Todd McIndoo is a Vice President at Speedy - National Association ...

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Why would more than 2.3 millionpeople work in the insurance industry?According to The Insurance InformationInstitute (iii) 2.3 million peoplewere employed in the insurance industryin 2008. Of those, 1.4 million worked forinsurance companies, including life, health,and medical insurers (804,200 workers),property and casualty insurers (569,200workers) and reinsurers (28,400 workers).The remaining 907,000 worked for insuranceagencies, brokers, and other insurancerelated enterprises. [1] Michael E. Porter ofHarvard Business School developed theFive Forces Model as a industry analysisand business strategy tool to analyzethe factors with the potential to affect anindustry’s profitability and therefore the attractivenessof an industry or market.Understanding the industry environmentand its competitors are critical to the futureprofitability and success of an industry orfirm. Porter’s Five Forces of CompetitionModel include: the threat of new entrants,rivalry among competing firms, threat ofsubstitute products, bargaining power ofsuppliers, and bargaining power of buyers.Through proper analysis of these forces,one may be able to utilize and buffer theforces to your benefit in order to increasethe likelihood of above-average returns andthe ability for future success.The threat of new entrants is obvious inthe growing number of agencies throughoutthe U.S. Between 1998 and 2006, thenumber of insurance agencies and brokeragesgrew by more than 9,000 from113,112 to 122,138 firms respectively. [2]The increasing number of competitorsthreatens the market share of existing firmsand may result in lower revenue and overallreturns if strategies are not changed. Notonly are the number of competitors increasing,the type of competitors are alsochanging. We now not only see the impactof Internet sales affecting existinginsurance agents, but the type of competingfirms is also increasing. These includebanks, mortgage and real estate companies,featureWhy Insurance?associations (AARP, NRA), and non-insurancerelated markets such as Sam’s Cluband Home Depot who are utilizing theirmarket presence as a means to enter the insurancemarketplace. In order to counteractthese opposing forces and maintain growthand profitability, existing firms must evaluatetheir marketing strategies and focus ontheir core competencies to become moreeffective and efficient.The intense rivalry among competitorshas the potential to reduce profitabilitythroughout the industry as well. Withthe high number of firms competing forthe same client base, successful agenciesmust be able to differentiate themselves,not only on price but with services provided.This might include ramping upefforts to deliver first-rate service toagency clients by imparting the knowledgenecessary for them to make wiseand proper coverage choices.In addition, providing clients with allof their insurance needs greatly increaseslong-term retention. Successful agencieshave historically provided more than asimple commodity to their clients – theyalso provide value, which increases loyaltyand retention. These value-added servicesincrease the “switching costs” associatedwith moving to another agent or company,making it more difficult to move.Insurance agencies must be able to differentiatethe products and services they sellfrom those provided by their competitorsto create value. Doing so instills confidencein the minds of their clients whichhelps cement lasting relationships.The existence of substitute productsthreatens an agency’s existing client baseby increasing the likelihood a client mayswitch. In 2008 there were 2,741 propertyand casualty companies and 1,128life and health insurance companies inthe United States, [1] each offering similarproducts and services. Insurance agentsmust become ‘insurance advisors’ to educatetheir clients and create a new level ofproduct differentiation – in other words,be able to demonstrate what makes yourproducts and service special. Indeed,there is a whole range of talking pointsagents can use to make their case. Theseinclude price, coverage quality, claimsservice and additional coverage options.And perhaps even more importantly,56 — Exclusivefocus Winter 2009/2010
agents should seek ways to instill a senseof trust and peace of mind in the mindsof their prospects and clients. By creatinga perceived level of product differentiationand increasing the “switching costs,”agents can hedge against the threats ofsubstitute products.The “Bargaining Power of Suppliers”is the power held by the insurancecompanies. Insurance agents have littlepower over product offerings, premiumscharged, or the level of service providedduring claims. The insurance companiesdictate the levels of commissions, bonusesand contingencies that agents areable to earn. Changes within the industryover the past several years have limitedcompensation levels and the abilityto earn additional bonuses, most notablydue to Eliot Spitzer’s campaign for insurancereform in 2004.The insurance industry is also seeingan increase in vertical integration whereininsurance companies are entering themarketplace as direct competitors, shunningthe use of agencies by utilizing Internetbased distribution methods. In 2008,more than 15% of all auto insurance transactionswere sold online through directmarkets. [3] With online sales and marketingnot showing any signs of decreasing,existing traditional agencies must adoptsimilar plans and offer their clients comparableservices while continuing to providesuperior service, value and, most importantly,knowledge.Clients want to receive the best possibleproduct at the lowest price. While individualsmay not pose a direct “BargainingPower of Buyers,” groups and large corporateclients can. In order to maximizeprofitability, firms must reduce their costswhile providing higher levels of service,better quality policies and lower prices.The power of buyers is evident within theinsurance industry as evidenced by thecompetition among insurance companiesand agents battling for market share.According to Porter, an attractive industryhas high entry barriers, suppliersand buyers with little power, few productsubstitutes, and moderate competitiverivalry. Since the insurance industryhas little to none of these attractiveforces, are 2.3 million American workersin the wrong industry? Considering theinsurance industry’s net written premiumstotaled $1.1 trillion in 2008 andaccounted for 2.4% of the U.S. gross domesticproduct in 2007 (2008 data notavailable), [1] the insurance industry ismore than thriving. While competitionwill continue to increase among insuranceagencies and brokerages, it is stillpossible for them to increase their longtermprofitability and overall returns byrecognizing and understanding the positions,intentions, and performance oftheir competitors.Sources:1. Insurance Industry at a Glance.Insurance Information Institute (iii)..2. Statistics of U.S. Business: 2005.U.S. Census Bureau. 3. Vollman, Andrea .2009 Online AutoInsurance Report. 04-28-2009. 4. Hoskisson, Robert E., Michael A.Hitt, R. Duane Ireland, and Jeffrey S.Harrison. Competing For Advantage.2ND ed. Ohio: South-Western, 2008Article submitted by The Woodlands FinancialGroup, The Woodlands, TX. Phone(877)-466-1115.Winter 2009/2010 Exclusivefocus — 57
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