Carriers Want Loyalty but Haven't Earned It

Intermediaries will emerge that will shop automatically for insurance for customers on an hourly, daily or weekly basis. |

Marty Ellingsworth

May 8, 2014

Informed risk-taking is what insurance underwriting is all about. It is also how consumers and business owners navigate every financial decision every day -- including whether to stick with their insurance carrier. Insurers often mistake in-force retention for “customer loyalty,” when the reality may be that a customer is actively shopping for better value. You cannot stop customers from shopping; you can only benefit from the fact that they want to learn more about where their money goes. The cost of insurance is top of mind to customers, and they are now intensely seeking to lower their insurance expenses, mostly via direct channel distribution over the Internet and via telephonic access to agents. Information drives decision making (data and analytics combined with underwriting judgment) in a process where accurate risk assessment, coupled with knowledge of expenses, lets an insurer add a profit factor to get to a market price. If the insurer’s cost structure and risk-taking appetite meet successfully with customers’ needs, then it should grow profitably. If not, then it either grows at a loss or only writes those risks in niches where it find itself competitive (either by choice or by happenstance). The need to drive down costs is the primary reason to adopt Internet and mobile-computing applications for distribution -- you can follow the consumers' own expense-minded shopping behavior as they are now accessing multiple on-line resources and then either buying online or contacting an agent (often with a mobile device). Insurance customers see thousands of their dollars disappear to protect them from financial ruin -- a “lesser of two evils” trade-off. No wonder they want to avoid spending more time and money than necessary. The traditional, intermediated marketplace for insurance keeps customers from caring which “big box” carrier provides their coverage -- whether for auto, home, business or life -- as long as the institution can pay any claims. In survey after survey, few customers even know who actually insures them. They only know that they are insured because they pay premiums. Given customers’ agnosticism about who underwrites their risk, and given the state of communications and transaction technology, insurers need to be prepared for changes in how insurance is distributed. Behavioral economics have shown repeatedly that customers shop, give their time and personal data, and then cease shopping for a period while covered under a policy. But we can expect the emergence of intermediaries who can shop for a customer on an hourly, daily, weekly, monthly basis for the cost of the customer opting in for a free service (data and receiving cost-saving promotions is the only fee). That intermediary will then auction the right to provide coverage into a competitive landscape of carriers looking for customers vs. customers accepting off-the-shelf products. With an active market and modern bill pay options, the new term of duration may be significantly less than a six-month auto policy, and now underwriters can more accurately price usage-based insurance (UBI) in real time. Carriers have not proven themselves yet worthy of real loyalty -- where the consumer won't toss them aside in return for 15% less in premium. Perhaps carriers will never be able to win that kind of loyalty, if insurance is truly a commoditized transaction simply waiting for progress to catch up. But if carriers aggressively push the best risk-assessment techniques to their current customers and prospects, then they may be able to win genuine customer loyalty by demonstrating that they are attuned to their customer’s individuated risk.