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Tom Schori DBA Millennium Marketing Research®, 808 Ironwood, Normal IL 61761, 309-532-8466

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Insurance industry: Immune to the 'Wheel of Retailing?'

By Thomas R. Schori, Ph.D., and Michael L. Garee, Principals,  Millennium Marketing Research, 808 E. Ironwood, Normal, IL 61761-5239. Tel. 309-532-8466 -

Having spent quite a few years in the insurance industry, we’ve observed a rather interesting phenomenon. Those within the insurance industry believe their industry to be unique and, consequently, they contend, that which applies to other industries simply doesn’t apply to insurance. But guess what? Quite to the contrary, that which applies to other industries also generally applies to insurance. The Wheel of Retailing is a case in point.

But just what is the Wheel of Retailing? Simply put, it is a cycle, in retailing, which repeats itself again and again. It works like this:

• A new form of retailing is introduced;
• The new form operates more cost-efficiently than does the prevailing form of retailing;
• By being more cost-efficient, the new form is able to offer goods at lower prices, and thus, attract customers away from the older form of retailing;
• As the new form prospers, its creators begin to think about "upgrading" their facilities, adding more products, adding staff, and myriad other things that cause them to operate less cost efficiently;
• The consequence of these additions, of course, is higher prices to the consumer;
• These higher prices, then, open the door for some innovative, more cost-efficient, for of retailing; and
• The Wheel of Retailing continues its merry journey with one new form of retailing after another, each of which gradually replaces its predecessor.

Generally, discussions of the Wheel of Retailing involve examples from the restaurant industry, e.g., "Mom & Pop" restaurants giving way to fast-food restaurants, etc., or the consumer retail industry, e.g., traditional department stores giving way to discounters such as Wal-Mart, K-Mart, etc. Our discussion will be confined to insurance sold to individuals, i.e., "retail" customers. The insurance Wheel of Retailing progression looks like this:

• Independent agency insurance companies;
• Mono-line exclusive agency insurance companies;
• Multi-line exclusive agency insurance companies;
• Direct writer insurance companies; and yet to come,
• Cyber insurance companies.

Except for the last one, cyber insurance companies, each of these forms of insurance distribution has come to the forefront as an innovative, more cost-efficient, form of distributing insurance to the market and, gradually, commenced to replace its immediate predecessor. As Montgomery Ward remained hopeful of returning to its days of glory for more than a half century, so, too, do each of these forms of distribution dream of their days of glory. But, like Montgomery Ward, it probably will be to no avail.

Independent agency insurance companies. A concept as old as dirt. Distribute one’s products through independent agents, an approach known as the American Agency System. Here, independent agents claim that, because they represent a variety of companies, they can shop around and get the consumer the very best price. Hear that. Price! Best price. The fact of the matter is, though, in reality they usually can’t get the consumer the very best price. The reason they can’t is simple. To acquire business, each company they represent must have many, many agents under contract. In any given year, some agents place little, or no, business with a given insurer. Yet each insurer must cover the costs associated with having many more agents under contract than they would need if each of the agents placed all their business with a particular company. Guess what that means? The consumer pays with higher prices.

Those higher prices provided the opportunity for an innovative, more cost-efficient, means of distributing insurance to the consumer. And that’s what breathed life into mono-line, exclusive agency insurance companies, proving that the Wheel of Retailing is alive and well in the insurance industry.

Mono-line exclusive agency insurance companies. The cost-efficiencies that put this form of distribution in such good stead is the result of the fact that the only agents with whom a company will contract are ones who will place every piece of business they produce with that one company. Consequently, the company:

• Need not train agents who will place business with other companies;
• Need not attempt to persuade agents to place more of the business they produce with the company; and
• Need not provide logistical support for agents who don’t place all their business with the company.

Each of these "need nots" constitutes a cost savings for the company. And, as a result of these cost savings, the insurer can offer less costly insurance to the market. Of course, people don’t buy just one line of insurance (i.e., they don’t just buy property-casualty insurance or life-health insurance), they buy both types. As a result, the agents generate less business than would the case if they were able to sell both property-casualty and life-health insurance. Naturally, this opened the door for an innovative, more cost-efficient, competitor. Enter the new competitor: the multi-line exclusive agency insurance company.

Multi-line exclusive agency insurance companies. Like every other innovative, more cost-efficient player that has been put in place to compete with an earlier form of retailing, the multi-line exclusive agency companies have come on like gang-busters, taking the wind out of the sails of their less cost-effective counterparts. But the truth is, they’re not nearly as competitive as they could be. The fact of the matter is, what the insurance industry considers multi-line insurers really are nothing more than property-casualty companies doing a modicum of life-health business. Take State Farm, for example. They’re usually cited as the epitome of what constitutes a multi-line company. While admittedly, they’ve been very effective in taking business away from insurers that employ early forms of distribution, they actually have sadly little life-health business. To put that in prospective, they have somewhere in the neighborhood of 20 million customers. Those customers buy some 2.8 million individual life insurance policies each and every year. But, unfortunately for State Farm, those 20 million customers probably purchase no more than 15% of those life policies from State Farm! Truly a multi-line insurance company? We think not. But they could be if they were merely to ask their customers what they seek and then make sure they deliver it! Talk about a simple concept.

Because their agents don’t tap into customers’ total insurance needs, these multi-line exclusive agency insurance companies have higher expenses than need be the case, and as a result, must charge their customers accordingly. This, naturally, opens the door for some innovative, more cost-effective, form of distribution. Enter the direct writers.

Direct writer insurance companies. Like all its predecessors, this means of distribution was able to come on strong by offering insurance products more cheaply than existing forms. They were able to do so for one simple reason. By being more cost-efficient than their Cro-Magnon competitors (independent agency insurers), their competitors from the Middle Ages (mono-line exclusive agency insurers), and their frontiersmen competitors (multi-line exclusive agency insurers), they were able to grab share. Not a lot of share, but just enough to worry their immediate predecessors into thinking that the key to keeping their dominance of the industry lies in becoming more cost-efficient. Neat trick¾ convincing your competitors that the key is low cost, something that those new competitors have proven to be able to do better, rather than paying attention to what customers really want.

Cyber insurance companies. Heretofore, each new revolution of the insurance industry’s Wheel of Retailing achieved its cost-efficiencies primarily by reducing the cost associated with acquiring business, i.e., with its distribution systems. However, the potential cost-savings which will be possible for a cyber insurer aren’t dependent upon simply saving by making one’s agency system more efficient or in eliminating agency all together. Instead, costs saving for a cyber insurer has the potential to be much broader. Naturally, cyber space wouldn’t require agent to sell insurance products. Neither will it require underwriters, claims adjusters, policy service, or billing staff. All functions can be accomplished in automatic mode. Talk about savings! And, these savings can help cyber insurers gain share at the expense of their predecessors in the Wheel of Retailing.

Eventually, though, this not yet realized new competitor will be replaced by yet another innovative, more cost-efficient, competitor. The Wheel of Retailing will simply keep on rolling.

We see, then, that the Wheel of Retailing is alive and well in the insurance world, just as it is in other forms of retailing. The question, though, is "Can an insurer avoid becoming a victim of what appears inevitable?" The answer is a resounding "yes." By learning what the consumer truly seeks and then providing it. While an insurer should always pay attention to cost, they also should avoid coming to believe that price is the only criterion consumers use in making their insurance buying decisions. It’s not. Not now and never was.