Less than stimulating results over the last several years have left many people wondering whether growth and profits are incompatible in the insurance industry. It is clear from even a cursory look at the stock performance of publicly traded property and casualty (P&C) companies that Wall Street has already answered this question in the affirmative. The returns on equity being realized by most major P&C companies have been entrenched in the poor single digits, and the price-to-earnings ratios of most publicly traded P&C stocks are abominable. Wall Street clearly views the sector as a "no-go zone" for investors expecting anything other than paltry returns for several years to come.
But is this fair, and is the industry to blame for its continuing under-performance and the disappointment of Wall Street analysts who seem to think that returning excess funds to shareholders might be the most sensible strategy? Perhaps a better question is: Can insurance companies with lots of under-utilized capital find better ways to create long-term shareholder value going forward? There certainly isn't an easy answer, but in the personal lines insurance marketplace, there are some great opportunities on the horizon for those companies prepared to recognize them early enough.
Contrary to what many industry analysts are saying, we are betting at our company that growth and improved profits can be realized by companies that are not afraid to recognize two fundamental realities: The personal lines insurance industry is dysfunctional in the way that it operates today; and emerging technologies offer many exciting ways to extract new efficiencies and enhanced margins as almost every point in the product cycle is inevitably re-engineered.
Today, onlookers see a personal lines industry that makes little sense. They see a massive $150 billion segment that is totally fragmented--thousands of companies compete so that most will end up with less than 1% of the market in any particular product area. They marvel at prices that vary wildly from company to company for substantially similar risks. Many wonder why companies even try to create their own internal operational efficiencies when they have insufficient critical mass to really achieve them. Industrywide standardization of point-of-sale processes still seems years away, and evidence of buying on brand is difficult to find at the consumer level (though some companies' heavy advertising spending contradicts that fact). All in all, it might seem difficult to see a commercial opportunity in this, but we see a giant one.
Consumers will embrace the Internet as a means of buying personal lines insurance and in doing so will be dislocated from their existing insurance carriers in very large numbers over the next five years. This dislocation will create tremendous opportunity for those companies that have adapted themselves in anticipation of attracting this shifting customer.
Marketplace in transition
The personal lines industry is in the early stages of a dramatic transition that will see major shifts in distribution and delivery of product. Direct writers are finding it harder (and far more expensive) to find and retain customers, and captive and independent agency writers are grappling with the attraction of competing distribution channels. Customer buying habits are evolving, as technological and generational changes have given consumers a desire for an unprecedented amount of information, control and independence.
The financial services industry--along with corporate America as a whole--is rapidly moving toward intensified customer relationship management (CRM). A company that has successfully sold one financial instrument to a customer now wants to be able to offer other popular financial products. Galvanizing that customer relationship against penetration by another provider of those core products is paramount. Personal lines insurance (as well as some more commoditized commercial products) is high on the list of essential products for these companies to include in their offering. Companies can aggregate a large amount of useful personal data about an individual by selling automobile and personal property insurance, and virtually every consumer must have one or both of these products.
New distributors are entering the marketplace as a result of legislative changes or because technology has allowed them to do so efficiently for the first time. As was mentioned above, a greater selection of financial products is already being offered by more vertical financial services providers, such as retail banks. In addition, power retailers, car manufacturers, and mortgage and car loan originators are only a few of those that are increasingly making inroads into the personal lines insurance marketplace. In short, any company with strong ties or a close affinity to its customers is exploring opportunities for new product offerings. Most will experiment in the personal lines arena either through acquisition, building internal infrastructures or by partnering with enablers.
These signs of transition are either a very serious concern or a great opportunity, depending on where you sit in this industry. The fact that consumers are already able to shop for and buy their auto insurance online at some of their favorite vendors means that industry players will be forced to react sooner than they might think. After all, how many insurance companies would make it onto most consumers' favorite vendor list? We are firm in our belief that these new insurance distributors will soon include affinity and alumni clubs, church groups, employers, credit card issuers and who knows, gas stations?
Though these new distributors may be a threat to those companies entrenched in the traditional sales mindset, there is a very good opportunity for growth for those companies that, through the use of the Internet and technology, partner with these vendors to meet the demands of their transitioning customers. A particularly good opportunity exists for insurance agents, who for years have been the product aggregators of the industry. Thanks to the emergence of a new breed of technology enablers, agents can offer a potent multi-carrier online solution to the new product distributors whose focus is to serve a large cross-section of their existing customer base.
What will this mean to insurers, and how will they respond? There is no doubt that the Internet will ultimately make product pricing more transparent to the consumer, which will result in the demise of the polar nature of current pricing structures. This is generally viewed as a good development for consumers and as a bad thing for the insurance industry. The only important reality is that it is an inevitable thing and, therefore, will be a very bad thing for those companies that don't prepare themselves for increased commoditization. Those that are already preparing will have the best chance to embed themselves and their products into solid affinity-type customer relationships where insurance is not the only reason to remain with the provider. It will be these early movers that will stand the best chance of actually desensitizing the personal lines price equation at a time when other providers are in the price war of their lives.
Incumbent insurers should be concerned. If there is any doubt as to whether customers will benefit from moving their insurance from their current insurer, surveys show that consumers who haven't shopped their insurance for several years are on average paying two to three hundred dollars too much for their car insurance. A significant number of these customers will become dislocated by the ubiquity and quality of online insurance offerings. While conveniently banking, shopping, or even reading the daily newspaper online, they will repeatedly be presented with an easy and quick way of pricing and buying a new policy over the Internet. A significant portion of current profits is being generated by these very customers, and this can only mean that an incumbent insurer's bottom line could get badly hurt by any major exodus.
The antidote to the eventual commoditization of personal lines insurance is more proactive use of technology today in order to benefit from a higher margin and more efficient emerging distribution opportunities. By using new technologies to truly re-engineer processes so as to totally streamline the sales, delivery and servicing of personal insurance products, the collective margins available to traditional channel constituents can be enhanced greatly.
Today the capability exists to completely automate the personal lines sales process (customers can fill out an application online, get a selection of quotes to choose from, and instantly purchase a policy); expert underwriting can be pushed to the point of sale (computer-driven exception underwriting); policy issuance can be streamlined (customer prints out policy and dec page, which is electronically shared with agent and carrier); and customer service is simplified (after buying a policy, insureds then can access and make changes to their policy online). Consider the impact on expenses as the sales-underwriting-issuance-service cycle becomes entirely automated and interactive. And this does not include any allowance for improved efficiencies that will become possible through new technology and consolidation in the claims adjusting area over the next few years.
Companies and agencies that adapt to the changing marketplace--and take advantage of the efficiencies offered by new technology enablers as alternative channels emerge--will succeed in creating growth and profitability in the short term. They will be able to access a viable and low-cost way to sell personal lines insurance to a huge population of transitioning customers. Although emerging technologies will probably do little in the short term about market fragmentation (and may actually exacerbate the problem by attracting new entrants), the efficiencies realized by the early adopters will make them increasingly dominant over time. *
The author
Kieran A. Sweeney is president and CEO of YouZoom, Inc., a San Diego-based Internet solutions provider for independent agents and brokers. YouZoom is creating a nationwide network of agent/broker Web sites where consumers can receive multiple auto and home insurance quotes, instantly bind coverage, and then access account information over the Internet. Agents are encouraged to use this technology to form partnerships with other businesses seeking to enhance their online offerings. For more information, visit the YouZoom Web site (www.youzoom.com.)