March 10, 2016 by Leave a Comment
It’s old news by now that Google is shutting down Compare, its financial services and insurance comparison site. It wasn’t open long – less than a year. When Compare was first announced, the industry reacted with warnings that this was a major disrupter in insurance distribution. With the massive audience that Google has, the industry expected that Google was going to swoop down and capture the online insurance market – which by the way is pretty big – typically 75% of prospects research online and 20-25% of all new auto policies are purchased on line according to those who track this type of metric. So what happened? Well, the fundamental idea of capturing the online market is a sound idea. And Google was pretty smart at avoiding all the hard technical costs of building out the aggregator engine by partnering with those who had already done the hard work – like Compare.com, Coverhound and Bolt. But the business model of an online aggregator is hard. There are three models – online agents – who earn full commissions. That wasn’t really Google’s deal. They weren’t interested in any of the after service or ongoing relationships. A traffic generator – sending a potential lead to another site and being paid for the eyeballs. Well, that’s not very lucrative either – and frankly, Google can make money through their own advertising and search capabilities. Spending the money to build an online quoting front end only adds cost to something they already do quite well, thank you. So why would Google have invested the money in an online quoting front end? To take advantage of a lead model. With a lead model, the aggregator collects data, processes a request for quote and sends a highly qualified lead to be fulfilled. The price per lead is significantly higher than the price for traffic. But there’s a fundamental challenge with this model. For the lead to be valuable to a carrier, the lead has to actually purchase insurance. And because a lead is sold to multiple carriers, the acquisition costs rise for a carrier. Let’s say a lead is sold for $5 to ten carriers. The aggregator makes $50 for that lead. But only one carrier actually writes the lead. If ten leads are sold, and each carrier writes one, the aggregator makes $500 but the carrier has spent $50 for that lead. Play out a competitive situation where the leads aren’t equally distributed, and you can see that the acquisition costs can rapidly rise. If I only get one lead out of twenty, I’ve spent $100 for that lead. If I only get one lead out of $30 I’ve now spent $150 for that lead – which now is pretty close to what I’d probably be paying an independent agent. And what if the customer NEVER buys – and simply goes in looking for prices so they have a comparison to an off line model? The numbers rise rapidly. Remember those numbers above – 75% shop on line and 25% purchase on line. That means that only one in three leads actually results in a sale. Assuming leads are distributed evenly, an aggregator will distribute 165 leads before I close one. That brings this $5 lead fee up to $82.50 –, which is pretty expensive. The way to make those economics work is to increase the conversion rate so that more of the leads a carrier purchases actually ends up buying a policy. So while carriers are very interested in participating in the online marketplace, they really want to work with those aggregators who are successful at converting traffic to leads that will convert to policyholders. The online agent model is attractive as the carrier doesn’t pay until the policy is written. The traffic model is similar to online advertising, so that works as well. But the success of a lead model is a combination of the price of the lead and the likelihood of closing that lead – which is dependent on the number of carriers the lead is sold to and the propensity to buy. So here’s where Google lost an opportunity with Compare. They thought they could convert relatively low paying traffic into high paying leads simply by putting a quoting front end on and didn’t think through what they could have done to improve the conversion rates. With their analytical power, Google could have created a truly disruptive experience by providing consumers with a powerful recommendation engine. Google is a master at finding out information about individuals from social media and other publicly available data. They could have created an algorithm that used the information about the lead to tailor and target recommendations. Personal auto isn’t that hard. If we were talking about commercial, it’s a much harder set of algorithms. But honestly, it’s not that hard to create something that tells a customer that given their location, the value of their home, the type of vehicle and their driving record, 64% of people like you choose this limit/deductible/additional coverage etc. And getting a personalized recommendation drives conversion. When people trust that the advice is good, they’re willing to buy. We’ve seen many examples of how inserting advice and recommendations into the quoting process drives conversion. When I personally go to get an online quote – it’s part of my job – I enter information that shows I own a home in California and I drive a luxury car. So why oh why do the aggregator sites today recommend minimum limits coverage to me? My car is worth more than that. Today, trusting the advice from an aggregator site is dicey. And that is why policyholders continue to rely on the advice of an agent. Does this mean the role of aggregators is dead? No. But Google missed a major opportunity to truly disrupt by providing a powerful recommendation engine that could use their ability to easily find information about individuals and combine it with their powerful analytical abilities. They ended up creating just the same thing we had back in the 90’s. Kudos to them for killing it quickly – but they missed an opportunity to use their capabilities to make the model work.
November 3, 2015 by Leave a Comment
I rarely, actually never, give advice to automobile manufacturers because I am an insurance technology analyst, and not an automotive analyst. But as more and more and more auto manufacturers make announcements about their plans to get autonomous cars on the road, ready or not—the dire implications for automobile insurance cannot be ignored. So on occasion I do find myself thinking about what autonomous cars will mean for manufacturers. In particular, since the marketing of cars emphasizes the driving experience so heavily, what will the automakers do when all they can offer is a riding experience? I mean a rolling home office, or family room, or man cave, or walk-in closet only has so much appeal. And yes I know that all these cars will be totally connected, but still how many touchscreens will entertain a car buyer/driver during the morning commute? So I do have an answer: virtual reality! Not just any virtual reality, but a virtual reality that makes the passenger in an autonomous car believe that he or she is actually driving that car—with appropriate physical artifacts (steering wheel, pedals, brakes, dashboard, etc.); and a choice of scenic and challenging routes. If Disney can create rides that make people feel like they are accelerating, de-accelerating, steering, and cruising, why not GM and Toyota? As mentioned, this advice is free. But if any manufacturer reading this post is so inclined, please send a large check to Celent (not to me, alas). Thanks.
May 18, 2015 by Leave a Comment
Carriers use a variety of techniques for growing the book and most consider distribution management as a key component of their growth strategy. They are expanding channels, adding distributors, moving into new territories, and working to optimize their existing channel to improve customer acquisition and retention. Some carriers are investing in improving the servicing of distribution channels. Others are focused on managing the compliance aspects of distribution management — assuring the distributors have the right licenses, and that state appointments are made in a timely manner. Many carriers are concentrating on using compensation tools and techniques to more effectively stimulate production. To understand what top carriers are doing in this area, I conducted a survey of carriers around this topic. The goal of the survey was to understand how the carriers are organized to manage the distribution channel, what types of techniques they use, how effective those techniques are, and what challenges they face. Check it out here.
- In most organizations, a formal Distribution Management organization has primary responsibility for channel management. Managing relationships and compliance are seen as the biggest issues they face.
- A wide variety of compensation techniques are used by carriers and most say they get value from those programs – although carriers report that it is more important to calculate compensation accurately than to assure compensation is effective at driving desired business. Some techniques such as incentive comp and contests may only be available to top tier or qualifying agents – but receive mixed reviews on their effectiveness. Only 25% of those offering incentive compensation programs see them as effective. “Having an incentive compensation program isn’t highly effective, but not having one would be even worse.”
- Most carriers rely on a variety of different systems to manage compensation – including Excel and find efficient calculation and distribution of compensation to be quite challenging. For many, the ability to administer a compensation program easily is the key driver as to whether the program will be offered. While they may wish to utilize a particular technique, their technologies create barriers.
- Compliance is another challenging area with many carriers in the early phase of considering additional automation. Fewer than half of carriers have automated any of the major processes – validating licenses, processing an appointment or providing self-service to distributors. Those that have automated the processes generally report them as delivering value.
May 7, 2015 by Leave a Comment
Let me present you my first smart watch: Timex Datalink. My mom gave me this as a present when I was 23, back in 1995 (Oh my, I just gave out my age!). For those that haven’t seen one of these, it was the first watch capable of downloading information from a computer. Co-developed by Timex and Microsoft it was capable of data transferring from outlook calendar and tasks, No email, no voice unfortunately. It didn’t look very different than any other digital watches from that time (did I mention they were water resistant?), but they were unique because they could synchronise wirelessly through light (using the monitor screen) with the computer and data was transferred from the computer to the watch quickly and easily. It seemed revolutionary those days. Nevertheless, it was a complete failure (do you see them somewhere today?) While the concept was fine, they were too ahead in time so the functionality was very limited, and there was no integration with mobile devices and apps (they didn’t exist!). So when everyone started talking about smart watches (again) I remembered my old Timex Datalink. I don’t use watches anymore (smart watch or not), but back then I did. So this triggered my curiosity as what are the chances for smart watches to succeed. I decided to run a small poll between my friends and asked:
- Would you use a smart watch?
- Under what circumstances would you consider using one?
- Some people (10%) don’t know what a smart watch is.
- 10% said no, my smartphone provides me all I need plus if smart watches connect through Bluetooth they make batteries die fast. They would only consider using a smart watch if it is free (as part of a smartphone purchase for example) and technology improves (and battery life becomes a non-issue).
- 40% said they don’t use watches today so why start using it now? They recognize that it needs to have a compelling advantage over the other devices we use today (mobile, tablet, laptop, etc.). If it is about health monitoring there are a plenty of devices in the format of wristbands that they would use instead. Video streaming would be another good reason to adopt it.
- 10% answered that a watch is something related to fashion (and in some cases luxury) so unless an established well recognized fashion/luxury watch maker brand enters into the segment and makes them attractive, there is no way they would use it. Clearly this segment of consumers wouldn’t buy it from Apple, even if they come in gold and with diamonds, but they would buy it from Rolex for example. The good news for them is that Rolex is launching one.
- 10% said they would use it out of curiosity (this reminds me myself back then with the Timex Datalink smart watch). If smart watches provide much more functionality and convenience than they did before, there is a chance that this segment may continue to use them after the “trial” period.
- 20% said definitely they would use a smart watch. Even more, they believe that it will become an accessory required for many daily tasks and interaction with business as in health for example. If you get a discount in health insurance (or life insurance) associated to a healthy lifestyle, a smart watch seems an ideal device to combine the monitoring capacity with other daily activities as talking and mailing. For those that today carry a watch it will be a seamless experience compared to when we moved from landlines to mobiles. Insurers moving into the use of wearables, including smartphones, to monitor lifestyle and provide benefits associated to it, will encourage adoption by people in this segment.
March 27, 2015 by 4 Comments
The other auto insurance telematics shoe drops: who wants to be adverse selection lunch for Progressive?
Until now US insurers have intentionally restricted the impact of their telematics programs by holding riskier drivers harmless. In other words, insurers told policyholders in their telematics programs that their premium could only go down or remain the same. Higher risk drivers’ premium would not be increased even if the telematics device revealed driving behavior which actually deserved a higher premium. But now the world has changed. In its 2014 annual report US telematics leader Progressive dropped this bombshell: “. . . we are affording more customers discounts for their good driving behavior while for the first time, increasing rates for a small number of drivers whose driving behavior justifies such rates” (Celent emphasis). See Bloomberg for the full story. Progressive is saying that when its telematics data indicates a higher premium for a given policyholder, it will charge that higher premium. If that policyholder can find a lower premium at another insurer, Progressive is quite happy to have that other insurer issue that policy, leading (on average) to higher losses, for a lower premium. In insurance this is known as the other insurer experiencing adverse selection. At its most basic level, being a successful insurance company is simple. Understand the risks that are submitted to your underwriters, and charge the right premium for those risks. Progressive is not a stupid company. With this announcement Progressive is signaling that its Snapshot telematics program lets it charge a more accurate and higher premium to certain risky drivers—and it jolly well will do it. If other leading auto insurers’ telematics data leads to the same conclusion, they will have to follow Progressive’s lead. Eat or be eaten.
January 26, 2015 by Leave a Comment
It’s 2015, the mid-point of the decade and a good time to start looking at major trends in Asian financial services over the next five to ten years. One of the major themes will be regional integration, which is another way of saying the development of cross-border markets. There are at least two important threads here: the ongoing internationalization of China’s currency, and the development of the ASEAN Economic Community (AEC) in Southeast Asia. RMB internalization is really about the loosening of China’s capital controls and its full-fledged integration into the world economy. And everyone seems to want a piece of this action, including near neighbors such as Singapore who are vying with Hong Kong to be the world’s financial gateway to China. The AEC is well on its way to becoming a reality in 2015, with far-reaching trade agreements designed to facilitate cross-border expansion of dozens of services industries, including financial sectors. While AEC is not grabbing global headlines the way China does, we see increasing interest in Southeast Asia among our FSI and technology vendor clients. From Celent’s point of view, both trends will open significant opportunities across financial services. In banking, common payments platforms and cross-border clearing. In capital markets, cross-border trading platforms for listed and even OTC products. In insurance, the continued development of regional markets. Financial institutions will be challenged to create new business models and technology strategies to extract the opportunities offered by regional integration. It’s the mid-point of the decade, and the beginning of something very big.
January 22, 2015 by Leave a Comment
Growth and retention continue to be the top business goals affecting IT investments. However, in our current hyper-competitive marketplace with continued pressure on rates, growth opportunities for insurers are limited. Many carriers are focusing on improving their distribution practices as a key technique for driving growth. Carriers are expanding channels, adding distributors, moving into new territories and working to optimize their existing channel in order to improve customer acquisition and retention. Designing, developing, maintaining and managing productive channel relationships can create a sustainable competitive advantage. Conversely, a poorly designed or executed distribution channel strategy can create conflict, inefficiency and disruption up and down the line. Some carriers are placing their priority on servicing distribution channels and improving service to distributors, increasingly using producer service excellence as a way to retain and grow business. Others are focused on managing the compliance aspects of distribution management – assuring the distributors have the right licenses, state appointments are made in a timely manner. Many carriers are focusing on using compensation tools and techniques to more effectively stimulate production. While in the property casualty world, most carriers work with independent agents, this is no longer an exclusive channel. Most carriers are looking at more effectively using data to manage carriers strategically rather than tactically. In addition, carriers are adding channels including wholesalers, GAs and MGAs. On the life side carriers work with exclusive agents, independent marketing firms, financial planners, banks and a wide variety of other channels. These multiple channels are effective at targeting different aspects of the market, but add complexity when it comes to channel management. Distribution management encompasses a wide variety of administrative functions that are focused on operational issues such as registering and licensing producers, configuring compensation plans, administering payment and reconciliation, and tracking performance. Distribution management systems provide tools and technologies to help carriers with the administrative aspects of distribution management. They are most typically used by carriers with a mixed distribution channel, multiple policy admin systems, multiple jurisdictions, complex compensation programs, or some combination of these factors. I’ve just published a new report Distribution Management System Vendors: North American Insurance 2015, It profiles 14 distribution management solutions. Check it out – or give me a call if you’d like to talk about the report.
May 12, 2014 by Leave a Comment
I love games. And I bet you do too. The Pew institute says the 77% of all US households own at least one video game. When you add in card games, sports, and politics – there’s a lot of game playing happening. But we don’t usually think of games as being a legitimate activity to take on during work. Well, that’s changing. More and more work activities are being gamified – a hot new term that means applying game techniques to non-game activities. Whether being used to drive new business and improve the brand, find operating efficiencies, or change policy holder behaviors there’s a whole lot of playing going on. There are a lot of things to think about when beginning to explore this new area of gamification. My latest report goes into a number of areas to consider. There are a number of established factors to consider when designing a gamified environment that will help to make a game fun, provide rewards, and deliver an experience most likely to achieve the firm’s goals. Points, badges, and leaderboards are common elements, but a wide variety of other techniques exist that can be combined to make a gamified environment more interesting. But there are a wide variety of other issues to consider. Carriers considering entering the world of gamification should start by creating a clear strategy with a specific intent in mind. Next, define a governance process that includes cross functional representation to oversee the initiative. Include legal on the governance team as there are a number of legal and regulatory issues to consider. Assure processes are aligned internally, and align the culture to support adoption. Invest in technology that will provide you with the flexibility needed to modify programs easily. Create metrics that will allow you to measure and monitor the returns. While gamification isn’t appropriate for every business problem, it is a rapidly emerging area that is generating real results for insurance carriers. follow me at @kcarnahan
May 8, 2014 by 3 Comments
Our team spends a lot of time thinking about the role of the agent. Over the years, we have seen considerable change, particularly in the application of technology. What we have not seen change is the agent. By agent I mean the “transactional” life insurance agent. Their business is made up of selling life insurance, usually at the kitchen table of the proposed insured, and that is their primary focus. You can picture the agent: they arrive carrying a briefcase that contains paper applications. They will likely be in a suit, or at least a sport coat, sometimes with the logo of their carrier or agency in a nice crest. They consult with the proposed insured, or more likely the husband and wife, and then sell them a policy by filling out the application with their ballpoint pen. This very old school approach has not changed since our parents bought insurance. This is still a successful model for some, but we believe it will be less so as time marches forward. But if you are one of these agents and recognize the need to change, what do you do? Many have already transformed their practice into that of a financial advisor or wealth manager, and that’s a great direction, but it is not for everyone. One approach follows a slightly different path and acknowledges the changes in the marketplace being driven by exchanges. The agent could license private exchange technology from one of several vendors and build a brand. They would advertise and push this brand and steer potential customers to a website where they could sell major medical, both on and off the federal and state exchanges. They could sell supplementary products and, perhaps most importantly, they could sell transactional life insurance, focusing on term. Back in the office, the agent could have a small call center team. Their role would be to answer phone calls from people that either came through their website or were referrals. You see, if it is easy and transactional (can you say term?), then we would want one of our modestly salaried team to handle it over the phone. The agent’s energies would then be focused on a combination of marketing (establishing the brand) and sales (focusing on the big win), including large-face life and large annuities. This is one option, and one perspective, but one that we believe should generate discussion. Tom Scales Follow me on twitter @tjscales