A recent research report published by Cliff Gallant and Matthew Rohrmann of Nomura Equity Research concludes that spending on advertising beats spending on insurance agents.
Once again Wall Street gets it wrong. Here’s why.
Executive SummaryWinning—in terms of premium growth—takes more than cut-rate prices and a cute mascot, says Brian Cohen, the former CEO of Pacific Specialty Insurance Company, in this opinion piece reacting to some research published by analysts at Nomura Research last year.
Their logic is flawed. The authors choose to focus only on advertising spend in 2013 and limit their analysis to the top-10 auto insurers. They then compared the advertising spend to premium growth that year. Since GEICO spent the most on advertising and had the largest premium growth, the authors conclude that advertising beats spending on agents.
One year’s advertising spend does not account for GEICO’s 2013 premium growth. The company has spent decades building its brand awareness. Since the mid-1990s, GEICO has spent billions of dollars to become top of mind as the company to consider if you want to purchase cheap auto insurance (aka “1-800-cheap insurance”). If GEICO stopped advertising, its growth would stop because it has almost no other way to reach the consumer. (Even the king of direct-response insurance has 150 insurance-agent locations.)
But other important factors account for GEICO’s performance: namely, its strategy to grow premium even if unprofitably. In 2011 for example, GEICO saw its profits plunge 48 percent while its advertising costs increased 9.4 percent. GEICO can afford to grow unprofitably because its owner, Berkshire Hathaway, is more interested in generating insurance float for investing rather than consistent profits.
(Editor’s Note: According to Berkshire Hathaway’s 2011 annual statement, page 66, GEICO’s underwriting profit was $576 million in 2011, compared to $1.1 billion in 2010 and $649 million in 2009. The combined ratios were 96.3 in 2011, 92.2 in 2010 and 95.2 in 2012. More recently, GEICO’s underwriting profits were $680 million in 2012, and $1.1 billion in 2013; associated combined ratios were 95.9 and 93.0 in 2012 and 2013, respectively, according to Berkshire’s 2013 annual report.)
A better way to evaluate whether to advertise or invest in agents is to compare cost of acquisition and retention. While GEICO scores high in initial consideration, it lands in the middle of the pack when it comes to the actual insurance purchase (Source: McKinsey 2012 Auto Insurance Customer Insights Report). It costs GEICO relatively little to get a consumer to make an inquiry, but a lot more to have someone buy a policy.
Furthermore, agent-oriented insurers score much higher in retention than GEICO and other direct-to-consumer auto insurance companies (Source: McKinsey 2012 Auto Insurance Customer Insights Report). The high retention numbers for agent-based insurance companies demonstrate that companies that underinvest in their agents do so at their own peril. Local agents build long-term relationships with consumers. Advertising doesn’t.
With the advent of the Digital Age, companies can generate bigger returns on their investment in agents. This goes against conventional wisdom. However, cloud computing, digital marketing, and social media let agents compete against the industry’s “brand behemoths” in their local community.
Forward-thinking insurance companies are designing programs for their agents to leverage these new capabilities. These companies are finding they get a much bigger return on investment than with a traditional advertising spend.
Consumers want choice today, and they expect to do business with companies that can provide a multi-channel experience. A local agent that a consumer can visit, call, or access via their website provides the customer experience that today’s consumer demands.
Insurers that focus on investing in their agent distribution channel will win. Pressure on companies to increase their advertising led to the insurance advertising wars of the last decade. Many companies diverted dollars from their agents to pay for increasing their advertising. But that trend appears to be changing as companies realize the power of agent-based distribution in today’s auto insurance market. For example, Allstate recently announced a renewed commitment to grow its agency distribution channel after years of neglect. (Allstate Beefs Up Agency Force and Allstate CEO Dismisses GEICO Threat in Race for Auto Insurance Market Share)
A strong agent-based distribution channel creates a long lasting and compelling strategic advantage. Blindly ramping up the ad budget is a simplistic, ineffective solution. Spending on ads just creates an indistinguishable commodity product where price and a cute mascot are the only differentiators.
In the October 2013 report, which tracked ad spend, premium growth rates and average premiums, the analysts reported (among other things) that GEICO’s growth rate was 12.6 percent across the top-10 states in the first half of 2013, while Progressive’s median growth for the same 10 states was only 4.1 percent.
In July 2014, the Nomura analysts updated the advertising expense and growth figures for the full year 2013.