Finance 341 Property and Liability Insurance Marketing Roger Schultz FCAS, MAAA, CPCU, MBA Guest Lecturer January 28, 2003

Thesis The marketing discipline is a concept that is foreign to the insurance industry.

A little about me... 1978 graduate of Drake University FCAS, CPCU, MBA in Marketing 24 years with Allstate Insurance, 17 Assignments Stints as a chief actuary, #2 underwriting officer, product management, special assignments: CNA PI due diligence Segmentation project Reengineering Focus of comments will be on personal lines...

Discussion Question What is “Marketing”?

What is “Marketing”? Discussion Question The process by which companies deliver value to customers. “Marketing is everything”

MARKETING is everything! What is Marketing? MARKETING is everything! Sales Underwriting Pricing Claims Operations

What do customers want from insurance? What is the value proposition Discussion Question What do customers want from insurance? What is the value proposition from their standpoint?

What do customers want from insurance? What is the value proposition Discussion Question What do customers want from insurance? What is the value proposition from their standpoint?

How do customers feel about personal lines insurance? Discussion Question How do customers feel about personal lines insurance?

How do customers feel about personal lines insurance? Discussion Question How do customers feel about personal lines insurance? Low interest, low involvement, rather not be bothered, dislike the topic, necessary evil, costly, confusing, poor service, don’t like being required to buy something I don’t plan to use.

Why is there such low interest in insurance? Low understanding of the insurance concept Low understanding of the contract Insurance is mandatory Costly Low usage rate Customers are not sure what to expect Service levels are low Shopping of very hard Pricing is complex Aspects of insurance are personal Companies are hard to tell apart

Marketing is all about the creation of value for customers! Conclusion It is hard to create a clear, compelling value proposition for insurance customers! Marketing is all about the creation of value for customers!

Sidebar 1: Regulation Why so much? Complex product Companies have advantage over customers Cost is high for mandated product - must regulate! Distrust of insurance industry Financial stability of companies is of high public policy concern and hard to assure To promote competition (really?) Anti-trust exemption - “to extent regulated by states” Politics

Sidebar 2: Industry attractiveness Porter’s Five Force Framework can be used to assess attractiveness of the insurance industry. Suppliers Buyers Substitutes New Entrants Rivalry Goal: Sustainable Profitable Growth

Sidebar 2: Industry attractiveness Personal lines Personal lines market is unattractive due to rivalry and modest supplier power. Suppliers MODEST Buyers LOW Substitutes Entrants Rivalry HIGH

Sidebar 2: Industry attractiveness Commercial lines Commercial market is unattractive due to rivalry and high supplier and buyer power and the threat of substitutes. Suppliers HIGH Buyers Substitutes Entrants MODEST Rivalry

“4 P’s of Marketing”? Price Product Place Promotion “The Marketing Mix”

Marketing is about value creation for customers...How so? MARKETING is everything! Sales Underwriting Pricing Claims Operations A Strategy Target Price Product Place Promotion Positioning Competition Consumer Company Strategic Fit Market Attractiveness B

Operational Excellence MARKETING is everything! Sales Underwriting Pricing Claims Operations Most insurance company management attention today is focused on operational excellence.

Market Attractiveness B Marketing Strategy Strategy Target Price Product Place Promotion Positioning Competition Consumer Company Strategic Fit Market Attractiveness Little insurance company management attention today is focused on strategy. Few companies have Marketing Departments.

Market Positioning What do customers want from their insurance company? Price Claim Service Agent / Customer Service Solid, Reputable Company

Price vs. Claim Handling Market Positioning Price vs. Claim Handling USAA Hartford Met Pru Farmers Bad Claim Handling Good Claim Handling High Prices GEICO AAA Travelers Nation Wide State Farm Allstate Liberty Am Fam AMICA Low Prices CNA PROG

Market Positioning Price vs. Claim Handling Hartford Met Pru Bad Claim Handling Good Claim Handling High Prices Travelers Low Prices Independent Agency Companies CNA PROG

Market Positioning Price vs. Claim Handling USAA Met Pru Farmers Bad Claim Handling Good Claim Handling High Prices GEICO AAA Nation Wide State Farm Allstate Am Fam AMICA Low Prices Captive Agency Companies and Direct Writers Liberty

Market Positioning Marketing is about making choices - nobody can be all things to all customers Marketing is about value creation for customers Marketing is about being different than others - segmentation helps frame these choices Market strategy informs market positioning. Market positioning should be purposeful, it should not be an accident.

Market Segmentation Helps to frame marketing decisions Possible segmentation dimensions Geography Service Products / coverages Channel Demographics

Closing Thesis: The marketing discipline is a concept that is foreign to the insurance industry. Marketing is everything - beware of the misuse of the term in the insurance industry Unattractive industry - being average and undifferentiated is a losing strategy Marketing is about creation of value for customers. Shareholders and other interests follow. Leaders job is to create and lead the development of strategy and oversee execution.

Questions?