Why do real estate agents still exist?
Online Multiple Listing Service (MLS) searches, price/neighborhood comparisons, virtual tours, and a cacophony of similarly powerful web-enabled tools have made finding your next home faster and easier than ever before. In fact, ten years ago, more than a few very smart analysts predicted the end of the real estate agent as a career. There would be nowhere left to add meaningful value.
But that’s not the way it turned out, is it?
Yes, online tools could provide more and better information to the average homebuyer, but they could never substitute for human agents—and their expertise—to help navigate a complex financial transaction.
That anecdote should be of some comfort to the old-line, retail insurance industry, but it isn’t.
This time again, it is powerful online tools that are transforming the way many people buy auto insurance. The numbers make a strong case for concern: From 2004 to 2006, industry data showed buyers requested over 70 million online auto insurance quotes. To the average agent, that’s worrisome. What’s more, starting is 2007, consumers started actually buying those policies. Apparently, many of us got over our fear of buying what was traditionally a person-to-person sell over the internet. That’s the part that keeps agents up at night.
Like the real estate industry, this transition has been cost-driven, pushing the prices people are willing to pay for comparable insurance products (or “common knowledge” expertise) significantly lower.
It was Progressive who really started the trend. Its ground-breaking website was among the first—and best—at providing “apples to apples” comparisons from different underwriters. It exposed price disparity the same way Orbitz does for airline travel. Price is a similar key value proposition for Geico (and its ubiquitous “Fifteen minutes could save you 15 percent or more on auto insurance” ads). Add to that the new Esurance model, targeting twenty-somethings, bringing anime style to the insurance buying process.
It’s tough for your average insurance agent to be as cool as the caveman, as smooth as an accented gecko, or as hot as a black-leather-clad animated special agent gal.
But when I caught up with my agent—American Family’s Dan Flynn out of Eau Claire, Wisconsin—he was a bit more sanguine about the whole thing.
Yes, he said, the slick ads drain some business, but it’s the business he would prefer not to have anyway. They are the type who don’t really value insurance past the lowest price they can pay, and will jump ship after six months for a few dollars in savings.
Also, Dan reminded me that the newer underwriters are not offering broad coverage in several insurance product categories; these new companies focus only on the most profitable slices of the insurance pie (namely, auto). They can’t (or won’t) touch more complex policies, and if they do, they are not competitive.
That insight brought the market issue into focus: These upstart companies are content to gain market share quickly by focusing on the easiest (and most profitable) business—leaving old-line firms to clean up the rest. This is much akin to what discount airlines (Southwest and JetBlue) and discount healthcare (Target/Wal-Mart in-store clinics and Minute Clinic) are doing to their industries.
I can see why: Industry estimates show 80 percent of all auto policies are spread between 25 different underwriters. Allstate and State Farm lead the list with about 30 percent between them, but they are by no means dominant. Because new auto registrations are holding steady, and therefore the market is not growing significantly, new growth must be cannibalistic. Therein lies the opportunity for heavy advertising.
But there’s a problem.
The money Geico, Progressive, and Esurance are spending on advertising (compared to their size) is not sustainable. Overall category growth in ad spending exceeded 33 percent for the last three years, making insurance ad spending a $1.7 billion expense. That just won’t fly long term. Insurer balance sheets are closely watched by their underwriters. It won’t be long before the pool of “easy market share” has been attained, and the big budgets begin to fail to bring the same results.
By the point of diminishing returns, these companies are hoping to be large enough to (a) compete, or (b) be bought. Or else. We’ll see what happens.
To prepare for that day (and smartly realizing that price alone will never sustain as a competitive wedge), insurers are driving creative policy writing. Allstate runs a cash-back program for safe drivers (my business partner loves this one). Progressive has started to offer pet injury coverage as part of its auto package. Esurance and Progressive feature carbon footprint reduction programs.
All well and good, but product innovation is a tangential differentiator.
Here’s the real buyer behavior insight, and what should give agents the key to their own survival: Buyers picking cheap insurance are far more likely to be those who view insurance is something the government makes you have (auto) or your employer just pays for and you never see (health). At that (usually) younger age, they haven’t had the life experience (statistically) to see the consequences of being underinsured. In other words, they don’t know better. They don’t understand insurance. So they don’t care. Yes, there is a risk in ignoring this cohort: That they will remain brand loyal as it ages, and that the new line companies will adapt to their needs. But I wouldn’t be too concerned.
It is the same reason real estate agents still exist. When it comes down to it, home buying (like insurance) is a complex financial transaction. The decision you make can mean the difference between financial security and financial ruin.
And when the worst happens (and it will), no secret agent will come to the rescue. No caveman will tow your car. And no gecko will pump out a flooded basement.
I think Dan Flynn is right. You’ll always need a real human being who understands how to help. If I were an agent, that’s what I would worry about.
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