1. Finance 431: Property-Liability Insurance Lecture 4: Marketing and Distribution Systems

2. Marketing and Distribution Systems Marketing - developing strategies to get and keep customers Measuring the market (2006) Premium volume $444 billion Number of insurers 2,648 Measuring market share Company NWP (Net Written Premium)/Total NWP -by line, by state Measuring competitiveness Concentration ratio Herfindahl Index (2006) 344 4 firm market share (2006) Total Property-Liability 29.5%

3. Property-Liability Insurance Product Product differentiation Contract - restricted by state regulation Price Service Philosophies of Marketing Management Production Concept - cost Product Concept - quality Sales Concept - sales effort (needs of the seller) Marketing Concept - market segments (needs of the buyer)

4. Based on the TV commercials you have seen for GEICO, what philosophy of marketing management do they have? A)Production Concept - cost B)Product Concept - quality C)Sales Concept - sales effort (needs of the seller) D)Marketing Concept - market segments (needs of the buyer) E)None of the above

5. Based on the TV commercials you have seen for Allstate, what philosophy of marketing management do they have? A)Production Concept - cost B)Product Concept - quality C)Sales Concept - sales effort (needs of the seller) D)Marketing Concept - market segments (needs of the buyer) E)None of the above

6. Key Marketing Decisions Whom to serve Product market specialization Product specialization Market specialization Selective specialization Full-service multi-product/multi-market insurer What products and services Product life cycle Product development process

7. Marketing Objectives Growth Profitability Innovation Diversification Satisfaction

8. Marketing Strategies Competitive positioning Market leader Market challenger Market follower Market nicher Growth Strategies 1.Market penetration (Current products to current markets) 2.Market development (Current products to new markets) 3.Product development (New products) 4.Diversification (Correlated products)

9. Based on competitive positioning, how would you classify State Farm in the auto insurance market? A)Market leader B)Market challenger C)Market follower D)Market nicher E)None of the above

10. Based on competitive positioning, how would you classify Allstate in the auto insurance market? A)Market leader B)Market challenger C)Market follower D)Market nicher E)None of the above

11. Marketing Functions and Special Constraints Functions Marketing research Market development Marketing information Marketing planning Advertising Sales promotion Marketing administration Customer relations Constraints Mature product Intangible Service intensive Low customer involvement ~30% of customers shop Regulated

12. Distribution Systems Insurance Market Intermediaries Unique characteristics of insurance marketing Legal status of agent Agent - represents insurer Broker - represents policyholder Powers and duties of agent Listed in contract Powers - Lines written, binding authority Duties - Accounting, rules Apparent versus actual authority

13. Attributes of Insurance Intermediaries Ties to insurers Compensation methods Salary Commissions Flat Contingent commissions Ownership of expirations

14. Types of Insurance Distribution Systems Independent Agency System Agents own expirations Exclusive Agency System Direct Writer Direct Response Combination Systems INA - 1970s Allstate - currently Expense differences

15. Alternative Marketing Systems Involuntary Market Auto Assigned Risk Plans Joint Underwriting Associations (JUAs) Auto Reinsurance Plans State Funds Property FAIR Plans Beach and Windstorm Plans Workers’ Compensation

16. Alternative Marketing Systems Governmental Insurance State insurance funds WC -25 states Auto - Maryland Federal Flood Crime insurance FAIR plans Insurance exchanges Illinois - surplus lines Risk Retention Groups Need approval only in one state 1981Product Liability 1986 Commercial Liability (except WC) Purchasing Groups Exempt from Fictitious Group laws Mass merchandising

17. Marketing Management and Agent Functions Branch Office System Managing General Agency System Independent business Performs branch office functions Appoints agents Primarily excess and surplus lines and specialty areas Functions Performed by Agents Prospecting Sales Risk analysis Policy issuance Collection Claims handling Consulting

18. Distribution System Decisions Geographic location Expertise and reputation of producers Nature of existing business Ability to service products Markets to be targeted Insurer characteristics Degree of control required or desired

19. Comparison of Distribution Systems Independent Agency System ~ 50% of P-L market Higher in commercial lines Lower in personal lines Slower growth rate Higher expense ratios Examples of successful exclusive agency insurers State Farm Allstate