Welcome to the reprise of a column that first appeared in the Insurance Journal in the 1950s. “On The Street” was a column written by my father that kept Insurance Journal readers apprised of the latest trends and events going on in the ‘industry.’
In the 1950s, every major center of the insurance industry was centered around, on or near a particular street: Pine Street in New York, Wacker Drive in Chicago, Montgomery in San Francisco and Wilshire Boulevard in Los Angeles. Hence the term, ‘what’s the word on the street.’ “On the Street” was a way of asking what is the latest news in the industry. My father would always end his column with -30-, an editing symbol that means end of the story.
Our goal in re-launching “On The Street” is to keep our readers informed about the buzz in the industry. Often the buzz on the street portends the actual news story. While we’re not going to print rumors, we do want to give our readers a feeling of what everyone is talking about, what it may mean to the industry, and most importantly what it means for them.
All the talk in the industry right now is about prices. Can the carriers maintain the prices they charged in 2003? And the answer is no they can’t. The old saw that the industry can’t stand prosperity will ring true again. Once enough capacity accumulates in a given line of business, the only way the carriers can keep the cash flowing in is to lower prices. The industry has never learned how to differentiate its products and maybe that’s not possible in this industry? As much as everyone hates to admit it, insurance is sold on price. It’s just easier than explaining the difference between policy A and policy B. Most sectors of the financial services industry have the same problem. When a consumer is shopping for a loan they want the lowest interest rate and the lowest points; when they buy stock, they want the lowest commission.
Time after time, marketing research shows that price is the determining factor in only 9 percent of purchasing decisions. If you don’t believe me then why aren’t you wearing the cheapest shirt you can find or driving the cheapest car? Price is the decision factor when you’re buying a commodity. A commodity is a product that the consumer can’t tell the difference between brand X and brand Y. Look what Starbucks did for coffee. Coffee use to be a commodity; not any more. You can buy a pen for 49 cents or $39,000. You can buy a Timex for $9.95 or a Rolex for more than $100,000. That’s product differentiation, but can it done with property/casualty insurance?
So, what’s the poor carrier to do in the face of downward pressure on premiums? The answer is merge! Look for some mega mergers to be announced soon. Look for another merger of the titans along the lines of the Travelers-St. Paul size to gain that elusive efficiency of scale. That kind of merger only happens though when both sides are fairly sure they know what’s hidden in each other’s loss reserves.
Another trend I think we will see is the formation of many smaller carriers that focus on a particular niche. They will focus on a few lines of business, and underwrite in only a few states. They may also take the form of writing in only one state and one line of business or may be agent owned. There is plenty of capital around the world looking for good returns and some of that capital thinks they can get a good return by playing the niche game.
Another trend is the continued growth of agency affinity groups. The success of Networked Insurance Agents in California, The Leavitt Group in Utah, the WAII in California and the Combined Agents of America in Texas will generate more affinity group formations. These groups are obviously filling a need for retailers. They are becoming more and more attractive to carriers due to the aggregation of premium and the ability to lower transaction costs. They will become more competitive with each other as retailers have more choices of affinity groups to join.
As you can see, this is also an opinion column. I’d like to hear from you about what you hear on the street and whether or not you agree with me. You can reach me through my e-mail: firstname.lastname@example.org. And that as they say is -30-
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