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Is Insurance a Commodity?  Should It Be Sold That Way?

Author: VU Faculty

We recently read an article in a national training magazine that, in the course of making a point about sales training, used "insurance" as an example of a commodity sale. Do you agree with that? Is "insurance" a commodity? Do you sell it that way? Should it be sold that way? How do your insureds and prospects view it? In this article, we'll explore some of these issues.

 

In the July 2002 issue of Training Magazine, there is an article that includes the following comment (emphasis added):

"But for things that come in relatively standard forms and well-known formats, such as commodity selling (insurance, automobiles, mortgages, etc.), the emphasis is as much on the personality and credibility of the salesperson, as the advantages of the product. Ergo, personality reading, best-foot forward, overcoming objections, or power-statement, construction-type training has an allure. The goal of commodity selling is to sell the salesperson. The goal of technical selling is to sell the product."

The initial response was one of indignity...contrary to the belief of everyone not in the insurance business, "insurance" is NOT a commodity. Buying an auto policy is not like buying a can opener, and putting together an insurance package for a contractor is not like purchasing a mortgage. (Incidentally, take a few minutes to read the entire article...the points made, particularly about sales training, are thought provoking.)

We suspect the author, when thinking about "insurance" is most likely thinking about something like term life where one could argue that the policies being sold are largely commodity products. "Insurance" is more than a policy...it is an often complex process that requires the proper matching of product and risk management techniques to exposures that, themselves, are not always easy to discern.

In addition, a critical component of the insurance "product" is the financial stability of the company, its customer and/or claims service, and its general ability to meet its future obligations in delivering the "product." These considerations are too often neglected by insureds who view insurance as a commodity, and too often suffer as a result of having made a decision based solely on price.

However, even if one concedes that "insurance" is not a commodity, is that not how we usually sell it? How often does the sales process revolve around the issue of price rather than product/service? This issue, as presented in the July 2002 raining Magazine article, was submitted to our faculty and below are their observations. We're interested in yours too, so if you have thoughts to add to the discussion, email them to Bill.Wilson@iiaba.net and we'll post them below.

Faculty response....
Basically he's right about selling insurance. The product may not be a commodity, but the sale often is. One reason is, at given levels, the salesperson is rarely offering a much different product than the competition. Call it packaging (BOP), forms standardization, state regulations, and coverage requirements (WC), or just the prolonged soft market, there's very little product differentiation out there. Just because a product itself is complex (biochemistry of the human body) doesn't mean the sale is complicated (eat right, exercise).

Faculty response....
I think I have an article or two on this subject on my website. I have another article on this subject in the works. Scott Adams (Dilbert) said something interesting recently to the effect of, "Soon all companies will be selling one of two things: technology or confusion." In other words, if it is not technology, we'll be selling confusion so that the consumer does not realize we are all selling the same product.

Is insurance inherently a commodity? No, because the product is not universally the same. A commodity is something that is universally the same regardless of whomever is selling it, such as gold, silver, or wheat. However, it is often sold as if all competitors are selling the same product. As I write in my next A&B column, this is partially or largely due to the lemon effect. When people buy a used car, they do not know if it will be a lemon or not. Therefore, they pay more for lousy cars than they should and less for the best used cars than they should.

The same goes for insurance. Because the differences between insurance companies, insurance agencies, and insurance products are subtle and complex, salespeople neglect to explain those differences. That results in consumers not knowing that differences exist, so they often pay more for less than desirable coverages, more for less than desirable company stability, and more for less than desirable agency services. Conversely, they are not willing to pay more for good coverages from good companies from good agencies because they do not know enough to tell the differences...so they end up paying an average price.

Therefore, if we are to best serve our clients, we will not sell insurance as a commodity. My clients that do not sell insurance as a commodity are incredibly more successful. They have revenues per person often 50% greater than their peers, their E&O exposure is significantly less, and their customers are much better served.

Faculty response....
I'm an expert witness on a case now that will make case law if we are successful. Our claim is that there is little if any Personal Goodwill (vs. Business Goodwill) in an insurance agency because, while the SALE of insurance is certainly based in the experience, expertise, sales ability, and personality of the producer, the maintenance of the product is primarily that of a commodity product.

As long as the agency treats the account well, and the product and the price are competitive in the industry, the accounts will stay. If the accounts are not treated well, or if the product or price competitiveness deteriorates sufficiently, the account will tend to leave if solicited by an agent with better products and prices (and the promise of excellent service after the sale).

Faculty response....
I read the article and actually could not disagree with the basic premise that insurance is a commodity. However, one claim can make a believer out of almost anyone that it is important who you buy from.

There is no doubt that personal lines in almost all categories is a commodity. You cannot drive a car without insurance, you cannot have a mortgage without insurance, and does it matter where it comes from? Or the cost? Not usually.

In my experience of working in a consulting capacity with insurance agencies over the last 20 years, most believe they sell and retain clients with customer service. This couldn't be further from the truth. If it was, some agencies couldn't keep a client through the first renewal based on what they practice as far as service goes. In the long run, price is a very deciding factor.

So you don't have the best price, but you are nice, charming, a great person to know, well I guess that would factor into the buying decision. And, you can even answer a question or two about the coverage you want me to buy from you. That's a plus.

I also hear from agencies countrywide that they have built their agency on referrals. There is no question that this is true, but the majority have not been proactive referrals, rather an "Oh, by the way, who is your insurance agent?" kind of question. Now don't get me wrong, some insurance buyers really do have a good idea of what they want, how much they should pay, and who they want to buy from.

Is it a commodity? I think so. Can I buy from someone I like and trust?
Absolutely. Is it rocket science? No!

The most successful sales people I see in our industry are either great
relationship builders or technical gurus. They are the ones with a following
and who are making a lot of money. The rest fall somewhere in between,
scrambling for orders without even offering a biggie size or a fried apple pie with them.

Faculty response....
My view of this is that much of the issue is a red herring, cul-de-sac, and angels-on-pinhead diversion. Training isn't a product, it's a solution (as is insurance when managed properly). The article author alludes to the results as a measure, but I think both industries (training and insurance) suffer from a form of ethnocentricity that ignores the reputations they've developed as a result: we talk about what we have available rather than listen to what the needs really are and present solutions.

I am not taking the time to make this facile and glib, but simply want to promote an alternative view that we should not be answering the "what have you got" question if asked, or proposing "here's what we have" when someone mentions a performance or risk need.

Faculty response....
While the insurance sales process has a great deal to do with building trust in the individual and/or agency, other salespersons of commodities don't have to live with the legal ramifications of unmet expectations quite like the insurance agent, and here is the big difference. How does a successful mortgage sale result in a lawsuit later against the mortgage company? When did a business ever have to file bankruptcy because their grain purchased didn't turn out to be all they'd hoped?

Insurance sales people have to sell themselves, all the while differentiating their product, not just from the competition, but from the customer's past experiences and future expectations.

Faculty response....
Haven't we made it a commodity in the way in which we have sold insurance for the past 15 years? The only thing that we have based our sale on is price. Product differentiation, product quality are not mentioned. I will pay more for a Lexus than I will for a Ford because I have at least been made to think that it is a better product. We have made things commodities, but even BOPs are different...we just don't learn those differences until the attorney attacks us for the uninsured loss. I believe that we have made buyers believe that insurance is a commodity because we sold it that way. All we have do in look in the mirror if we wish to see the person who is to blame for the circumstance we find ourselves in.


Do you have an opinion? If so, email your opinions to Bill.Wilson@iiaba.net and we'll post them here:

Subscriber Response....
First, we need to define commodity. Merriam-Webster says that it is a "mass produced unspecialized product." Then we need to specify perceptions. If taken from the perception of the average insurance purchaser, insurance is indeed a commodity. For the most part, the average insured thinks that all insurance is the same and we have unintentionally reinforced that idea by standardizing our forms and making them "E-Z read" to allow the average consumer to think that he can actually understand what he's reading. We've also done a poor job of educating the public as to how an insurance policy is constructed.

A half-educated insurance professional knows that every policy is an aggregation of different forms which, when put together, make up an extremely hard to understand contract that promises to do certain things. Different insurance companies have the option of adding or omitting certain forms that can change the obligations in the contract. Therefore, what may on the surface look like a mass produced product (contract) can actually be a very specialized, specifically worded document. And, if it's specialized, it cannot be considered a commodity.

By not requiring a higher level of training and education to sell insurance, the insurance industry as a whole has encouraged the notion of their products as commodities. The more uneducated agent will seek to convince the buyer that it's all the same and should be purchased based solely on price (and to some extent on the agent's standing as a "good ol' boy," "friend of the family," etc.). And so long as a claim doesn't occur that's not covered, the insured is convinced that the uneducated agent is right.

There are numerous instances where insureds buy coverage based solely on price, only to suffer a loss which is not covered, but could have been covered if only they'd paid a little more. That's why E&O carriers exist.

The underlying problem is greed. Greed is the reason companies try to cut costs by selling their product over the internet or over the phone. Greed is the reason some agents will sell a stripped down product which doesn't provide the best coverage for the insured's needs. Greed is the reason an insured will buy the cheapest policy. Greed is human nature so long as the average consumer is unaware of the consequences of his greed.

The answer is education. We, as (relatively) knowledgeable agents, have the responsibility to educate the insurance buying public one at a time as they come in to talk to us. But so long as there's somebody on the next corner who has a modicum of credibility and the same license I've got, and will sell a lesser product for a lower price, we're going to lose. And, holding the moral high ground in this situation doesn't put food on the table.

When all's said and done, what we've got here is a damned if you do, damned if you don't situation. As long as we're paid a percentage of the premium commission, some agents are going to do whatever is required to put food on the table. The solution may be fee based compensation, but I'm not so sure about that either. This one's a real can of worms.

Subscriber Response....
I may have a unique perspective on this whole commodity vs. professional thing. My wife has been a travel agent for 30+ years and her industry was ahead of the insurance industry in many things (from computers to agent commission cuts to no commissions at all for airline tickets now.)

She has shared with me some absolute horror stories about people who buy tickets "online" and got stuck with tickets and schedules they didn't want or re-routed to places that took the really long way around getting there, etc.

She now issues tickets only if the customer also books some other commission-paying arrangement with her and she charges a $30 fee per ticket for doing it. Why do many people still want her to do this, in spite of the extra fees she has to charge to do it? Well, she deals with the high end traveler who is used to paying for service, but getting it all done for them at one place. Some people still value the service and convenience she offers. Also, she backs what she does with experience and the ability to make changes that many of the cheapie ticket vendors online cannot or will not do without selling another ticket. They won't refund most of their bargain fares.

Will insurance come down to this some day? I don't know for sure. Insurance deals with legal contracts. Many people feel they can read a contract and decide for themselves if it is good enough for them. The more educated the person, to a point, the more they feel they can make those decisions. However there are many people out there who have made claims and seen first hand what an agency can do for them in a close case as their advocate.

There are also those out there who like the professional advisor checking on rates and contracts and the financial strength of companies...before an offer to sell a policy is ever made to them. They perceive that insurance is not a commodity and that not all policies are alike because of the differences in companies and clout the agent brings to the table.

But, alas, there are still many more who have had good service and claims handled adequately by the company, or the price seems reasonable to them with a connection direct to a company without us independent agents. Even though, in recent years, we independent agents have regained a slight edge in personal lines, there is still a lot of personal lines bought virtually without an agent (except the order taker kind who talks a big game on the phone and mails out the application to the client hoping the price will reel 'em in.) and who will continue to do so.

So can we predict anything yet? Well, if the insurance agency system parallels the travel industry, hang on to your wallet. The next round of mergers and bankruptcies in the insurance industry (many have predicted we are just a few short months away from some of those...do you believe it?) may see many companies unilaterally cutting commissions and eventually doing away with commissions for certain lines. But I seriously don't think it will happen.

I think the insurance product, to the average person in this country is far more complex and legalistic for many consumers to want to take on the real challenge of understanding what it is all about. Granted, there will always be those who buy only for the lowest price. They will scream the loudest when they get stung. The great majority of buyers will want to have an agent who they can call up and talk with about coverages and companies and claims and their particular policies. Will it be one of us independent types? Well...that is the big question. It depends on whether or not we are diligent in establishing and keeping our relationships solid with our customers. We'll need to do a better job than we have done in the past to overcome some of our own servicing mistakes.

Do we independents know how? Of course, but do we have the will to apply that knowledge for the reward of making a 15% commission on a $400 homeowners policy and a $1,200 auto policy? Well...no, there is the rub. Most of us are being attracted once again into the commercial arena where the commissions per account are much higher, where the rate increases in the past year alone have added 15% or even 25% extra commission to our bottom line. We all know that personal lines comissions sustain an agency through the commercial lines slumps and that commercial lines really bring on those excess profits in the rare year when prices are up and losses are actually moderate or even down.

Each agent will have to decide what he or she wants. Some consumers have decided they want a cheaper price. Many of the independent agents are content to let them suffer at the hands of their own desires. There is green grass on both sides of the fence. No sense in breaking it down to get to it.

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