Boxed Out: You've Just Been Wal-Marted

Just when you thought you knew your competition, another big player enters the game.

The competition in personal lines just got a whole lot stiffer: Wal-Mart, the biggest and most cutthroat competitor in America, is now hawking car insurance.

The big question: Will agents feel the same pinch as the old neighborhood grocery store?

The Big Box Approach

What makes Wal-Mart’s market entry more provocative is that it will offer a range of different auto policies sold by half a dozen carriers by partnering with an independent agency. Consumers will be able to select policies from Progressive, Travelers and Allstate-owned Esurance, among others.

There will be no agents in Wal-Mart stores, unlike the days when an Allstate booth was situated under the escalator at Sears, back when the latter owned the former (Sears divested Allstate in 1995). Rather, consumers will be directed to use their mobile phones to log onto autoinsurance.com, which is owned and run by Tranzutary Insurance Solutions, Wal-Mart’s partnering agency.

“To obtain a quote, customers must go online to autoinsurance.com or speak with one of the company’s licensed agents by phone,” explains Molly Blakeman, Wal-Mart national media relations manager.

One week after Wal-Mart made its announcement, another discount retailer, Overstock.com, broadcast that it too would sell auto insurance, as well as homeowners and business owners insurance, on its website. “Millions of consumers are looking for more affordable insurance,” stated Patrick M. Byrne, Overstock.com CEO, in a press release. “We’re here to help.”

Overstock.com will offer consumers live quotes from different insurance companies for comparison purposes. The company did not respond to emails soliciting an interview.

Both retailers seek to capitalize on their reputations as a preferred place to shop for deeply discounted products. “We see auto insurance as a major opportunity to help our customers save money,” Blakeman says, citing internal research that indicates nearly half of all consumers overpay more for auto insurance than any other recurring monthly expense. “This is a first-of-its-kind online auto insurance comparison service that helps drivers quickly compare, buy and save on policies right on the site.”

If Wal-Mart and Overstock.com see value in peddling auto insurance, others are likely to follow—including social media brands. Can Main Street independent agents compete against such behemoths? “Any time any part of the economy is threatened with being Wal-Marted, there is obviously a need for concern,” says Robert Hartwig, president and chief economist at the Insurance Information Institute.

But Hartwig notes that Wal-Mart has no apparent plans to be a risk bearer or even a distribution channel. “They’re a referral mechanism,” he explains. “We’ll see where this goes.”

Coverage Concerns

One place it’s not going? Away. “There is a constant barrage of new outlets trying to steal agency customers, and they have great ideas just how to do that,” says Rick Betterley, president of Sterling, Mass.-based Betterley Risk Consultants.

Betterley points out that agents lack what Wal-Mart has—a physical presence where millions of people shop every week. “If any one of them got their auto insurance renewal that day and the price went up, rest assured they will check in to see if Wal-Mart can get them a better deal,” he says. “Nobody has any loyalty anymore to their auto insurer or agent. They just want to spend less than they currently spend.”

But spending less can sometimes cause unanticipated personal financial losses for consumers if they are not apprised of the policy differences beforehand. Unfortunately, many consumers are unaware that such variations exist.

“The reality is that Warren Buffett and Geico made auto insurance a commodity a long time ago,” says Cindy Donaldson, president of Red Barn Consulting, a New Hartford, Conn.-based insurance technology consultancy. “Now that times are tough and people are pinching pennies, they care more about the price of insurance and less about what might happen, loss-wise, down the line. Consumers are being told that this is all about price.”

What they’re not told is that a cheap price often reflects a lesser policy—which means substantial coverage limitations. “I’ve seen auto insurance policies that were 10 pages long, and a single one that was 70 pages long,” says Bill Wilson, Big “I” associate vice president of education and research and director of the Big “I” Virtual University. “Obviously, there are [coverage] differences.”

For example, Wilson points out that some policies absorb the business use of an automobile; others don’t. If the policyholder driving to the office supply store to buy printer ink gets into an accident, he or she may not have insurance coverage picking up the related costs. Similarly, some policies fail to address rental car losses. Others have no loss provisions for betterment—if the car is a total wreck and the tires on it had 60,000 miles of wear, the policy may not pay for a new set. “Do you know if your insurance policy has these features and exclusions?” Wilson asks.

The question, then, is whether a website is capable of responding to such intricate, detailed questions—particularly one that is engineered to produce quotes and not provide nuanced coverage conditions. Alex Kaufman, autoinsurance.com chief marketing officer, says a customer can “make apples-to-apples comparisons with his or her existing policy and also change options, such as coverage or deductible.”

But Wilson, who logged onto the site, has a different perspective. “I went on autoinsurance.com and they won’t give you an actual copy of the insurance policy until after the fact,” he says. “I was told it wasn’t their policy to provide the contract for viewing prior to purchase. Name any other industry where you are asked to enter a binding contract but can’t see it. This is all about the price.”

The Counter-Punch

Does that mean that agents should enter the same fray, advertising price and price alone? Many agencies are already marketing auto insurance as a commodity, says Tim O’Brien, managing director at East Hampton, N.Y.-based Amaden Gay Agencies. “We have met the enemy and it is us,” he says. “I hope agents look at these new channels and ask themselves what we’ve done to create this competition. Once we all look inwardly, then maybe we can get back to some basic blocking and tackling.”

When a prospective customer asks O’Brien for the lowest price he can offer on car insurance, he has a ready response. “I say, ‘Are you tasking me simply to reduce your costs or to make sure the coverage you buy gives you the protections you need in the event of a future loss?’” he explains. “You need to start the conversation with the end in mind—the end being filing a claim. Rather than discuss price first, we discuss protections first.”

Donaldson says the first step for agencies is to establish a clear mission statement in writing, which is then incorporated in the firm’s marketing philosophy. “Maybe you want to be the seller of the least expensive insurance—if so, then this is your value proposition,” she says. “But if you want to be perceived as a trusted adviser who takes his or her customers’ risks extremely seriously, then your mission statement needs to establish this. Once it does, your employees need to reflect it in all their conversations with consumers.”

Betterley agrees. “In truth, Wal-Mart and Overstock.com are just another incremental pressure on agents’ books of business,” he says. “These threats are nothing new. They’ve been going on for years, beginning with the direct writers and their promise of lower prices. If independent agents haven’t figured out how to fight off the cheapest price competition by now, they shouldn’t be in business.”

Russ Banham is an IA contributor.


SIDEBAR: Inquiring Minds

It’s up to agents to make an effort to disprove the widespread notion that auto insurance and homeowners insurance are commodities. “Agents must point out the differences between policies, which culminate in a range of prices,” says Bill Wilson, Big “I” associate vice president of education and research and director of the Big “I” Virtual University. “The cheapest price merely buys the cheapest insurance.”

Need some conversation starters to get clients thinking about coverage and not the price tag? Here are a few:

  • Do you want to bicker about the depreciated value of your car if you were to total it, or do you want an insurance policy that pays you for the current agreed value of the automobile?
  • Do you rent automobiles with any frequency? If so, do you want coverage picking up related financial liabilities and losses?
  • Do you ever use your car for business purposes?

For more background on how to dispel the myth that auto insurance is a commodity, see “Price Check” in the July issue of IA. —R.B.