Point/Counterpoint

Is personal auto insurance a commodity? A McKinsey consultant and the Big "I" VU director debate the issue.

YES.


Insurance may never be a pure commodity like copper or wheat, but personal auto is edging closer to this territory. Why?

Consumers have easy multichannel access to auto insurance products from many carriers, and no longer need an agent to navigate carriers or explain terms. Independent agents themselves are using comparative raters to generate enormous numbers of commodity-like price quotes to present to the customer. The flood of price-centric marketing for auto insurance has conditioned many consumers to focus on price as their primary buying factor. And customer claims satisfaction is at historically high levels, leaving less ground for differentiation between insurers.

The agency channel has lost seven percentage points of share in auto insurance to direct carriers since 2003. And while more than half of auto insurance purchases still occur through a local agent, in most cases the agent is simply executing a transaction. The hard truth is that most agents have neither the scale nor the operational efficiency to profitably sell a commodity (or even a near-commodity). Commission revenues and profit margins have been on a long-term decline as yield rates on new business remain low, average premium per policy has been relatively flat, and costs are rising due to increased operating expenses.

Many agents report that auto acquisition has the thinnest margins of any line and can even be unprofitable. With auto insurance accounting for 30 to 60% of a typical agent’s book, the numbers paint a difficult picture for future profitability.

—Devin McGranahan, director at McKinsey & Company (adapted from "Agents of the Future: the Evolution of Property and Casualty Insurance Distribution")

NO.

The Virtual University received a claim in which a relative moved back in with his family and, while operating one of their vehicles, had an at-fault accident—killing or seriously injuring several people in another vehicle. The “ISO standard” personal auto policy, absent any fraud to the contrary, covers the use of declared autos by any resident family member. But in this case, the family was insured by a non-ISO policy that excluded any resident family member who had not been reported to the insurer. This exclusion creates a huge exposure for any family with “boomerang” kids.

The premise of a commodity is that the product is always the same—and this example illustrates that all auto policies are not. Examples abound of marketplace differences among non-ISO policies, many of which are heavily advertised on TV with slogans like “same coverage, better price.”

For example, some auto policies exclude any business use. Imagine the office worker that makes a run to Staples to pick up supplies, has a serious accident, and discovers his or her auto policy offers no coverage. Even if the business has commercial auto insurance, employees are usually not considered insureds while operating their own autos on business unless the policy has been endorsed to cover this—and it usually isn’t.

These are just a few examples of the potentially catastrophic exclusions found in some policies that are readily available and heavily advertised in the marketplace. Personal auto is not a commodity.

Bill Wilsondirector of the Big “I” Virtual University