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Insurance Customers Are Changing, Are You?

You must notice that insurance customers are changing. They have been changing for years now. Technology has played a significant role in this change:

  1. Customers are savvy because they can instantly access more information via the internet.
  2. Customers have a much larger voice than they once did through social networks and other information sharing portals.
  3. Other industries have poured tons of investment dollars into improving customer experiences. Investments on technology including improving back-office systems, customer experience, improved processes, reduced expenses and lowered customer costs. The rise of Amazon and the demise of travel agents are strong signs that customers are adapting to new self-serve technology and want better shopping experiences including better prices.

How does this impact insurance customers and how much has the insurance industry done to “step up”? Consultants McKinsey and Company have summed it up quite succinctly:

Compared with other industries, the insurance industry has not yet structurally addressed operating costs.
“The productivity imperative in insurance” by McKinsey & Company August 2019

McKinsey examined cost efficiency of P&C insurance against the telecommunications, auto and airline industries. They concluded that cost efficiency, expressed as selling, general, and administrative expenses as % of revenue, has improved in every industry except for insurance. The other industries have clearly become more cost efficient since 2009, P&C insurance has seen an overall increase in P&C insurance operating costs, indexed to 2009, of almost 40%.

Why is the dismal performance of the insurance industry such a vital problem? Because customers are changing. Customers have long ranked price as the single biggest factor in their insurance purchasing decision. However, the problem is becoming more acute:

“the price factor…has increased by 54% as a key driver of satisfaction”
-J.D. Power 2020 U.S. Insurance Shopping Study- April 30, 2020
“When consumers shop, price outperforms loyalty” and “50% of Shoppers expect to shop again in the next year. One in five expect to switch carriers when they do shop.”
-Insurance Shopology: The what and why behind consumer insurance shopping behavior – LexisNexis – September, 2019

Given the ability and desire of insurance customers to shop for better deals on insurance, industry stakeholders must make cost control and better pricing for customers a strategic priority.

New industry players including online agents and comparative raters have taken notice. They sell the marketing message of the power of comparison and saving money. That is the sizzle they sell, but is it reality? We studied over 20 such new entrants and have our own conclusion. Firstly, if their website has posted a commission disclosure statement (congrats to those that do), you will find that they all take standard agent commissions. Here is the common wording of those disclosures.

We are typically compensated on a commission basis by the insurance company that is selected for the placement of your insurance policy.

Oddly though, they want to make it seem that customers don’t pay their commissions, the insurance company does. This theme is consistent with one notable exception being far more explicit:

We get paid a commission by insurance companies for each sale. Insurance commissions are already baked into the price of an insurance policy, so you’re not paying any extra for using our service (or any broker’s service for that matter).

Kudos to these guys for being honest, but to suggest that the commission isn’t being paid by the customer? It must be magic! The same online agent offers the best bit of honesty that we have come across to date:

Can we get you a cheaper price for insurance?
No—but neither can anyone else. Insurance rate tables and premiums are filed with and regulated by your state’s department of insurance.

Yes, that is the reality, insurers do file rates and premiums (rules too) that are subject to regulatory approval. However, if you remove retail commissions (averaging approximately 20% per policy), this does make a BIG DIFFERENCE in what customers pay.

Many insurers are considering going to a Direct-to-Customer (D2C). However, if that is something that you are considering, industry statistics show that the savings are significantly less than that. As well, are you sure that is what customers really want? Maybe they still prefer the advice of an independent agent? It is a large technology investment with significant customer acquisition costs. Is the reward worth the risk?

Consider that the industry’s expense ratio has been stuck at 30% forever, and that includes both direct and agency insurers. Today’s customers aren’t going to continue to take that forever.

Insurance industry aggregated results suggest that no one has made serious cost reduction efforts to lower prices. That is one big opportunity missed. If you would like to adopt a D2C strategy without the costs and risks but get the lowest way to deliver your products to new customers contact Awywi and let’s talk.