February 19, 2018
Unfair Perception of Insurance
by Chris Burand
Insurance is perceived as a commodity, but it is not. Those who "sell price" do a disservice to the industry, to themselves and to customers.
The definition of a commodity, per Investopedia is:
“The basic idea is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer. A barrel of oil is basically the same product, regardless of the producer. By contrast, for electronics merchandise, the quality and features of a given product may be completely different depending on the producer. Some traditional examples of commodities include grains, gold, beef, oil and natural gas. More recently, the definition has expanded to include financial products, such as foreign currencies and indexes. Technological advances have also led to new types of commodities being exchanged in the marketplace. For example, cell phone minutes and bandwidth.”
West Texas oil of x grade is West Texas oil of x grade. It does not matter what hole in the ground it comes from. The market values it the same. Red Russian wheat is Red Russian wheat. It does not matter what farmer grew it. The market values it the same. When the market values something the same, regardless of who grows it, drills it, makes it or services it, that “something” is a commodity. Sometimes the product is truly indistinguishable, such as the oil and wheat examples.
Sometimes. though, differences exist, but the buyer does not recognize the differences and therefore treats something as a commodity that really is not. The seller knows, or should know, the difference. The seller can then take advantage of the buyer by selling a product/service of less quality than the buyer imagines at the commodity price. Or, the seller will sell a higher-quality product at the commodity price and lose money or at least waste money because no one is paying for the extra quality because the buyer does not realize the higher quality exists.
In these situations, a perceived commodity exists, not a real commodity. The difference is important. Insurance is a perceived commodity, not typically a real commodity (a few exceptions exist). As a result, quite often, people buy lower-quality insurance policies because they think all policies are commodities, so why spend any extra? If they were correct, then their logic would be right. However, they are getting taken advantage of because they are comparing a lower-quality product at a lower price with a higher-quality product at a higher price and not seeing the difference in quality. Where they get suckered a second time is the seller of the lower-quality product prices the policy higher than actually necessary but materially less than the higher-quality policy. The insured thinks he is getting a good deal when he is not, the higher-quality provider loses a sale and the lower-priced seller makes extraordinary profits.
See also: Insurance Is NOT a Commodity!
Any reader thinking this is not happening clearly does not live in the real sales world. An entire economic analysis of this circumstance was described in detail in 1980 by an economist named Dr. Shapiro, and we’re seeing it played out before our eyes every day. The only winners are the entities selling low quality.
The reasons insurance is a perceived commodity rather than a real commodity are:
- Insurance is complex. All one has to do is read a policy to understand that it is complex. Then add the elements of service and claims, and how no one publishes quality claims data relative to which carriers provide the best claims service, and one understands why consumers’ eyes glaze over.
- Most consumers do not want to buy insurance, even if it was simple, so asking them to invest time and energy into determining which product is quality by learning something so complex as insurance when they do not even want to buy it is asking for far too much.
- Let’s be honest, most producers and customer service represenatives (CSRs) do not truly understand many insurance coverages, either. I have been teaching coverages, auditing agencies for E&O, answering email questions from agencies regarding coverages and so forth for 30 years. I am amazed at how little quite a few producers and CSRs do know.
If sellers cannot explain insurance, they default to selling insurance as a commodity. Typically we refer to this as “selling price,” but it is really defaulting to selling insurance as a commodity because the only differentiation with a real commodity is price. Such actions reinforce to the public that insurance is a commodity. At the very least, producers should selfishly avoid selling insurance as a commodity because, bluntly, insurance companies and the public do not need to pay 15% commission to sell a commodity. To sell price is to tell the market you are worthless.
The industry now has new players, insurtech or disrupters as they’ve become known. Many have no insurance background and therefore no pretense they know anything about insurance. They do not pretend that insurance is special. They see insurance as a commodity. Many industry veterans cannot stand the thought of obvious “know-nothings” selling insurance, but at least when they admit they know nothing I admire them for being honest. Quite a few people in the industry who have decades of experience do not know much either but will not admit it. These particular new players are simply making ignorance transparent.
When ignorance is transparent, price also becomes more transparent, and this is what the public, who sees insurance as a commodity, wants. They want transparency. If they see insurance as a commodity, they certainly do not want pricing obscured by an agent, who pretends to know something, when he does not, making an extra 15%, which means the public may pay an extra 15% that is truly a waste. Truly, the industry should not be upset if the result is to eliminate the waste incurred spending 15% on agents who are incompetent.
The catch, as Dr. Shapiro described back in 1980, is what happens to the producer who truly knows what she is doing, brings true value to the consumer and is worth 15%? What happens to the insurance company who truly has far better coverages or far better claims service? These entities bring important value to all of society, and they are being squeezed. Here are some of my suggestions:
- Actually know coverages. Actually learn business income. Actually learn ordinance and law. Actually learn at least what questions to ask around cyber. Actually even learn the differences in homeowners policies.
- Then learn how to discuss coverages with clients. Knowing coverages and knowing how to communicate coverages are two different things. This is work and a craft. Learn your craft well.
- Hire a marketing firm/publicity firm to explain for you your knowledge and ability to communicate.
- Package the insurance policy with services. Insurance policies in and of themselves do not deign a premium of 15% commission any more. The 15% is for the package of services the agency provides, the experience the agency creates at sales, renewal and claim.
See also: Insurance is Not a Commodity? Hmmm
I work with a handful of clients that have truly built their culture around these features and others. They do not have the problem of selling commodity insurance that most agencies have, and their organic growth rates prove it. Study after study has shown that, regardless of the industry, building expertise, communication skills and a consumer experience around the sale is absolutely the only way to counter, even thrive, in a world where consumers perceive a product to be a commodity when, in reality, it is not.