The way we buy and sell insurance is inefficient, arcane, and antiquated.
It should come as no surprise to anyone that marketplaces for insurance are a mess. Let’s set aside for a moment the quagmire of the health insurance market and focus on property and casualty (P&C) insurance, (a.k.a., “hazard insurance” to the mortgage industry). P&C insurance is easier terrain but also complex enough that it makes for a good independent model for health. P&C is also where we have our knowledge and experience at Comparity.
It’s practically impossible to shop online for home insurance without help. We know because we’ve been working for 3 years at Comparity making it easier for people shop for home insurance on their own. Shopping for home insurance should be like any other online shopping experience today. Instead, buyers are still expected to call phone numbers from billboards and cars wrapped with the giant faces of insurance agents. Insurance carriers pour billions of dollars annually into ridiculous ad campaigns, mostly for auto insurance, in what is effectively a dredge-net acquisition strategy. (Mass consumer advertising is indiscriminate, while insurance underwriting is not.) Insurance agents also spend a billion dollars each year buying oversold contact leads. Agencies tend to buy their leads from the same, limited sources. Where different agencies use different lead channels, the same individual contact information tends to flow through all of them. Conversion is abysmal. No one likes it, yet it persists.
Anyone should be able to go online, provide some relevant information, get a host of comparable options, and “click to buy” whenever ready. We might need some help with our purchasing decision because home hazard insurance is complicated. We might want to shop now and buy later with an online shopping cart. But at no time do we want to call a phone number from a roadside billboard or the side of a car, nor do we want to fill out multiple applications, nor speak to multiple insurance agents simultaneously trying to win us over, nor give our contact info up to marketers who sell it over and over again.
So why can’t we shop for home insurance like we want? The good news is we can, now. The reason we haven’t been able is because no one has been incentivized to make it happen. No one was focused on it. Much capital investment has been and is directed at new models of insurance, like “peer-to-peer”, “just-in-time”, and “per use”. Further resources and attention are trained on emerging technologies like drones, telematics, and blockchain. Whatever the direction of investment, distribution is a small piece of the insurance industry. And yet the affect of distribution on the insurance industry is profound.
How else could one explain the billions spent through 20th century distribution channels for what is essentially an algorithm of matching risk holders with risk takers?
Companies that have waded into the space of online comparison shopping for insurance quickly found themselves in a race to the bottom through commoditization of the product (auto insurance). The market is flush with companies that use the internet, public data, and software to lure shoppers through contact lead generators. The net result is purely extracted value with little contributed by some companies active in the marketplace. Google and their partners in Google Compare seemed the only group showing leadership and innovation in the space. They weren’t really shopping the market, however. It was something like a Google shopping experience to the buyer but only one or two sellers behind the scenes. Ultimately it was lead generation funneled to a couple of super-regional independent agencies with their own (limited) carrier appointments. The initiative ended. Companies partnered with Compare went from everywhere to invisible over night. We have more thoughts about why it didn’t work but it is a long topic on its own.
We must look at insurance distribution in a totally new way to get it right for the 21st century. There are a multitude of forces at work in the marketplace. There are comparative rating and agency management system vendors that touch, process, transform, buy, sell, trade, and otherwise influence the flow of data from application to quote.
It might surprise everyone but carriers and their agents to learn that there is direct competition between carriers and their agents. If a carrier can acquire a new customer through direct marketing and their web site or call center they will forgo an agent. We watched our agency partners for multiple carriers get lower commissions in 2015 and 2016, for example. People, representing a variety of self-interests, think quite reasonably that we are witnessing the decline and demise of insurance agents. Agency owners tell us they often wonder about it. Every investor we ever spoke with either asked or asserted that agents’ time has come to an end. It’s still being debated and only time will tell. No doubt, agents and agencies will consolidate and decline in number, due to technology. Writing agents off anytime soon, however is a mistake. GEICO, a company that traditionally used call centers and not agents, added local agents in 2015 and 2016. At best the situation is murky and agents are a strong constituency.
Even if carriers could eliminate all agents (and their commissions), how will carriers get customers without an evolutionary change in the marketplace? Will the insurance companies dump even more billions into the dredge model of mass media advertising and quirky mascots? Will insurance carriers spend big bucks mining big data, including social media to hyper-target customers online? What would that arms race look like? Will carriers buy customers through mergers and acquisitions that ultimately concentrate risk?
Healthy competition comes into the market, not through attention grabbing and sales capture, but through competitive bidding on a given set of risk factors.
We assert that the entire insurance industry has lost sight of how the marketplace should function. Insurance distribution is a crowded mish-mosh of middlemen where there should be proxies. Choosing insurance shouldn’t be about brand awareness and market capture. Choosing insurance should be about matching risk holders with risk takers based on ability of both parties to mitigate risk. To compound matters, the industry has not kept up with technology. At Comparity we still receive PDF scans of dot matrix printouts from national brand carriers! Back-end systems used by agents and carriers can range in backward dependency from Internet Explorer 9 to green screen terminal.
To re-imagine an optimal marketplace for insurance we have to strip it down to its bare essentials before we add things back. Essentially this about connecting buyers and sellers who, despite any amount of automation, are people who need to communicate.
Property owners are the people shopping for and buying property and casualty insurance. Practically speaking, buyers are given, perhaps unlike any other marketplace. Because of home and auto loans, property insurance is a required product for nearly everyone who has it. No matter what anyone thinks Millennials want, homes with mortgages will be insured by home hazard insurance for the foreseeable future. While mortgage insurance exists, it’s not a valued product in the marketplace for several reasons we need not get into here.
Insurance carriers are the people selling property and casualty insurance. Because the nature of insurance is distributed risk, it’s inherently in everyone’s best interest to have many, many insurance carriers in the market. Robust competition comes into the market, not through attention grabbing and sales capture, but through competitive bidding on a given set of risk factors.
A better marketplace for insurance is one in which every buyer can easily, anonymously apply for insurance with every carrier and compare results, while every carrier can determine risk for every buyer without a middleman. Many-to-many exchanges, however, are far from optimal when it comes to insurance. It’s impractical for shoppers to complete separate applications for each carrier. Carriers don’t represent quotes in the same way. Ultimately, it’s hard for shoppers to assimilate and compare quotes.
At minimum proxies are needed for both insurance applications and insurance quotes. Standards are one way to address things and standards do exist for insurance data. But no buyer today ever receives two or more quotes that look the same, a fact unlikely to change in the future. De facto, standards are presently irrelevant to quote presentation and comparison. That’s fine. We can do this without standards, for now.
A proxy insurance application simply allows anyone to complete one application that can be transported to any carrier. A proxy insurance quote lets any carrier present quotes however they choose while enabling quotes to be assimilated into side-by-side, “apples-to-apples” comparisons with other quotes from other carriers.
Given these proxies and a machine for processing them, all insurance buyers and sellers can access the entire marketplace efficiently and simultaneously while independently controlling the way in which they are presented to and accessible by one another.
We have an hypothesis at Comparity that each carrier’s underwriting defines their market. We don’t doubt that multiple carriers want to insure the same customers and must therefore compete. But competition should be based largely on the product, an insurance policy and the people who will service it. That requires buyers’ ability to compare. We also don’t discount that distribution of insurance risk is important to a robust insurance market and ever-changing risk frequently changes the competition. By extension, we think that the function of the insurance marketplace is to optimally match property owners with insurance carriers based on underwriting.
Insurance distribution is match making.
Match making is not brokering.
Even in the age of Tinder and e-Harmony, most of us don’t want, need, or use a dedicated person to help us find a companion. We don’t need that with insurance either. More specifically:
- People who need insurance don’t need other people to sell to them or broker for them in order to find a best policy
- People who provide insurance don’t need to pay their agents or third parties to reach customers they want insure
- People who need insurance should be able to easily compare as many policies as they wish while maintaining complete control over the decision to choose any one policy
- People who provide insurance should not have to pay contact lead fees for the potential to acquire a customer
Insurance agents don’t vanish in this new marketplace. Because of technology in general, fewer insurance agents can service greater numbers of policy holders. But agents still play a vital role in insurance through front line underwriting, long-term policy service, retention, and local knowledge. No matter how shoppers arrive at a policy, they almost always want to speak with a someone, and not just anyone – a licensed insurance professional.
This is all possible with open, anonymous system through which buyers privately declare their specific needs for insurance to all carriers and carriers freely and easily quote or pass on any buyer without upfront cost of acquisition. Such a system enables buyers to shop and compare insurance online in the manner to which they are accustomed to shopping for anything else. The same system, without modification, affords insurance carriers and their agents the ability to cost-effectively connect with any shopper according to the carrier’s underwriting and best available policy.