To some outsiders, insurance agents appear to be threatened with obsolescence. Commoditized products, the extensive information available online and the decreasing value placed on personal relationships could lead insureds to devalue the role of agents and instead make decisions largely on their own. A similar cycle has affected travel agents, decimating that industry. However, becoming a dinosaur is far from a certain destiny.
For example, obsolescence failed to play out with bank branches. In the 1990s, branches were the “obsolete” part of banking. Deposits and withdrawals were moving rapidly to automated channels, and branches were a large infrastructure cost to carry. Some banks de-prioritized branches in favor of virtual channels. Yet by 2007, the industry had done an about-face. The data speaks clearly: branches help sell products. Their function may have changed in the past decade, but their importance in differentiating banks and boosting their share of the customer’s wallet remains.
Drugstores were also viewed as doomed. When Wal-Mart can undercut Walgreens by 20 percent on many items, why would consumers keep the costly retail network in business? Yet drugstores, too, have proven resilient. It turns out that consumers value convenience as much as price, and they place particular importance on advice from the pharmacist. On which route is the insurance agent headed? Patterns of innovation provide a guide.
Each of the industries experienced what is called “disruptive innovation.” Unlike innovation that sustains existing business models, disruptive innovation upends them. The innovation is frequently not a new technology, but a new way of doing business. Southwest disrupted the airline business, and Vanguard disrupted asset management. In each case, the new form of business offered a certain set of customers a “good enough” offering that satisfied them along most dimensions of performance, but excelled on one or two dimensions, such as convenience or price. The new business made money in a different way, and it initially captured customers who were not the incumbents’ main priority. Like almost any business proposition, the new business gradually improved, sometimes to the point where it could capture much of the market.
Incumbents were blindsided and incapable of response. Often, the disruptors’ main competition was not even an incumbent, but nonconsumption — the lack of any product being consumed because the category simply did not exist.
Disruptive innovation occurs in almost every industry, and it never stops. Sears, Roebuck and Co. disrupted corner shops with their catalogues, which were disrupted by Marshall Fields’ department stores, which were disrupted by “big box” retailers. Merrill Lynch brought stock trading from Wall Street to Main Street, but Charles Schwab made investing more inexpensive and convenient for a certain class of investor. And E*Trade enabled the rise of a whole new category of investor. The key to surviving disruption is to update the reason you are in business.
Innovation in insurance
Agents have cause for concern. It is a poor omen for growth if much of your business consists of products that people are forced to buy. Minimum levels of coverage also offer low profitability. Aside from ensuring operational efficiency, the key to growing profits is tackling the nonconsumption of coverage, as well as providing people new reasons to value their agent relationship.
Unfortunately, many carriers have done little to advance in this regard. Customer service has improved via remote channels and mobile claims adjusters. Market conditions, not carriers, have been responsible for much of the growth in markets such as liability and homeowners insurance. These changes have done little to enhance the role of the agent.
A handful of disruptive innovations have, in fact, undermined the agent’s role. Progressive’s “Call Us First” approach provides its prices as well as the competition’s prices via a remote channel, in the belief that if Progressive is not the cheapest the company does not want the person as a customer. InsWeb offers online quotes from a range of providers in minutes. Pay-as-you-drive auto insurance offers new means of differentiating risk through technology, not relationships.
Implications for agents
To weather the disruptive threats, agents should borrow from the playbook used by countless firms that have survived disruptive innovation. Consider these five steps:
First, tackle nonconsumption. Use technology as well as deeper personal relationships to help insureds understand the risks they have and what a cost-effective insurance strategy would entail. Best Buy is a master of showcasing products that people didn’t know they needed, and its Geek Squad tackles a barrier to consuming high-end products. Sell new products. How many of your customers know about identity theft insurance, for example? IBM reinvented itself many times in response to repeated waves of disruptive innovation. Must a P/C agent sell only a small set of standard products?
Think deeply about personal relationships. These keep you in business, and differentiate you from the countless other agents offering similar products. What are your customers really seeking to get out of their personal relationships with you? What are a handful of things you can do to make your relationship stand out in the customer’s mind? BMW’s Mini excels at creating an ongoing relationship with its drivers, with the company sending customers Mini-themed games and other inexpensive items to reinforce the message that they are unique — which is a large part of Mini’s value proposition. What messages do you want to cement in the customer’s mind?
Differentiate your service propositions by customer type. Counter-intuitively, think about how you can create a compelling proposition for your worst customers, whom other agents will be loathe to poach. Capital One did this in subprime credit cards, creating a formidable market position off the radar of the big incumbents.
Last, think about how you can disrupt others. What related businesses have high nonconsumption and poorly serve customers’ needs? For example, financial planning is an industry replete with conflicts of interest as some “no fee” planners receive hefty commissions from mutual fund companies and switch customers frequently from fund to fund. Are you in the insurance business, or the risk mitigation business?
The steps are challenging. Innovation is difficult, and that is why it is so rewarding.
Stephen Wunker leads the financial services practice of Innosight, a Boston consulting firm founded by Harvard Business School Professor Clayton Christensen, who coined the term “disruptive innovation” in 1995.