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The Inevitable Destination of Price-Focused Direct Insurance Sales

Author: Bill Wilson 
I recently read an article about “digital insurance stores.” The article made some good points, though this was not one of them:
“Agents need to go beyond their traditional roles as sellers of auto insurance because auto is fast becoming more commoditized.” [emphasis added]
Once again, we’re told that auto insurance is a commodity. In articles (see the “Price Check” article, for example) and webinars, we’ve communicated why auto insurance in particular, and personal lines insurance in general, is not a commodity, nor is it “fast becoming more commoditized.” If anything, the opposite is true. In his paper, “Reevaluating Standardized Insurance Policies,” University of Minnesota Law School professor, Daniel Schwarcz, writes about homeowners insurance:
“The current personal-lines insurance marketplace is largely organized around a myth. That myth is that personal-lines insurance policies are completely uniform. This myth explains regulatory ruled that do nothing to promote insurance contract transparency….”
“Different carriers’ homeowners policies differ radically with respect to numerous important coverage provisions. A substantial majority of these deviations produce decreases in the amount of coverage relative to the presumptive industry standard….”
“If regulators do not act to substantially improve consumer protection in this domain, then it can be expected that coverage will continue to degrade for most carriers, in a modern-day reenactment of the race to the bottom in fire insurance that triggered the first wave of standardized insurance policies….”
Most of the agents I know recognize the demonstrated marketshare threat of direct insurance sales, but don’t fear it. Transparent competition is generally a good thing. Historically, intensified industry competition has, more often than not, resulted in more broadened, innovative products. That’s no longer the case given the lack of transparency in the marketing of direct/online insurance products.
Given a focus almost entirely based on low-price, “painless” marketing by increasingly data-driven, tunnel-visioned and short-sighted financial bean counters, what were likely seeing now is the beginning of a lemming-like stampede over a coverage oblivion cliff. Too many carriers today couldn’t care less about the role their products play in protecting American families from financial ruin…they’ve convinced themselves (and much of America) that what consumers really want and need is fast, cheap and funny and the way to sell that is through lizards with Australian accents and box store clerks who’ll sell you a generic brown paper packaged insurance product at whatever price you tell her.
So-called experts and researchers who likely have never read their own auto policies and almost certainly have never compared two or more policies tell us that car insurance is a commodity where the best deal is the cheapest price that can be quoted in 2 minutes (yes, one market implies that they can ascertain your unique exposures and quote you the right product in 2 minutes, not 15, 7.5, or 5). They tout the efficiencies of the internet as the marketing channel that can bring even greater riches to insurers, as they predict the imminent demise of ignorant, unhip Baby Boomer insurance agents who foolishly believe that consumers need consultation and advocacy. Note, too, that virtually all of these research reports focus on the advantages to the insurance company, with almost complete disregard to the obvious disadvantages to the American consumer.
But let’s say they’re right, that the internet provides efficiencies that traditional marketing and sales channels cannot compete with. When all you can offer is “fast and cheap,” at some point you can’t provide that product any faster or cheaper. You’ve become as efficient as you possibly can be. So, when price is your only value proposition, what do you do at this point when you can’t cut the expense ratio any closer? Presumably, you’d look to, by far, the biggest component of premium – losses and loss adjustment expenses. So, how do you reduce that 75-80% or more premium component in order to continue to compete on price?
One way would be to actually return to underwriting. But you can’t do that when you’re quoting in 2 minutes. So, what does that leave? Reducing coverage and/or becoming more restrictive in claims handling practices. After all, who will know? Everyone agrees that “car insurance” is a commodity, so no one is considering what the policy actually covers or doesn’t cover. Until claim time. And, on average, that’s only once every 7 years or so. So, again, no one much will notice…other than the families who lose just about everything they own because they bought an inferior product.
As Mr. Schwarcz opines, that’s exactly where the industry is headed in auto insurance unless agents make their case to the consuming public about the value of consultative selling and claims advocacy. And unless regulators return to carefully vetting the products they approve for the marketplace to ensure that they do not leave unreasonable, potentially catastrophic coverage gaps for insureds and that they reasonably protect the public from becoming victims to overly restrictive policy exclusions and limitations.
Last Updated:  April 22, 2015
July 2015 Update:
I was recently perusing reader comments on an Insurance Journal article and came across this one:
“I have also noticed that over the past few years, we have seen many more uninsured motorist or underinsured motorist claims than I have seen in my more than 50 years in this business.From that fact, I have guessed that many drivers have been sold a policy based only on price and not on coverage.”
This is an astute observation. When we read about large numbers of UM drivers, we automatically think of drivers without insurance or possibly inadequate limits, while it’s quite/more likely that they have an exclusion-riddled low-cost (allegedly) policy. Most states define a UM vehicle to include one with insurance but the insurer rightfully denies the claim based on a lack of liability coverage under the policy. What is being approved for the marketplace today by regulators is often shameful. The products that some insurers sell are equally shameful.
The primary reason for auto liability, compulsory insurance laws, and minimum financial responsibility limits is to protect the general public from negligent drivers. But when stripped-down coverage policies are allowed into the marketplace in a competitive pricing frenzy, the primary purpose of liability coverage is thrown to the wind.
Here’s a recent example that could be (and probably is in many other instances) worse:
Here is another article that questions where we’re headed as an industry and the implications for consumers:
Is it time regulators started regulating minimum policy coverages?
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