Insurance Marketing - Changing Focus (1,584 words)
by Don Jackson
The date: Nov. 10, 1999. The time: 16:52 Eastern Standard Time. The headline: "Allstate Announces New Business Approach Including Direct and Internet Sales."
Now in the world of insurance marketing, and insurance direct marketing specifically, this qualifies as a momentous strategic initiative. After all, Allstate Corp. is the nation's largest publicly held personal lines insurance company. With the exception of State Farm Mutual Insurance Co., it writes more property and casualty (P&C) business than any other company in the United States.
Allstate is number two, and apparently it is going to "try harder."
"Try harder" to capture an increased share of market from arch rival number one—State Farm. Sort of reminds one of the Hertz-Avis rivalry.
Allstate's move to a multiple distribution channel strategy began early in 1999. Historically the company has distributed its products through 15,600 captive agents. Next it added an independent agent initiative (State Farm's primary distribution channel) by acquiring CNA Personal Lines. And now it is adding direct to its distribution channel strategy. (Keep in mind, the Internet is a medium, not a distribution channel.)
Also, the company has supported its agents with a terrific direct mail lead generation system, "Prime," for more than a decade.
Allstate is positioning itself for the 21st century world of consumer demand by delivering products and services the way the consumer wants them delivered, when the consumer wants them delivered at a price the consumer wants to pay. This is a significant business change for the insurance industry.
Here's the thing:
In response to Allstate's forward-looking strategy, State Farm Mutual reaffirmed its total commitment to its old business model, and the independent agent distribution channel. After all, why change the way you're doing business just because consumers want you to change?
What Does Allstate's Strategy Really Mean?
Here's what it means: a significant expansion in market share for P&C companies following the insurance direct marketing concept by providing auto insurance to consumers.
In 1997, these companies achieved a 13.5 percent share of the $109 billion personal auto market. In 1998, companies following the insurance direct marketing concept added almost 1.5 points to their share of the personal auto market, gaining approximately 15 percent of an estimated $110 billion market.
To put this in perspective, in 1990 eight companies were selling directly to the auto insurance consumer: GEICO, USAA, Colonial Penn Insurance, Worldwide, AIG, National General, Amica Mutual and The Hartford.
By 1997, 27 companies were doing so. In 1998, five more companies started up: The total is now 32. And in 1999, there was a net of two more start-ups added to that total, making it 34 companies offering auto insurance directly to American consumers.
In 1999, Great American purchased Providian P&C (the old Worldwide) from Aegon. Reliance Direct was bought by Kemper Direct. And Farmers Direct suspended operations. Net net to this saga is the fact that there has been a more than 300 percent increase in companies using the mail-order distribution channel in the last nine years!
Now that is good news.
But it is only one segment of the almost $1.2 trillion insurance industry, the estimated amount of money collected by the insurance business, excluding special risk dollars, in 1999.
Based on 1997 numbers, the share of market by functional segment looks something like this:
In business-to-business and business-to-consumer insurance sectors, insurance direct marketing accounts for a 6 percent share of market. But, and a big "but" it is, less than three years ago the market share was 4 percent. That is a 2 percentage point increase in just three years.
The news gets better and better.
"Trend" is Even Better
The overall dollar growth of the total insurance market is a relatively slack 1.5 percent to 3 percent a year, depending on the sector. But the growth of the direct marketing share of that market is a robust, double-digit average, 14 percent annually.
In 1997, companies following the insurance direct marketing concept generated $72.2 billion in revenue. In 1998, that number increased to $84.4 billion and at the end of 1999 revenue growth reached $95.5 billion. At the present rate of growth, companies following the insurance direct marketing concept will exceed $110 billion in revenue by year-end 2000.
That's a mouth-watering trend.
Share of Market and Share of Mind
It seems apparent that to succeed in the years ahead, there are three strategic issues every insurance company must face:
• Success requires an end-user focus. These are the consumers of your products and services who pay the bills.
• You must understand the buying behaviors of your customers and prospects, and you must seek to favorably modify those behaviors.
• It is critical to link understanding customer needs with financial performance.
Now one P&C company has "gotten it" big time. Understanding how the business works has made dramatic growth possible for GEICO, which recently signed its four millionth customer.
In a speech given at the 1999 Auto Insurance Reports National Conference in Boston, Vincent J. Dowling, senior analyst at Dowling & Partners, focused on a philosophy that most insurers mired in statutory accounting haven't yet grasped.
Dowling quoted Warren Buffet from the 1998 annual report of Berkshire Hathaway, which acquired a majority interest in GEICO in 1996. Buffet writes:
The direct writing of insurance—that is, without there being an agent of broker between the insurer and its policyholder—involves a substantial front-end investment. First-year business is therefore unprofitable in a major way.
At GEICO, we do not wish this cost to deter our associates from the aggressive pursuit of new business—which, as it renews, will deliver significant profits.
In 1995, the year before the Berkshire acquisition, GEICO spent $33 million on advertising. In 1998, it spent $143 million. In 1999, it spent an estimated $190 million.
The point? Buffet continues:
There is no limit to what Berkshire is willing to invest in GEICO's new-business activity, so long as we can concurrently build the infrastructure the company needs to properly serve its policyholders. Because of the first-year costs, companies that are concerned about quarterly or annual earnings would shy away from similar investments, no matter how intelligent these might be in terms of building long-term value. Our calculus is different: We simply measure whether we are creating more than a dollar of value per dollar spent—and if that calculation is favorable, the more dollars we spend the happier I am.
Here are a couple of points for you to ponder:
• Warren Buffet comes from outside the insurance industry!
• He understands customer lifetime value!
• Buffet delivers his shareholders higher value than most insurance operations!
• Warren Buffet has deep pockets!
Buffet, in fact represents a significant threat to the insurance industry—the same type of threat represented by General Electric's Jack Welch.
Buffet is in the process of brand-building. Welch is leveraging brand. In a sense both have become the next generation of insurance direct marketing pioneers.
And the future?
Proliferation and Technology
Insurance industry change is being driven by non-insurance leaders—not uncommon for change agents.
Nonetheless, there are two dominant themes governing the future of insurance direct marketing over the next five years: proliferation and technology.
First, technology. The challenges and the opportunities represented by the Internet are, to say the least, profound. And especially so for the insurance direct marketing community.
Today there are only four companies able to accept applications, bind or pay policies and issue over the 'Net. There is a host of others who are capable of using integrated fulfillment to accomplish these tasks: the integration of the Web site, the telephone, e-mail and direct mail.
There is even a greater number who provide "brochureware" or portal access to quotes for everything from business coverage to auto insurance to life policies to health protection.
But keep in mind those three strategic imperatives:
First, the Internet is a medium for carrying your messages to customers and prospective customers. It cannot stand alone. It requires integration and interactivity—everything from media to process.
Truth be told, the technology is evolving so rapidly it is hard to know exactly what business models will emerge. But it is safe to say that new business models will emerge more frequently than at any time in the past.
Second, to the swift go the spoils. Companies able to adapt and adopt these new models fast and first will achieve an enviable competitive advantage.
Now, the notion of proliferation.
More than 340 insurance companies are using elements of the insurance direct marketing concept today.
That is a 100 percent increase since 1995!
As non-insurance organizations and leaders embrace the ideas of measurement, customer relationship management, database and data mining, the number of companies following the concept will surely increase.
Creating value is what it's all about— for customers, prospects, shareholders and employees.
And that is exactly what the insurance direct marketing concept is all about.
You can see why it is indeed a most wonderful time. If the concept can capture Allstate, those insurance companies choosing to survive will follow.
Don Jackson is chairman of the Jackson Consulting Group, Ltd, in Middletown, DE, and chairman of The Bermuda Executive Workshops in Insurance Direct Marketing. He can be reached at (302) 378-0218 or by e-mail at firstname.lastname@example.org.
This article is based on updated excerpts from Jackson's book "Insurance Direct Marketing 1999: A Special Report on the Companies, the Practices, the Standards and the Benchmarks." Ordering information about the entire report is available at www.jcg-ltd.com.