Michael Treacy and Fred Wiersma's book, The Discipline of Market Leaders, presents a compelling explanation of why some companies continually outperform their competitors. Their thesis rests on this premise: If a company is going to achieve and sustain dominance, it must first decide where it will stake its claim in the marketplace and what kind of value it offers customers.
If customers value low cost, they want it lower. If they value convenience or speed when they buy, they want it easier and faster. If they need expert advice, they want companies to give them more depth, more time, and a strong sense that they are the only customer. Explore how these concepts affect the latest insurance industry trends. These new developments signal the beginning of the end for independent agents who do not fundamentally change the way they do business.
The first-value discipline is operations excellence. Companies that pursue this course are not product or service innovators, nor do they cultivate deep, one-to-one relationships with customers. Instead, operationally excellent companies provide middle of the market products at the best price with the least inconvenience. They offer customers low price and/or hassle-free service.
Look at where many insurance companies are competing. You can buy insurance via CompuServe or via direct mail from a variety of companies. Even Bank of America is involved in direct sales of low-cost products. AIG is leveraging their bailout of 20th Century Insurance by rolling its low-cost direct writer approach across America. AIG is already a mass merchandiser of Automobile insurance to affinity groups and associations. Metropolitan has over $200 million in premium in 'workplace marketing programs.' Chubb launched a Personal Lines initiative with the purchase of Alexander and Alexander's portfolio and the acquisition of PLI, a $130-million insurance agency. Do not be surprised to see Intuit link up with an insurance provider that will provide coverage via an on-line link with Quicken financial management software.
Agents are protesting Automobile policy commission reductions. The insurance providers just mentioned pay no commissions! Face the facts, folks-there is a huge market segment out there telling you they do not feel agents add value to the transaction.
These consumers are going to buy their insurance cheap and quick from a company that is extremely efficient. And why shouldn't they? Very few customers can tell one policy from another. Look at what most agents and companies advertise-price and not much else. If all you have to offer is a generic product with no price advantage, why should I buy from you?
The second-value discipline is product leadership. Its practitioners concentrate on offering products that push performance boundaries. Their proposition to customers is to offer the best products, and they continue to innovate year after year. Except for niche markets, designed for small market segments, there is little product differentiation in the insurance industry.
The industry could use a dose of innovation in its delivery of products and services. A research project conducted by the Pacific Northwest CPCU Chapter found that 'only 38% of the insureds indicated that they had received loss prevention and safety protection assistance from either their agent or their insurance company.'
A study by the Strategic Performance Group (SPG) found that 'professional insurance consultations' is the insurance consumer's most urgent need; pushing a product and a price isn't enough. Customers told researchers that customized products and quality service were their second and third most pressing needs, respectively-adding however, that industry fails miserably in both respects. The CPCU study found that 34.95% of consumers have a favorable attitude toward the insurance industry, compared to the 44.29% who have an unfavorable attitude. An Insurance Information Institute survey found that only two in five customers feel they receive value from insurance products. Worst of all, more than half feel they are not treated as valued customers. It appears that the consumers are saying, 'Why not buy from a direct-response provider when neither my agent nor my company provide value-added services?'
The third-value discipline is customer intimacy. Its adherents focus on delivering not what the general market wants, but what specific customers want. Customer-intimate companies do not pursue one-time transactions; they cultivate relationships, specializing in satisfying specific customer needs, which they discover through close relationships and intimate knowledge of their customers.
The CPCU study found that 38% of the consumers were not given an explanation of coverage in the past three years. Another CPCU chapter study found that less than 63% of consumers say they are kept informed of how insurance products and services meet their needs. Yet the SPG found that consumers place continuing communication and contact at renewal time high on their list of wants (numbers five and six). Price placed fourth on the list.
What does all this mean? Competing on the basis of product and price against the direct-response providers is a losing proposition. They are winning the war because they outperform the competition with customers who value operating efficiency that results in low-cost, low-price, and speed of delivery.
While niche markets offer opportunities for product innovation, these often represent a relatively small segment of the total market. Customer intimacy is a competitive strategy built upon long-term relationships. It is created around a total understanding of the customer, how they are or are not being served by the competition, and knowing what customers need. The key is to forget about insurance for a while and focus on customer satisfaction (primary wants). This is the foundation for creating and inviting the customer into the risk-management process for both personal and business exposures.
Successful agents do not open the relationship by filling out an application as suggested by 99% of insurance agency procedures. Instead, they begin with a professional risk management consultation. It includes a complete personal or commercial asset inventory. Then they help the client determine what the client can afford to lose. When the customer flinches and says, 'I want to protect that asset from loss,' they know how much of the loss the customer is willing to retain. Transferring risk of loss via insurance doesn't become an issue until after loss-prevention procedures are addressed. Successful providers explain their insurance options in plain English. This process of educating and inviting consumers into the process of preventing or financing losses creates the opportunity to begin lifelong relationships.
The customers' business and personal needs are always changing. The new breed of agents and companies follow a strategy of life-events selling and servicing. They understand that the small growing company's needs differ from those of a mature company with little or no growth. A young married couple's needs are different from those of a middle-aged couple, and both are different from those of a recently retired couple. Paying attention to the clients' life-events provides significant opportunities to address their current, potential, and future insurance and risk management needs.
This highly professional, customer-driven (intimate) approach creates the added value that separates the successful company or agency from its competition. Let customers who want to buy insurance on the basis of price, go to the direct-response providers. Let insurance consumers who want professional consultations and top-quality service come to you. There is absolutely no reason your company or agency cannot become the Nordstrom's of the insurance industry. It is simply up to you. But remember, if you do not start adding value to the relationship, your customers may as well go to a direct-response provider.