Nothing seems to scare insurance executives more than insurance industry commoditization. They fear that their companies will be relegated to the status of discounters; peddling bare-bones products at the lowest price with little or no service provided.

These concerns are reinforced by the auto insurance market; where the Berkshire Hathaway subsidiary GEICO had captured 22.81% with aggressive advertising and direct sales by 2015. That made GEICO; which has become one of the most recognized consumer brands in the United States, the second largest auto insurer.

They fear that their companies will be relegated to the status of discounters; peddling bare-bones products at the lowest price with little or no service provided.

Many Property and Casualty (P&C) underwriters are worried by GEICO’s recent forays into the homeowners and renters insurance markets. The company has attempted to use its successful business model of massive advertising buys and aggressive discounting to force its way into those fields.

Insurance Industry Commoditization: Does it always work?

A worrisome example is the United Kingdom where aggregators; online insurance brokers that specialize in price comparison, captured 36% of home insurance sales by 2009, according to Accenture. Aggregators were so successful that they saturated the British market, which forced some of them to turn to costly marketing efforts including television advertising, Accenture reported.

Attempts to introduce the aggregator business model to the United States have not been successful. Alphabet shut down its auto-insurance aggregator Google Compare in March 2016, Insurance Journal reported. One reason Alphabet pulled out was the difficulty in complying with regulations, at the time of its demise Google Compare was only operating in four states.

A more successful form of insurance industry commoditization in the United States has been direct sales in which customers purchase policies directly from an insurer usually via a

  2. file:///C:/Users/jdangjenn/Downloads/Accenture-Coming-To-Terms-With-Aggregators%20(1).pdf

website. Consumers go to the direct sales channel via advertising. This business model has proven enormously profitable for GEICO; which wrote $20.5 billion worth of auto insurance policies in 2014, according to Nerd Wallet.

Therefore it is the direct sales business model pioneered by GEICO but now widely embraced by other insurers; including Allstate, Progressive, and Liberty Mutual, that P&C executives need to worry about most. Would it be possible for an organization like GEICO to capture 22.81% of the US property/casualty market?

Data Shows Property and Casualty might not become commoditized

The same data show insurers some means of surviving commoditization without selling their souls.

Insurance industry commoditization related statistics indicate that the scenario is less likely than you might think. The same data show insurers some means of surviving commoditization without selling their souls. The largest issuer of property and casualty by direct premiums in the United States in 2015 was State Farm which captured 10% of the market with an agency is driven business model, according to the Insurance Information Institute.

Three other companies; Allstate, Berkshire Hathaway and Liberty Mutual, were tied for second with 5.1% of the market each. These companies employ a variety of distribution channels; Allstate operates both agencies and direct sales operations for example.

What is most interesting is that the top 10 companies only controlled 46% of m the market for directly written property/casualty premiums according to the Institute. Only one of those insurers; State Farm, had a double-digit market share and only four had a market share larger than 4%.

Why Agencies and Brokers will Not Go Away

Insurance Industry Commoditization

These statistics indicate that there is a lot of room for specialists and niche players in the property casualty sector. They also show us that the agency model is not going away because of insurance industry commoditization.

Data from McKinsey & Associates about travel agencies support the thesis. McKinsey found that the number of travel agencies in the United States fell from 47,000 in 1995 to 14,000 in 2011, yet the value of airline tickets sold through those companies increased from $1.6 billion in 1995 to $5.8 billion in 2011.

McKinsey’s statistics show that the agency model still works in a commoditized market. One reason why agents’ sales grew so dramatically was that only the larger and more successful institutions were left in the field. Therefore carriers can survive commoditization is by identifying the most successful agents and brokers and develop healthy relationships with them.

One obvious means of achieving this goal is through data analysis. Just monitoring sales volume can be a means of identifying such agents and brokers. Another is to look for those agencies and brokerages that are on top of current trends and technologies.

A New Agency and Brokerage Model

The greatest fear produced by commoditization is that of a generation of consumers who only buy insurance through direct channels. Such concerns relate to Millennials who grew up watching the GEICO Gecko on TV.

The greatest fear produced by commoditization is that of a generation of consumers who only buy insurance through direct channels.

One company that is demonstrating how to compete in the commoditized market; and sell to millennials is Bungalow Insurance.Bungalow; a brokerage created agents Tom Austin and Zachary Stiefler, is pioneering a new sales model allows carriers to compete in a commoditized environment while passing the risks onto others, Insurance Journal reported.

Bungalow uses an approach Austin called “minimalist and simplicity” to sell renters’ insurance to younger people. Its’ sales channel is a bare bones website that asks for basic information. The buying process mimics GEICO’s procedure for selling auto insurance, but policies are underwritten by several companies; including Chubb, Stillwater, Homesite and Travelers, and available in 10 states.

The business model is different from GEICO’s; because it uses a technology called automatic programming interface (API) to connect to carriers systems; and repackage existing products to appeal to millennials. API is an example of a solution carriers can use to work through next generation brokerages. That means Bungalow handles the marketing chores; and takes risks, but the carriers’ premium volume increases.

Bungalow is trying to get around the regulatory barriers that blocked Google Compare by making use of carriers’ compliance with state law. Bungalow updates the agency model for the 21st Century by creating an outside sales channel underwriters can plug into.

Insurance Industry Commoditization

One way Bungalow tries to reach out to renters is to build partnerships with businesses that serve tenants, but do not offer insurance. This can include property management companies, apartment building or mobile home park owners, investors that own rental properties and realtors.

Austin and Stiefler plan to add other property and casualty products including jewelry insurance to Bungalow’s line shortly. Homeowners insurance is another logical product to add to its book.

Technologies like API; and next-generation brokers like Bungalow, provide property and casualty insurers best means of increasing market share in a commoditized environment. Identifying such marketing outlets and establishing strong relationships with them will be one of executives’ most important roles shortly. Having solutions like API in place will make it easier to build such relationships.

Bungalow’s experience and the example of travel agents indicate that the commoditized property and casualty market will be far more diverse than many observers think. That means there will be room for a wide variety of property and casualty providers for the foreseeable future.

Most of the existing P&C carriers will survive insurance industry commoditization, and some of them will thrive in that environment. Those that learn how to work with next-generation markers will be the most successful.