance professionals can answer that question.

Caveat emptor.

How Does GEICO Save Customers 15%?

Easy question, simple answer: They don’t. The implication is that an agent “skims” 15% commission off the top, as if (1) agents STILL get 15% commission on auto insurance, (2) agents don’t do anything to earn their meager commissions (like exposure analysis, product selection, claim advocacy, etc.), and (3) GEICO has no acquisition costs like advertising, sales and service staff salaries and benefits, etc.

See also: How Basis for Buying Is Changing (Part 2)  

The Florida Association of Insurance Agents (FAIA), the state affiliate of the Big “I,” has a blog area where agents can comment on staff blogs. Here is an agent’s response to a recent blog post:

“I certainly don’t put myself in the ranks of Warren Buffett, and we clearly have a different target client than his GEICO brand does, but it is very interesting to look at their recent financial reports.

“GEICO’s recent disclosure notes that it wrote 974,000 new policies last year. Sounds like they are hitting us hard. They also spent $1,400,000,000 on advertising last year. That’s 1.4 BILLION with a ‘B.’

“If you do the math, that is $1,437 per policy in acquisition costs just for advertising, not including other underwriting expenses. Now remember, they have another 21 million customers on the books already. I wonder how they like subsidizing all those new policies….”

So, all you agents out there, how many of you get $1,437 commission on each auto policy? If that represents less than 15% of the premium dollar, then GEICO’s average auto premium would have to be about $9,600. Of course, that 15% claim might be a little off, perhaps by 100% or more?

See also: How Agents Can Tap the Gig Economy  

Thirsty for more? Read my blog post from six months and a day ago.