How to Slay the (Geico) Caveman

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.

The Milk Marketing Machine

The milk mustache is just the beginning.

Behind the endless “got milk?” T-shirts and bumper stickers, and beyond countless celebrities sporting milk mustaches, exists a powerful dairy promotional apparatus. Of course, that’s not much of a surprise—the upper Midwest is the nation’s leading dairy region. But seeing tangible evidence of the machine’s muscle proved, nonetheless, a bit jarring.

A couple of weeks ago, I was able to get my hands on the “Dairy Sports Nutrition Toolkit” presented to school nutritionists at their annual get-together in St. Cloud (not nefariously, of course; I happen to have a “connection” in the audience—and even so, the information was by no means confidential, just enlightening).

It was a #486W plain white Smead folder stuffed full of the ordinary promotional jibber-jabber. A color brochure touting the “New Look of School Milk”—flavored to entice kids who would otherwise shun milk in favor of the latest energy drink or sports concoction. A cute milk bottle cutout of helpful (read: promoting milk and dairy) websites. A small stack of printouts highlighting the benefits of whey protein. For anyone who plays the channel marketing game, this is normal stuff.

The striking pieces were the two discreet fliers promoting “chocolate milk” as a superior sports recovery drink.

Huh?

Clearly, I must have nodded off during that lecture in sports physiology.

But here on the page was the new evidence.

A study in the “International Journal of Sports Nutrition and Exercise Metabolism” found cyclists consuming low-fat chocolate milk were able to ride as long or longer than cyclists drinking traditional sports drinks.

An additional study found that whey protein (found naturally in milk) could lead to bigger, stronger muscles.

The third citation excerpted an article from the “American Journal of Clinical Nutrition” examining the positive affects of drinking milk after heavy weightlifting. Apparently, milk helped burn fat and build more muscle than other drinks.

There was more, but I think you get the point.

Presented with this information, we could—if we wanted to—begin to ask some critical questions (not critical in the negative sense, but rather critical in the academic sense): What did the control group look like? Does the study methodology support a reasonable expectation of reliability in the findings? What information are we not seeing in the one paragraph write up? Who paid for the study?

But while valid, these questions miss the larger point.

What do any of the above conclusions have to do with elementary, middle, and high school kids drinking milk during lunch?

And therein lies the real question. To many observers of the presentation, this was the most “authoritative” segment—it was backed up with real “data” and not just “promotional” claims. The journals cited were not Science or Nature, but that was hardly the point. This is the classic research shell game: Use hard “numbers” to shift attention—to borrow credibility as it were—from a presumably accurate (albeit unwarranted) argument to promote a particular point of view. In this case: That milk is good for you, and scientifically better than the average sports drink.

I don’t fault the dairy council from presenting information that promotes their position and their products. That’s their job. To do otherwise would be a fiduciary breach with those who contribute to the fund. And the image of milk has been pummeled by sports drink bottlers.

But this is different, isn’t it? This is sophisticated channel marketing that directly impacts school-age kids—your kids—and their meals at school.

To be fair, I can think of worse things to promote to school nutritionists than the benefits of milk and dairy, even if the evidence is a bit obtuse. (Also, members of the audience in this case have heard more than their fair share of “food pitches”, and are pretty savvy consumers of information.)

But answer me this: Would you feel the same way if the information presented instead touted the benefits of Coca-Cola products? Or M&M Mars? Or Pizza Hut?

And if you think the dairy folks are good at marketing...

Reverse Mortgage: Hero or Villain?

Perhaps it is just poor timing.

Just as the word 'sub-prime' became part of the everyday vernacular, just as mortgage industry giants fell, and just as the Federal Reserve wrested new authority over the market, we have a new mortgage product on the scene.

It is called a 'reverse mortgage,' and it is not really that new.

In the days of heady profits and rapidly escalating home values, no one saw much value in selling them. No wonder, really. Reverse mortgages are reasonably complicated financial instruments. By statute, they apply only to a narrow segment of the population. They were simply too much trouble. But that has changed.

For a primer, I tapped Tony Weick, the resident expert on reverse mortgage products at Bell Mortgage.

Tony reminded me reverse mortgages are not, in and of themselves, 'good' or 'bad' products. Just like FHA, Jumbo, VA, and sub-prime, reverse products fit certain buyers under certain circumstances.

In short, a reverse mortgage is exactly what it sounds like. Instead of you making payments to the bank to earn back the equity it owns, the bank pays you each month to earn the equity you own.

A few caveats (aren't there always?): Reverse mortgages are only available to homeowners aged 62 and over who own - or mostly own - their own property. Also, homeowners cannot 'buy into' a reverse mortgage; it must be a refinance (although just-signed legislation may ease some of that burden). Finally, buyers must complete HUD-authorized coaching session before they are allowed to begin the process. On the surface, smart precautions.

On the plus side, reverse mortgages allows homeowners to stay in their home and access its equity without selling the home outright. Another major bonus, reverse mortgages are non-recourse annuities. Essentially, you and the bank enter into a sort of grim game of chicken. Based on your age, the bank determines your life expectancy, and uses that number to set a maximum dollar payout and monthly payment. If you live past your life expectancy, you win. The bank must continue paying you each month, even if the amount they pay goes beyond the value of the home itself. In the end, they are left holding the bag. But if you expire early, you also "win" (or more specifically, your estate "wins"). The bank has only the lien on your property for the amount it paid out to that point. In other words, the game is loaded in your favor.

Not bad.

So what does the bank get?

For one, the up-front fees are a bit heftier than 'forward mortgages' (Tony's word, not mine). Yes, you never make a payment, but that means the interest and fees capitalize, essentially limiting the total amount you could access. In other words, you (or your estate) could feasibly get more money out of your home if you waited it out (read: you died) or sold it early (read: move into another home/assisted living arrangement/etc.). Of course, all this depends on your tax situation.

Tracking so far?

If not, I don't blame you.

Tony and I spent 45 minutes on the phone working through the details. Any errors or omissions in the above description are mine, not his. And believe me, there are a lot more details.

And therein lies the issue.

To get good at reverse mortgages - from a professional's perspective - takes time, patience, and training. Bell takes it pretty seriously. As do many other organizations. But can you envision a scenario in which loan officers looking to survive in today's market will cut corners to open up this potentially lucrative market? I can.

The image of a few bad apples in the market, however, is nothing compared to risk when you begin to market to seniors.

That game is fraught with peril.

First, you need to spend considerable energy building trust. That takes time and money. And while there may be many more seniors in the coming years given demographic changes, they also are savvier about money than at any point in history. Add to the mix involved and financially adept adult children, along with the emotionally charged inheritance/family issues they bring, and you have an unrivaled marketing challenge.

More vexing, however, is the risk the industry takes the more it promotes this product. Coming off the heals of the sub-prime mess, mortgage players always could claim, "we should not have lent to unqualified buyers, but hey, they lied on their applications too."

Not so when marketing a financial product to seniors.

You have what I call the "swampland in the Sunshine state" image problem. Whether the industry likes it or not, consumers have a long memory of real estate scams targeting seniors throughout the 1970s and '80s. Fair or not, as a financial product for seniors, reverse mortgages have been greeted with more than a healthy dose of skepticism.

Senior Lending Network (as seen on TV), among many others as of late, is running up against this problem. Heavily promoting reverse mortgage products, it places its entire industry at risk if word gets around that seniors are getting the short end of the stick.

This time, there would be no shared blame. The public would consider itself fooled twice, and would likely not take kindly to the charge of "bilking grandma out of her home."

Talk about an emotional pressure cooker.

Mortgage types had best tread very carefully here.