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Distribution Channels All About Choices

Robert Regis Hyle | April 23, 2014

The world of commerce has flipped upside down over the last decade. No longer do consumers wait for the doors to open. Today, the customer tells the businesses how they want to purchase products and when they want to buy them. As those options increase, even the staid old insurance industry must eventually take notice.

“Customers are going to demand choice in the channel they want to operate, whether it is research, buying or servicing,” says Denise Garth, partner and chief digital officer for Strategy Meets Action. “Whatever the situation is they want choice. They may want to go to an aggregator for research and possibly purchase, but they also may want an agent to help them in servicing or handling a claim. Insurers, if they want to maintain customer relationships, have to be able to provide choice.”

While developing a UBI product for DTRIC, Scott Mackey, vice president and chief underwriting officer, traveled to Europe to see what insurers were doing there, particularly in the UK, and learned the importance of aggregators in that insurance market.

“If you think about the independent agency system and the old comparative rater approach, Google bought an aggregator and what they are doing is front-end sales; not so much service after the fact,” he says. “If you can imagine Google Plus reviews or Amazon reviews next to your different insurance company pricing on a comparative rater screen, it’s almost a Yelp-type thing. That kind of stuff is scary.”

Mackey believes Amazon and Google’s data collection abilities along with the data inputted to get the quote would be a great aggregation of data.

“I don’t know if those companies want to get on the agent’s side, but if I was going to pick a company to do it, it would be Intuit,” says Mackey. “Why couldn’t they be doing auto insurance or business insurance? You have Hiscox out there selling direct. If I was Intuit, I would be eye-balling that one.”

Chad Hersh, a managing director in the insurance practice with Novarica, points out some insurance carriers and retail businesses have already displayed an appetite for working with retailers outside the world of insurance, citing MetLife and Walmart as an example. The life insurer set up kiosks in the retail giant’s Big Box stores and others are beginning to think along the same lines.

“You look at the breadth of services and the partnerships has entered into over the years, and Google when they bought an insurance brokerage in the UK. That gives a hint as to what they are capable of doing,” says Hersh.

Hersh points out many large retail and technology companies have capital that they need to put to work and certainly enough that they could start down the insurance path and see what they think of it.

“They certainly could partner because they have massive distribution channels,” he says. “I definitely would argue there is a lot of opportunity—whether it is white labeling or outright partnering. MetLife and Walmart is probably the first of many.”

Hersh believes there are potential partners for whatever market an insurer is interested in exploring, such as Walmart for under-insured customers; Costco or Sam’s for the small business market; or Amazon for not only the affluent market, where they have tremendous market penetration, but the web market as well, where they already are a dominant performer.

Amazon would have the ability to cross-sell financial services products to an existing client base, which Hersh believes would be a huge differentiator along with the technology they have in place.

“Imagine you search for a book on Amazon on life insurance or one on having your first baby,” he says. “What a great opportunity to market life insurance. Someone researches new cars on Google; what a great opportunity to offer auto insurance.”

Mackey feels it is time for insurers to get lean because that is what retail sites and consumers are going to demand.

“This is like Levis in the 1980s losing sales to Walmart because they didn’t have the supply chain to get their product into all of Walmart’s stores,” he says. “It’s Schwinn with their standalone stores and Huffy out-selling them at Walmart. You have to build to be in this place and think about that as your products grow. Is your front end flexible enough to meet these demands?”

Regulatory Concerns

The options consumers are seeing in other industries have not reached the insurance industry yet, in part because of the regulatory nature of the industry. Regulators have been the protector of the U.S. market because individual states still control that aspect of the industry, but that’s not the case in other geographies where they can introduce products and deal more with financial regulations around capital and customer privacy. For example, Garth points out that UBI has been around for most of the 21st century, but it’s still not approved in all 50 states.

“Is that in the best interest of customers?” she asks. “It limits their choices. Regulation is driven by industries and products; it’s not driven by customers. As companies become more adept at meeting the customer, I think customers will demand changes in regulations that make it easier for them to get access to products.”

Another example involves Obamacare. There are now healthcare exchanges in every state as well as on a national level, points out Garth.

“As issues are worked out and people become more comfortable they are going to wonder why they can’t do that for auto or property insurance,” she says. That will open the door because if customer experience is positive over the next few years pressure and demand will be placed to offer that for other products and services.”

If the new Federal Insurance Office turns into what some national carriers are hoping for—file once and be done for 50 states—that will likely have a negative impact on the midtier and smaller insurance companies, according to Mackey.

“If you imagine Progressive rolling out a product and it is legal everywhere, that’s huge,” he says. “Regulatory filings take a huge amount of effort. The other side is the whole argument is the one benefit for state regulations is it creates an environment where the small regionals and mutual players put a lot of capacity into the American market. It’s redundant capacity, but it’s huge. When AIG was on the ropes people were saying to let them go (out of business) because the industry still had the capacity. The sad part is can the small groups like NAMIC lobby like the multi-nationals?”

Steps for Insurers

Hersh believes insurers need to take two key steps to prepare for changes in the market. The first is modernizing to be ready for either of the two branches the next step can take.

“Modernizing is critical so that whether they want to partner or be competitive, they can be able to offer better ability to serve the customer, whether that is the agent or the policyholder,” he says. “That’s not only on the front end, but also on the back end. You can’t have 24-hour delays due to batch processing. You need product names to be stored, not as codes but as readable names people can understand.”

Hersh adds that like many homeowners he struggles with the declarations page on his homeowners’ policy.

“I have no idea what my coverage is,” he says. “That’s not something you are going to buy at Walmart. The easiest way to prevent problems is be competitive in a way that makes others not want to enter that space. If you look at what banks did with online banking. They made it to where some of the online only banks didn’t have much of an advantage and that sort of nipped that in the bud. Insurance companies haven’t done that yet.”

Hersh maintains there are few people, other than customers of direct writers, who would say their insurance company has a strong web presence.

“You have to offer good customer experience that doesn’t invite competition,” he says.

The second option for insurers involves partnering.

“If you look at Homesite and what they did with GEICO and Progressive, there’s no reason they couldn’t do that with any retail outlet—online or in a store,” says Hersh. “It’s almost transparent that they are the ones offering the product. If they proactively partner to fill a retail void, it is a disincentive for non-insurers to jump into that arena.”

Who’s Worried?

Mackey believes someone entering the insurance market would need to build a front end system that would be easily accessible like the old comparative raters and if a Google or an Amazon were to put a store online, virtually every insurer would want its product to be displayed there.

“The direct writers are going to be OK with such competition, but the challenge is going to be for the regional and mutual insurers,” says Mackey. “Would they view it as abandoning the independent agency system or somehow funnel the business back to the agents.”

As usual, Hersh believes it is the midtier insurers that should be worrying the most because the big insurers have better brand recognition among consumers.

“The midtier rely more on agents to push their name out there or price competitiveness, so if you have a Google, an Amazon, a Walmart or a Costco, you are going to lose the price advantage by skipping the agent/broker channel,” says Hersh. “There are a number of factors working against the midtier.”

Hersh feels American insurers might eventually see something happening similar to what Google did in the UK as a model: become a brokerage.

“What’s the best way to make money in insurance? Don’t sell insurance,” says Hersh. “That’s what we are seeing with Google in the UK.”

Mackey believes such involvement by retailers would make like difficult for insurers, particularly those that sell commodity-type products such as personal auto and the BOP for small business.

“At the end of the day, Progressive and GEICO can write with a loss ratio in the 70s and still make money,” he says. “Ameriprise can make money at 80 because they have so defined their niche and just focus all their technology on taking all the baggage out of buying insurance. Then you look at an independent agency system that is sitting on 10- to 12-percent commission rates, that’s a lot of money.”

Mackey maintains there is going to be some kind of hybrid system, whether it is consolidation of regionals or the abandonment of small risks.

“I’m a big fan of the independent agent system, but it’s going to take a lot of automation for [midtier insurers] to play in this market, which may mean more consolidation,” he says. “I can see a model where if Google is selling it maybe if you want an agent you choose to pay an extra 10 points, or something like that. Then you get to decide if you want to do it online or with a local agent you can talk to and for that there is a charge, kind of like the travel industry. Then the challenge for the agent is to define your value.”

Marketing Concerns

The technology in terms of marketing is one thing, but the ability to develop real front-end systems that customers can and want to use compared to what insurers are dealing with because of back-end legacy systems is mind-boggling, explains Hersh.

“There is a different customer service mentality,” he says. “You look at the average ranking of customer experience with Amazon and compare that to an insurer and figure out how different that could look. “

The biggest problem insurers have as an industry is carriers can’t break down the silos. Retailers and other technology companies look at business differently.

“They look at it as a product defined by data with a price that is basically one big algorithm,” says Mackey. “All the other stuff is ancillary.”

Mackey doesn’t believe outside businesses will get in the insurance business because at the end of the day insurers have to pay claims, which means they need a claims operation.

“We are not building widgets,” he says. “Could an Amazon or Google contract with some big TPA and define that? I don’t know if that would be worth it for them. I think they would like the upfront transaction. If they want to brand it themselves or if they just wanted to be the aggregator, they collect all the data up front and the customer checks the company they want. There would be a bunch of reviews just like you would be buying shoes.”

Through the research conducted by SMA, Garth believes the next generation insurer will be fueled by innovation. A 2010 survey identified where insurers were in regards to innovation and the percentage was pretty low, but 2013 was a breakthrough year for insurance with 87 percent of insurers reporting they had had some form of innovation underway and 20 percent indicating they have a strong innovation culture.

“Some people say innovation, some say R&D and others call it strategy or process re-engineering,” says Garth. “Some companies are averse to calling it innovation. The key, though, is 20 percent have the culture in place.”

It is one thing to say you want to do all these interesting new things, but Garth points out insurance is so ingrained with legacy systems, processes, business models, assumptions of what the industry is about, how to operate the business, and the revenue and business models.

“You need a culture that embraces the idea of innovation—seeking new ideas, committing resources, researching, trying things, and being willing to fail,” she says. “You have to be able to say there might not be an initial ROI so you have to be willing to take that risk. That is the piece insurers have to focus on the most in order to be successful. For Google, that’s in their DNA.”

Hersh maintains the reason insurers don’t offer more complicated products online is because they haven’t figured out how to crack what he calls “the education nut.”

“It’s not just education, but suitability,” he says. “A real technology company would leverage the power of the web in different ways to allow for that. Video products, education, virtual agents, gamification to see if suitability is there. You have to prove a product is the right product for people and you could turn that into a quiz to do that. Illustrations could be done quite nicely.”

As an example, Hersh points to, a life insurance software solution out of New Zealand.

“It has a slick front end that is designed to be consumer friendly. I can envision something like this to really move up-market with third parties,” he says. “For example, they do online term life, a cancer product, mortgage, funeral expense. It can be done, it’s just a matter of doing it well. I think it is fair to say that small commercial business could absolutely be sold (online), whether through a dedicated agency or a kiosk in a place like Sam’s where a lot of small business people do their shopping. There is a tremendous amount of room for that.”

Closer Than You Think

Mackey believes with the Google venture in the UK, American insurers shouldn’t discount any possibilities. What may trouble those from outside the insurance industry, though, is the fragmentation within insurance, particularly at the state level with 50 different regulators.

Another issue is where insurers would want to do business. Do they want to sell insurance in every state in the country, or concentrate on large population centers?

“In the metro areas there are higher prices for an auto insurance book,” says Mackey. “I would think the Amazons and Googles would do well in marketing to the metro areas. They understand those areas. That’s also where the higher insurance premiums are.”

Rather than feel threatened, Garth maintains insurers should embrace the challenges before them.

“Instead of being threatened insurers should embrace the fact Google is doing interesting things around insurance,” she says. “How can we leverage that and re-think our business model to serve our clients. The implications for insurance can be far reaching, but what is interesting is that Google has such a commitment to innovation and I think that commitment and that mission and vision of constant innovation—not to do something a little bit better, but a lot better—is something the insurance industry needs to step back and think about.”

Google went from a search engine to having a vision on innovation that would make technology universally acceptable, explains Garth. Once Google headed in that direction new things started to pop.

“The insurance industry continues to embrace our legacy of managing risk and paying claims,” she says. “Could we do something that provides more value? Could we be more innovative? That’s what we can take from Google.”

Google is so customer focused on enhancing and changing people’s lives, adds Garth, while insurance has been focused on products.

“It’s a flip for us,” she says. “Some companies are transitioning better than others, but some don’t know who their customer is—the agent or the policyholder. It’s an age-old discussion we’ve had in this industry.”

The Outsiders

Google is one example but Garth feels there are others. She explains the premise around a major multinational insurer that bought out a start-up insurer. The start-up was focused on a specific market segment that aligned with the major provider in the market and they saw the opportunity to deepen customer relationships.

“I think we are going to see these kinds of things that are driven around the customer or a specific market segment with acquisitions that drive into specific areas so insurers can deepen relationships with customers—all the things they’ve always tried to achieve,” says Garth. “That is going to create challenges for insurers across all lines of business. There is a potential for specialized niche insurers backed by outside organizations that know the market and see insurance as a complement to owning the customer.”



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