Layne Burns is the VP, Insurance Partnerships at myCOI, delivering the new industry standard in third-party compliance. Layne was interviewed by Michael Fiedel, a Managing Director at InsurTech Ohio and Co-Founder at PolicyFly, Inc.
Layne, why do you believe a focus on selling insurance products falls short of identifying value for the customer?
“When it comes to property and casualty lines, the majority of insurance products are sold as individual pieces. The products themselves still must be independently and individually profitable to support the product, the staff that manages that product and all of the administrative costs - from development, to underwriting, to agent compensation. It's very much siloed across the products. This separation then bleeds into the distribution and sales models, dictating how agents and brokers are paid, as well as how they sell it and, ultimately, how buyers buy. Even when products are bundled for savings, the new bundled price is typically a discount that's given primarily because of the savings gained through the acquisition costs.
The accepted cost to gain a new P&C customer is anywhere from seven to nine times the cost of selling to an existing customer. That could mean anywhere from $500 on the direct side, up through an agency or an independent model where you may be paying $1000 for a new customer. Looking at this high price of acquisition, coupled with the low margin of P&C products, which ranges from 3% to 8%, you can see why carriers are quick to offer low prices for bundled products.
The reaction is, ‘I'm getting this new product sold to an existing customer, and selling to an existing customer could be five hundred to a thousand dollars cheaper for me. It's worth my while to discount that product.’
So bundling, in effect, is an instant savings for the carrier on acquisition that's then passed on to the buyer. It's not a savings on the risk that's covered by the products. It has nothing to do with the product itself. It's all about the marketing and the acquisition of it. Overall, it's done for a good reason - to ensure that the viability of the carrier is there. It helps them meet the promises they've made to their policyholders when there's a claim - which is the primary reason the customer is buying insurance. But, let’s be clear, the greater value is for the carrier with the buyer’s value being secondary.
I question whether there’s a better way to structure products or product portfolios that work together to offer greater value to the average, individual consumer. This happens regularly in the financial services/investments space, where products are used together to achieve an overall desired outcome. It also happens in the commercial insurance space where buyers are often counseled using the risk appetite spectrum: Different product solutions are presented, many times at varying risk levels, with the purpose of keeping the total cost of risk (TCOR) at an acceptable level, while increasing the overall protection.
For example, I may be in an industry where I can afford a higher deductible on my commercial general liability policy because the frequency and severity are low. I can use that freed-up premium to purchase a new cyber policy. Overall, I have increased my risk coverage and better protected myself for the same overall cost. Or, maybe it isn’t an additional product that I need, and instead, I use the saved premium to better manage and track my insurance compliance and close gaps that exist with third-party contractors, vendors or suppliers. A service like myCOI can eliminate risk and increase your protection. In either case, my total cost of risk did not change, but my protection increased.
But, when it comes to the average, individual buyer, very few get this type of counsel from their agent. The primary reason being because there’s no money in it.”
If the insurance industry can get this right, what impact will it have on the customer experience?
“The impact can be fairly great. Let's face it, nobody likes buying insurance. On the individual consumer side, when it comes to basic products like auto and home, we buy them because we have to. It's mandated by state law or by our mortgage provider.
An NAIC (National Association of Insurance Commissioners) survey recently found that only a third of people believe they have a good understanding of their insurance policies. You're buying it because you're forced to, but you don't really understand what you're buying. Over the weekend, I read a separate survey that said about half of consumers believe that they have the right amount of homeowner's insurance based upon the value of their home when they purchased it. But, most experts will recommend that coverage should be based on the value to rebuild your home, especially in the environment right now where the building costs have gone up dramatically. The value of your home at the time you purchased it may be a very small number compared to what it would cost to rebuild your home today.
I don't say any of this to say the insurance industry is bad, or say what it should be doing. I think the insurance industry is very good and can be extremely beneficial, especially in the most challenging times. It's just that P&C at this individual consumer level is very transactional, and it usually involves just two products - home and auto. Consumers are buying based on price, acquisition costs are high and margins are suppressed, so money has to be made off of volume. There just isn't enough time and profit for agents to spend the time to educate their insureds like they may be able to do in the commercial space. Most agents in this space are only educated on these two products to begin with. Being able to take a more holistic view across the total cost of risk for an individual consumer isn't viable. In my opinion, this is a miss.
If a similar total cost of risk strategy could be implemented for the average individual consumer, making insurance truly customer-centric, then the overall customer experience will increase for the better. I would submit that the company who does this effectively will be well positioned to succeed as well - whether that’s an agency or a carrier.”
In terms of agencies as well as brokers, how do they address this focus or opportunity to focus on value when training both their new and existing talent pool?
“There's at least one company out there that focuses on total cost of risk for the average individual, but in no way would I consider this a mainstream practice. To do this would require an expansion of knowledge on the part of the agents and brokers. It may require them to get additional licenses, so they can offer and sell additional products. They need to be more familiar with the risk-appetite spectrum for the individual consumer, and they need to be able and willing to spend additional time and counsel with their clients and insureds to help them better understand their individual situations. It really comes down to a relationship-type sales opportunity for those agencies. They will need to think more about a portfolio of products for their clients and understand how those products can work together for the overall good of the consumer.
Let's go back to the homeowner statistic. If I should increase my policy limits to cover a rebuild, that's likely going to increase my premium. So, now you're telling me I need to pay more when I may not be willing or able to do so. But, if I'm driving an older car, or I could afford to cover more of a deductible, could I reduce my auto premium to cover the cost of the increase in my homeowner's premium? Can additional products to my portfolio, like a whole-life policy, or debt consolidation strategy, increase the likelihood of a neutral TCOR, while increasing protection?
This does make personal lines P&C insurance less transactional. Yes, it requires more time to be spent with a consumer who may just be looking for the lowest price on auto insurance. But, being able to look at these situations in a more holistic view offers benefits to both sides that could be substantial. In an economic environment where we are seeing less for more, this changes the experience for the consumer - more for the same. Satisfaction levels increase, more products are offered and acquisition and retention rates trend upward.”
Can you envision any further fundamental changes in how insurance is packaged and sold that could stem from a deeper focus on value instead of price alone?
“It comes down to the overall satisfaction and what happens when you can sell a portfolio of products versus just a single product at a time. Success can come from agencies developing and building their own portfolios for their clients. Although, I believe it's best accomplished when carriers that offer products across multiple lines do more to align their products for a portfolio strategy.
On the carrier side, we've been talking about total cost of risk for the consumer, but there's also a total cost of risk for the carrier. A portfolio of products could help with the total cost of risk at the carrier level, especially if you're able to dial up and down deductibles on those products by offering premium pricing based upon the total cost of risk to the carrier on the portfolio versus the individual profitability of separate products.
The same argument can be made regarding the profitability of a portfolio at carrier level. The difference in retention rate on one policy to five policies increases from 60% to 90%. Customer satisfaction increases, more products are sold and retention increases. Now, as a carrier, you've got additional savings from retention and additional savings in acquisition costs by offering multiple products to the same consumer. This leads us back to our conversation on acquisition costs at the top of the interview. The benefits across all three minds, from consumer to agent to carrier, can be very significant.”
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