What is the Best Insurance Sales Channel, Direct or Agent-Assisted?

I was reading this article in the latest edition of the Coverager email newsletter:

“The Big Bet”

This was excerpted from a 2004 Berkshire Hathaway annual report:

“But a man named Leo Goodwin had an idea for an even more efficient auto insurer and, with a skimpy $200,000, started GEICO in 1936. Goodwin’s plan was to eliminate the agent entirely and to deal instead directly with the auto owner. Why, he asked himself, should there be any unnecessary and expensive links in the distribution mechanism when the product, auto insurance, was both mandatory and costly. Purchasers of business insurance, he reasoned, might well require professional advice, but most consumers knew what they needed in an auto policy. That was a powerful insight.”

Effectively, this expressed GEICO’s philosophy that:

most consumers know what they need in an auto policy and
agents are “unnecessary and expensive” links in the distribution mechanism.

The first premise is easy to dispel. The typical auto insurance consumer has absolutely no idea what they need when it comes to limits and coverages. The typical auto insurance consumer has no idea about the potentially catastrophic coverage differences between auto policies.

I have written and spoken about this extensively. To illustrate, just search my web site for “commodity” and/or “commoditization.” The perception of auto insurance can be attributed largely to the almost exclusively price-focuses advertising of some members of the insurance industry and it’s reinforced by the hundreds or thousands of consumer media articles about “how to save money” on car insurance.

The premise that most consumers are capable of shopping for auto insurance on their own is ludicrous. Warren Buffet doesn’t even understand this based on his 2004 comment [emphasis added]:

“Insurers have generally earned poor returns for a single reason: They sell a commodity-like product. Policy forms are standard, and the product is available from many suppliers, some of whom are mutual companies (‘owned’ by their policyholders rather than stockholders) with profit goals that are limited. Moreover, most insureds don’t care from whom they buy. Customers by the millions say ‘I need some Gillette blades’ or ‘I’ll have a Coke’ but we wait in vain for ‘I’d like a National Indemnity policy, please.’ Consequently, price competition in insurance is usually fierce.”

Given that insurance is NOT a commodity, the term “commodity-like” might be better expressed as “similar.” Price competition is fierce because that’s how insurance is largely sold…by too many insurers. But that’s not how it’s sold by good, competent agents who provide a service that is far from “unnecessary and expensive.” I debated this in this article:

“Can Consumers Act As Their Own Insurance Agent?”

First of all, ALL insurers sell through agents. You can’t sell insurance without being a licensed agent. I believe, if you compare the relatively meager commissions paid to agents to the salary and benefits paid for direct-sales insurer employee agents, there probably is not a great deal of difference. If you factor in the BILLIONS in advertising costs these insurers assume, especially if coupled with the loss ratios produced by good agents, insurers whose primary sales channels are agents might even be able to sell a superior AND less costly insurance product than direct-sales channels.

When you read articles about insurance sales success, they almost always focus on what’s best for the insurer, not the insured. GEICO may be viewed as a highly successful insurer from a market share and profitability standpoint, but are their policyholders better served by not having good agents assist in exposure analysis and advocacy at claim time?

Bill Wilson, CPCU, ARM, AIM, AAM

Founder at InsuranceCommentary.com

Mr. Wilson retired from the Independent Insurance Agents & Brokers of America in December 2016 where he served as Assoc. VP of Education and Research and was the founder and director of the Big “I” Virtual University for over 17 years.

He is the former Director of Education & Technical Affairs for the Insurers of Tennessee and, prior to that time, he was employed by Insurance Services Office, Inc. He is a graduate of the Illinois Institute of Technology with a B.S. degree in Fire Protection & Safety Engineering.