Personal lines insurance carriers have a problem, a problem of their own making, and it’s getting worse. The problem I’m talking about is the ‘ups’ (which are great for mountains, but bad for the carriers). The ups usually start at the first renewal and then keep cranking away for the next 5 – 7 years.
The ups are one of the main causes of really crappy retention amongst insurance carriers . . . And a huge driver for insured ‘shopping’ behavior. I can’t tell you how many times I’ve heard insurance execs talk about ‘acquisition cost’ with nary a glance their sliding retention numbers. No worries, we’ll just sell to more new customers! After all, it’s a brave new world and everyone wants to shop their insurance all the time, right?!
Let me stick with that for a second . . . It’s absolute bull that people want to shop their insurance. Most people want to go through filling out forms and spend money on something they hope they won’t use about as much as a fish looks forward to a drought. I’ve never once had a customer come to me and say, “I’m so excited to go over my insurance again!” I have heard, “I hate this stuff but I know I need to have it. It’s just so darn expensive and I can’t afford it anymore. Can you find me something cheaper?”
Back to the ups. If you haven’t already guessed, the ‘ups’ are the term I’m using for the significant increases in premium personal lines policies tend to take as all the new business discounts peel their way off the policy. In my experience, most of these discounts phase out in the 2 – 3 year period with some having a long 5 – 7 year tail. It’s the insurance industry’s version of $29.99/mo cable that then triples the very moment you’ve forgotten it was a trial price. Yeah, and we know how much people love cable providers right?
As an interesting side note, this tactic of selling policies at bargain basement prices and then jacking the premium over the next few years tends to be strongest in captive and direct writers (the agents will try to keep them with the company because they have no other choice), and less so with independent agent based companies (too much increase in any given year and the agent can easily move the policy to another carrier in-house). Nevertheless, all PL distribution channels are down with the ups (by ‘down,’ I mean ‘hip’ or ‘happy’).
Recap: Personal lines insurance companies deeply discount pricing for new policies using discounts. These discounts are designed to phase out over the first few years of the policy, resulting in rapid premium increases during that time frame. These ‘ups’ lead to more insureds shopping their insurance and going with the carrier that currently has the lowest new business rate for them. The cycle is complete.
So we have the carriers participating in a new business discounts arms race to the bottom . . . But at what cost to the consumer and the industry in the long run? And if I’m going to be reflective for a moment, just who is driving the consumer shopping behavior? Is this a chicken/egg situation? Lastly . . . What role does the Independent Agent play in stabilizing the market? Do you warn your client when a carrier premium looks too aggressive for the market and offer an alternative?