Tag Archives: mckinsey

Has Auto Insurance Become a Commodity?

A boomerang kid lost his job and moved back home with his parents. While driving his mother’s car, he negligently struck another vehicle, causing several thousand dollars in property damage. The mother’s insurer denied the claim on the basis that the driver’s residency was not reported to the carrier within 30 days of his return home.

Fifteen minutes can save you 15%, anyone? Actually, the latest online ads say you can get a car insurance quote in only 7 ½ minutes.

Buying insurance may not be a pleasant task for most people, but neither is getting a root canal, and you wouldn’t choose a dentist based on how fast he or she can complete a procedure where your health is at stake. Yet consumers routinely risk everything they own and much of what they might earn in the coming years by choosing the fastest, lowest-cost insurance with the cleverest advertising campaign.

The denial of the boomerang kid’s claim arose from an exclusion in the insurer’s policy for accidents involving undisclosed household residents, unless the insurer had been notified within 30 days of the residency. What insured would think to report something like this to his or her auto insurer? If an “ISO-standard” policy had been in place, that wouldn’t be necessary.

At a rapidly accelerating rate via TV advertising, online “ease of use” promotion and proliferating media articles, consumers are being duped into believing that personal lines insurance is a commodity, with the only significant difference being price. Nothing could be further from the truth. While a lower price doesn’t necessarily imply lesser coverage, that is often the case.

In the words of sales legend Morty Seinfeld, “Cheap fabric and dim lighting. That’s how you move merchandise.”

What Does the Caution to Compare ‘Apples to Apples’ Really Mean?  (Hint: Nothing.)

Recently published studies by firms like McKinsey, A.M. Best, Nomura Equity Research and Gartner proclaim that auto insurance is now officially a commodity. Some of their conclusions predict the demise of the insurance agent, as the direct sales model wins the commodity war. Have any of these researchers ever read their own auto policies, much less compared the coverages in multiple policies?

The media perpetuate the myth. The typical “How to Save Money on Car Insurance” article cautions consumers to make sure they compare “apples to apples.” Translation: Make sure you’re getting quotes on premiums for the same liability, uninsured motorist and medical payments limits and physical damage deductibles. It’s as if broad coverage categories, limits and deductibles were the only differences between auto insurance policies.

A Wall Street Journal article, “Car Insurance Rate Shopping Can Pay Off,” says, “The Consumer Federation recommends consumers shop around to get quotes from insurers that don’t use agents, such as Amica Mutual Insurance and USAA (for families with military ties), and then ask an agent to beat the best price.” Not a word about any coverage differences—only the price.

More Proof That the ‘All Car Insurance Is the Same’ Mantra Is an Illusion

A Florida insured’s auto was in the shop, so she rented a car and later loaned it to someone, who loaned it to someone else, who had an at-fault accident that killed a child and seriously injured other children. The claim against the operator and named insured was denied by the insurance company on the premise that the vehicle was not a “temporary substitute” and that the operator was not a “permissive” user, as defined in this insurer’s personal auto policy.

The son of a friend of an agency owner was street racing when he crashed, seriously injuring himself and his passenger. The claim was denied by the insurance company based on its interpretation of its personal auto policy’s “racing” exclusion.

A church allowed a member to park his car in its heated “bus barn.” While exiting, he wrecked the car, causing structural damage to the building. The claim was denied by the insurer, citing the “care, custody or control” exclusion in the personal auto policy.

What do these claims have in common, other than denial from the insurance company? Each of them would have been covered if the policyholder had purchased an “ISO-standard” personal auto policy rather than the policy in question.

With regard to the Florida claim, the ISO personal auto policy defines “temporary substitute” and “permissive use” much less restrictively than the policy that was in force. The named insured might have saved 15% in 15 minutes when she purchased her auto policy, but it proved to be a bad deal when she had to take her claim to the Florida Supreme Court to recover. The Supreme Court did reverse the Court of Appeals ruling that favored the insurer, but the rationale was less about the policy language and more about Florida’s unusual dangerous instrumentality doctrine.

In the street racing example, the ISO personal auto policy excludes injury that arises from accidents that take place “inside a facility designed for racing,” while the auto policy in question excluded almost any racing activity, including on a public street. Fortunately, the father of the injured child had a Trusted Choice independent agent to aggressively advocate on his behalf by pointing out to the insurer that the exclusion applies only to organized racing activities, not impromptu street racing. More than a dozen coverage opinions from the Big “I” Virtual University Ask an Expert service supported the agent’s efforts. Do you think someone who purchased insurance online from “a guy in khakis” would enjoy the same advocacy?

Like the ISO personal auto policy, the “bus barn” claim also involved a “care, custody or control” exclusion. But the ISO policy makes an exception for damage to a private garage. The policy in question has no such exception—not to mention the fact it’s unlikely that the barn was actually in the driver’s care, custody or control. So both the policy itself and the insurer’s interpretation of the exclusion were faulty from the insured’s perspective—rendering the carrier’s slogan, “same coverage, better value,” untruthful.

12 More Nails in the Coffin of the ‘Insurance Is a Commodity’ Myth

Here are a dozen auto insurance exclusions or limitations you won’t find in the “ISO-standard” personal auto policy:

  1. Undisclosed household residents are excluded.  How many families have “boomerang” kids living at home whom they have not told their auto insurer about? An exclusion of this type was just recently added to the auto policy of one of the major TV advertisers.
  2. Business use of autos you don’t own is excluded.  Have you ever borrowed a neighbor’s car or made a business stop in a dealer loaner or rental auto?
  3. Business use of ANY auto is excluded.  Do you ever run to Staples or the post office on business for your employer?
  4. Use of ANY auto you don’t own is excluded.  Better not drive anyone’s car but your own.
  5. Vehicles weighing more than 10,000 pounds are excluded.  Have you ever rented a U-Haul truck or an RV for personal use thinking your liability coverage extended to the rental? With an “ISO standard” policy, it does; with some auto insurance policies, it doesn’t.
  6. Any type of delivery is excluded.  Denied claims include pizza, newspapers, Mary Kay cosmetics and, yes, even the delivery of insurance policies to customers by an agency producer. Google pizza delivery auto accidents and take a look at the catastrophic nature of some of them. Was that $50 you saved to buy a policy a good deal?
  7. Permissive users only get minimum limits.  This can apply to people who borrow your car or even unlisted household drivers.
  8. “Street racing” is excluded.  Google “street racing” and see how often people are killed or critically injured in the process. Does the auto policy covering your testosterone-fueled teenage son cover street racing? The “ISO standard” auto policy does.
  9. Criminal acts are excluded or limits reduced.  DUIs or even speeding tickets may preclude coverage.
  10. Medical payments only include licensed physician fees.  One insured incurred a $25,000 “life flight” helicopter fee that would not be covered, even in part, by a policy with this exclusion.
  11. Theft without evidence of forced entry is excluded.  One insured had a four-figure vehicle theft loss denied because he left his keys in the car. No such exclusion exists in the “ISO standard” personal auto policy.
  12. Sales tax is not covered under loss settlement.  This cost one “You get the SAME COVERAGE, often for less” insured more than $2,000 out of pocket for sales tax on a replacement auto.

Do you still believe what you’re told on the TV ads that the auto policy you’re getting a quote on is just like every other auto policy in the marketplace?

Accept the Challenge and Dispel the Myth

The differences between auto insurance policies are many, varied and potentially catastrophic. As insurance educator John Eubank, CPCU, ARM, says, “The bitterness of no coverage is remembered long after the sweetness of low price has been forgotten.”

Don’t be sold a bill of goods by TV advertising and consumer articles that state or imply that the only material difference between insurance policies is the price. It is time for insurance professionals to dispel this destructive myth. Innocent consumers experience catastrophic uninsured losses every day because they bought into the illusory proposition that their risk exposures can be identified and addressed cheaply and within 7 ½ to 15 minutes.

Failure to get this message to the consuming public is likely to lead to increasingly stripped-down insurance products that enable competitive pricing. Arm yourself with the information necessary to educate your clients, and bust the myth that insurance is a commodity.

Future Is Bright for P&C Agents

The experts guaranteed that the Baylor and Alabama football teams would win their bowl games after the 2013 season. Both lost. Baylor was favored by a whopping 17 points over Central Florida but lost by 10, while Alabama was favored by 15 over Oklahoma but got crunched by 14. 

Likewise, for decades, the “experts” have been betting against independent insurance agents, yet agents keep winning. Why? The consultants, finance guys and others who populate the skyscrapers on Wall Street discount the power of the local trusted insurance agent who does business on Main Street.

That’s not to say that the recent report from McKinsey on the future of property/casualty insurance agents should be discounted. It raises some very good points about how insurance agents need to evolve to continue to be the distribution channel of choice in the insurance industry.

McKinsey got some things right, some wrong. Let’s start with the latter.

What McKinsey got wrong

— The agent’s role hasn’t changed.

Automation has reduced independent agents' role in underwriting and processing, so insurance companies perceive agents are doing less and should get less commission. But the agent’s role has not changed. The client still needs a local, trusted adviser to explain and recommend the proper insurance coverage. Today, that role is valued even more, with trust in big corporations and the government at all-time lows. Cost-cutting is the easy way to increase short-term profits, and the biggest cost for most insurers is commissions. The McKinsey report gives a short-sighted insurance company executive a reason to lower commissions, but companies that reduce commissions will be following a “fool’s gold” strategy producing short-term gains at the expense of the long-term viability of their agent-based distribution.

— Brand awareness doesn’t translate into customer loyalty.

A talking gecko, the discount double-check, Flo, Mayhem or Farmers University don’t build customer loyalty. They do build customer awareness, so the big insurance companies spend hundreds of millions of dollars on ad campaigns. But being top of mind doesn’t mean the customer will have any loyalty to the company. You can’t create a relationship with a person through advertising. People create relationships–for example, with someone whose son or daughter plays on the same soccer team and attends the same school as the agent's children. The opportunity to establish a relationship is unique to the agency distribution channel. It takes time and effort, but once established the relationship creates strong customer loyalty. That’s why you never see any studies from big consulting firms that ask people whom they trust more – their local agent or the insurance company We all know the answer.

— Independent agents will gain market share as auto insurance becomes commoditized.

I agree with McKinsey that some parts of the auto insurance market are becoming commoditized but disagree with the conclusion that this will hurt independent agents. Because they can offer multiple carriers, independents will still get the sale. They will just place the business with the best-priced carrier. The big losers will be the captive distribution companies, which will be unable to offer their clients choice.

–A multi-channel distribution strategy ends up cannibalizing agent-based distribution. McKinsey argues that insurance companies must balance their investments among multiple distribution platforms. It sounds reasonable, but in reality it means a company must reduce the amount of money it commits to its agency distribution channel to reallocate its resources to contact centers, web portals, advertising and other costs of building a direct consumer platform. Companies that follow this strategy will discover that they traded valuable multi-line customers for single-product consumers with no company loyalty.

Where McKinsey got it right

— Agents must evolve in the way they attract and retain their customers.

Absolutely! The cost of technology is dropping so fast that small and mid-sized agencies can now use tools like social media and data analytics that only large companies could afford a few years ago. Local agents need to be able to engage with their customers in real time. That requires they have a digital media and mobile-compatible platform as well as a social media capability to engage with clients and prospects.

— Agents must be seen as able to handle all of a client’s insurance needs. Product peddlers won’t survive. Agents have to be able to demonstrate the value they add by virtue of their expertise and that their advice can be trusted.

— Agents must understand the customers they are targeting and stay focused on that segment. One size no longer fits all in today’s insurance market. Independent agents need to understand their target market, the attributes of profitable customers, and how to reach and serve them. Just like the big insurance companies use advertising to create a top-of-mind brand, agents today must become top of mind with their customer segment.

Today, we live in a world that is moving so fast and becoming so much more complicated that people need someone they can trust—and work with conveniently when and where they want. Current trends in the insurance marketplace bode well for the local, trusted, independent adviser who represents the interests of her clients. The McKinsey report supports that conclusion.