Expert Commentary

Insurance as a Commodity? Addressing Our Industry's Biggest Challenge

For those who have not yet noticed, IRMI has a new discussion group on LinkedIn: Personal Lines Insurance Forum. There have already been several topics that have elicited lively discussions, and it is apparent that many in our industry have strong views on the issue of insurance coverage being regarded by consumers as a commodity. This article examines why so many consumers regard insurance as a commodity and provides solutions that insurance professionals can use to help consumers more sharply focus on purchasing insurance policies that actually meet their protection needs. Future articles will explore several of these solutions in much greater detail.


Personal Risk Management
August 2012

Years ago, a memorable Mercedes Benz advertisement reminded readers that, in order to determine the true value of a car, consumers should focus not on what a car costs but on what the car is worth. If distinguishing between cost and worth is challenging for an industry with products so tangibly different, is it any wonder why the insurance industry finds this challenge even more difficult?

Insurance Value—Cost or Worth?

Though the concept of cost requires no explanation, understanding the worth of a product is quite challenging. A quick search for a practical definition of worth yields these two offerings: "the quality that renders something valuable or useful" and "the value of an object in relationship to a purpose." Understanding the true worth of most products requires an inside perspective that is often beyond most consumers. The extra difficulty in discerning the worth of insurance products may explain why so many insurance marketing campaigns are singly focused on cost. Sadly, our industry appears to have little interest in helping consumers to examine the actual worth of the coverage being offered.

Think of the insurance advertisements that quickly come to mind. Exhibit A in the advertising shell game that instructs consumers to focus on the cost rather than the worth of the policies being offered is the "name your own price" advertising campaign. This theatre of the absurd inspired campaign encourages consumers to buy insurance protection by simply deciding the price they are willing to pay, with the aid of a magical price gun and sage counsel of America's new insurance adviser, Flo. Those crafting this campaign have perfected the black art of framing insurance as a commodity with this simple offer: Tell us how much you want to pay, and we'll tell you how much coverage it will buy (if you even want us to bother you with this detail).

There appears to be an ever-growing list of insurers that seem quite proud to describe their value proposition as "we're the cheapest." Although such messages encourage consumers to virtually ignore the worth of the protection being offered, we all know this approach is very effective at attracting new policyholders. To really understand why, let's briefly examine the psychology that is employed by marketers.

What Is a Heuristic Anyway?

The advertising executives who craft insurance marketing campaigns are armed with an expert understanding of behavioral psychology. As a result, they understand that, when consumers make buying decisions requiring careful analysis, our actions are more heavily influenced by emotion than logic. The emerging field of behavioral finance explores the many mental shortcuts that cause otherwise rational consumers to make predictably irrational buying decisions. Not just irrational buying decisions, but predictably irrational buying decisions.

Heuristics is the term psychologists use to describe the many mental shortcuts that influence our subconscious minds to arrive at such predictably irrational decisions. Advertisers use their knowledge of heuristics to craft marketing campaigns that subtly steer consumers to make quick decisions without carefully considering the implications. In an article titled "Geico & Psychology: This Gecko Has Some Venom" published by Psychology Today in 2010, author Ted Cascio, Ph.D, explained in lay terms the behavioral psychology and shrewd marketing genius of the amiable gecko. Cascio revealed the Gecko is "meant to distract consumers from the business side of the equation; the side that impels companies to exploit consumers' ignorance and emotions in order to generate revenue and assure stockholders."

Summarizing the Issue

It escapes no one with a radio, newspaper, television, or Internet connection that insurance advertising is big business. How big? Four billion dollars a year big, and increasing annually. Entertaining and often comical advertisements have been cunningly crafted to exploit the human tendency to simplify our buying decisions by promoting this false and dangerous message: "All insurance is the same; just buy the coverage that costs the least." In one of the early discussions on the IRMI Personal Lines Insurance Forum, one prominent industry leader offered the provocative observation that, in essence, all of us are responsible for insurance being regarded as a commodity.

Seven Ways To Help De-commoditize Insurance

While some may argue they are not part of this problem, we should ask ourselves whether we are doing all we can to be part of the solution. How can we better assist consumers to make well-informed decisions when buying the important insurance protection they may one day need to rely on after a loss? Especially for those in a consumer-facing role, I offer seven suggestions that can be used to help consumers more closely consider the real worth of the insurance products they are buying.

#1: What Would Jack Hungelmann Do?

Insurance coverage is confusing, and no one in our industry is better at making confusing concepts clear than the previous author of this column, Jack Hungelmann. All who interact directly with consumers should own a copy of Jack's book, "Insurance for Dummies," and use it to improve their ability to help consumers better understand how to buy the protection they truly need. Further, the 37 columns authored by Jack and made available to IRMI.com readers are a treasure trove of practical solutions on how to differentiate and strategically structure insurance coverage to meet your clients' protection needs.

#2: Start with the End in Mind

In his book, The 7 Habits of Highly Successful People, author Stephen Covey reminds readers of the importance of starting any endeavor by first focusing on the desired end result. The Chubb Group of Companies has a pithy advertising campaign aimed at focusing consumers on seeking value and considering the future implications of their buying decision that uses just eight words: "Who insures you doesn't matter, until it does."

Help consumers understand the possible future implications of their decision by reminding them that, in the event of a large loss, the insurance coverage they are purchasing will likely become the most important item they own. Why not use Chubb's clever words to remind consumers that who insures them, and how their coverage has been structured, will matter greatly after a loss.

#3: Fixing $6 Haircuts

A popular television advertisement a few years ago featured the owner of a local barber shop who was losing customers to a new national chain barber shop that had moved across the street and was attracting customers with a big banner announcing "$6 Haircuts." Several weeks later, the local barber went to the office supply store and hung his own banner, proudly announcing, "We Fix $6 Haircuts."

I have had the chance to meet with and interview many in our industry who are very effective at helping insurance consumers to fix the equivalent of $6 haircuts. Among the shared characteristics is a passion for providing their keen insights about the value and worth of different insurance products. They are also quite direct and assertive with consumers about what they know to be true and offer a refreshing contrast to those in our industry who are either passive or pandering. The very best interact with consumers as if they are on a mission—a mission to correct dangerous misconceptions about insurance, bad advice from well-intended but ill-informed friends, and the wrong-minded messages conveyed by many national advertising campaigns.

#4: Watch Your Language

After working to secure a coverage offer that meets a consumer's protection needs, referring to it as a "quote" or "bid" only serves to place all of the emphasis on the cost of coverage. When a consumer asks for a quote or bid, explain that you will provide them with an entire coverage offer, and that as part of reviewing all of the terms of the coverage offer, you will of course clearly identify the annual cost as well. This is more than mere semantics. To change the discussion, we must use words that describe something more substantive and meaningful than the "quote" that was asked for. We also need to avoid arcane insurance terms and acronyms and the use of glib bromides when speaking with consumers. Advising consumers that a policy provides ACV, extended replacement cost, APIP, or "all the bells and whistles" imparts little insight on the protection being offered and causes consumers to focus instead on what they do understand—the cost. Using words that are clear and specific that consumers can relate to will help promote a meaningful dialogue.

#5: Document the Differences

Although insurance consumers have been preconditioned to focus on cost and not protection, they also appreciate the need to be wary of offers that look too good to be true. To help consumers see through the often protection-poor coverage provided by save-money-now policies, take the extra time to document the coverage that is—and is not—being provided by different policies. Average agents focus merely on the coverage limits on a declarations page. Agents who are on a mission to help consumers make well-informed decisions take the extra step to document the actual types of losses that are and are not covered by different policies, while also explaining how variances in the loss settlement provisions of policies will determine how claims are actually paid. When doing this, strive to be concise and clear, and avoid jargon.

#6: Provide a Process Focused on Risks and Solutions

The common theme behind most insurance advertisements and sales strategies is to convince consumers that the policy being offered is a "better deal." The better deal focus prevents consumers from examining their risks and developing a worthwhile protection plan. Knowing what you know about insurance, would a better deal product pitch appeal to you if you were suddenly employed outside the industry and in need of insurance? Not me.

What would interest me? Someone who offered me a well-designed process that helped me understand and examine my exposure to different losses. Once I understood my risks, I would greatly value guidance in selecting solutions that protected me from the risks that concern me the most. Instead of pitching better deals, shift the focus from cost to protection by providing a "best practices" inspired process that helps consumers to understand their risks and select solutions to manage those risks. Those consumers will become clients.

#7: Offer More Than Just Insurance

Although buying insurance coverage is not the only strategy available to help consumers manage their many risks, insurance professionals rarely present other risk management strategies that are not risk transfer oriented. This insurance bias is particularly frustrating for those insurers that offer policyholders a wide range of valuable but often underutilized services to help consumers avoid or reduce certain risks. Among the reasons select insurers offer an increasingly wide range of valuable risk management services to policyholders is to further differentiate the value of their offer from the many insurers that offer only low-cost coverage.

Shouldn't insurance professionals do all they can to make consumers aware of the noninsurance strategies that are available to help prevent or minimize losses? When available, these services are yet another way to demonstrate that the value of insurance policies differs by more than just cost.

Conclusion

Insurance professionals should recognize the many reasons why consumers view insurance as a commodity and become more vigilant in educating those we serve that the protection provided by insurance policies varies greatly. To do so, we need to work to shift the conversation away from merely focusing on the cost of a policy and toward a more meaningful discussion of the harder to discern worth of a policy. Those who view their role as both a true consumer advocate and personal risk manager should feel empowered by the critical importance of this mission and will be rewarded by the many consumers who seek real insights and professional guidance in managing their risks.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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