Have you ever been annoyed by the constant bombardment of television and internet advertising from national insurance carriers? The amount of insurance advertising on television and on the internet seems to have ratcheted up in recent years.
Who pays for this advertising? Consumers do, in the form of higher insurance premiums.
In the fourth article of our series on how we plan to change the insurance process, we explore the impact of insurance marketing and advertising on the consumer in terms of higher costs.
In reviewing the costs recorded specifically to the ‘advertising’ category of insurance company financial statements, we find that the amount spent by large carriers is staggering. To get a sense for the scale of advertising costs alone, we reviewed the largest carrier groups’ financial statements from 2020. We found that Progressive led the pack, recording $2 billion in advertising expense. State Farm and Allstate both spent about $1 billion. Notable was that GEICO only recorded just over $420 million in advertising expense. However, it is likely that most of the large advertising spend for GEICO is being recorded to other expense categories or allocated among other insurance affiliates in their insurance group. We believe the actual advertising spend for GEICO to be closer to or higher than the $2 billion spent by Progressive. The direct writers that do not use agents, such as USAA and GEICO, have an advantage when competing against companies paying commissions to agents. However, much of this advantage is eliminated due to these companies’ increased focus on advertising spend to attract new customers. Many smaller carriers using the agency distribution system spend little if anything on advertising, because they know it does not influence the ability to attract customers. What matters for those companies is the percentage commission they pay to their agents. Pay a higher commission rate, and you will attract more sales and more profitable business to your company.
Who pays for this advertising? Consumers do, in the form of higher insurance premiums. Advertising and marketing costs are an expense that is passed through to consumers in company rate filings. Various recent studies have placed the advertising spend of larger personal lines insurance carriers from 3% to 6% of direct written premium.
The wide range is due to difficulties in determining precisely how much of advertising expense relates to the lines of business targeted by that advertising. Companies that access consumers directly, such as GEICO and USAA, tend to incur a much larger advertising cost per premium dollar than those using the independent agent system, but is it really a larger spend?
For standard personal lines insurance policies such as home and auto, an increasing portion of an agency’s work relates to the advertising and marketing done to direct new clients toward certain carriers. Most people do not even know that agents are rewarded every time they secure a new policy for a carrier and again every time those policies renew. The reward comes in the form of agent commissions that are a percentage of total premiums written. Insurance is one of the only industries where this archaic and inefficient marketing process remains intact.
This structure became obsolete long ago in other financial industries. Long gone are the days of 15% real estate agent commissions and pay-per-trade stockbroker commissions. Insurance agents, however, function as paid marketing and advertising teams that drive business to insurance carriers. This system helps to keep personal lines policy retention high, as an agent has no incentive to help a consumer shop for a lower rate since that would result in a reduced dollar commission for themselves.
Most consumers do not realize that 15-20% or more of their home insurance premium relates to the agency marketing team employed by carriers. While not all commissions paid to agents are meant as a marketing incentive, it is a sizable portion. In the increasingly automated personal lines market, agents have a far reduced role in terms of advising customers on coverage, helping with claims issues, or solving billing questions. Most consumers are simply looking for the lowest price available to protect against large claim events, and they do not need tailored advice and service from agents. When we add together both the known and ‘hidden’ costs of insurance company advertising and marketing, we arrive at a percentage spend of 20-25% of home insurance premiums. These costs of inefficiency increase the price to the consumer by a commensurate amount.
Is insurance advertising worth it for the carrier? Several studies have shown that there is a dubious relationship between advertising and increased sales, especially for large companies with established brand names. If everyone in America already knows your tag line and company mascot, why would you continue to increase advertising expense to go after consumers that are not as profitable as the ones you already have?
A prime example of why traditional advertising may not be worthwhile can be found in another industry that has been disrupted over the last decade, auto makers. Have you ever once seen a television commercial or internet ad for Tesla? No, because the company’s products speak for themselves, and they are highly recommended through a network of extremely satisfied customers. This company is now among the most highly valued of all businesses in the US. This is as much proof as we might need that advertising is not cost effective. However, in the inefficient insurance industry where there is little true innovation or differentiation across companies other than price, companies fight for market share through advertising spend and agent commissions. This is just the way it has always been, and insurance company executives have little motivation to change since everyone is making money following the same playbook.
Is insurance advertising worth it for the carrier?
Several studies have shown that there is a dubious relationship between advertising and increased sales, especially for large companies with established brand names.
If everyone in America already knows your tag line and company mascot, why would you continue to increase advertising expense to go after consumers that are not as profitable as the ones you already have?
A prime example of why traditional advertising may not be worthwhile can be found in another industry that has been disrupted over the last decade, auto makers. Have you ever once seen a television commercial or internet ad for Tesla? No, because the company’s products speak for themselves, and they are highly recommended through a network of extremely satisfied customers. This company is now among the most highly valued of all businesses in the US. This is as much proof as we might need that advertising is not cost effective. However, in the inefficient insurance industry where there is little true innovation or differentiation across companies other than price, companies fight for market share through advertising spend and agent commissions. This is just the way it has always been, and insurance company executives have little motivation to change since everyone is making money following the same playbook.
We think this highly inefficient system of spending advertising and agent commission dollars to attract customers is a losing game that only hurts insurance consumers. Even the newer ‘insurtech’ companies have bought into this strategy. These companies tackle it differently but spend even more than traditional companies to acquire customers. Some are spending hundreds of dollars per click to get their company names at the top of search engine lists, while others are spending enormous amounts of IT dollars to build slick websites that attract only those customers with a reason to shop. It is well known that the large group of ‘passive’ insurance customers are by far the most profitable segment of the insurance market, yet companies continue to fight over the least profitable subset. Why? Because the agent distribution system includes powerful incentives to perpetuate a marketing strategy that leaves renewals alone. For home insurance, the passive consumer makes up over 75% of the market since many home policies are paid through a mortgage escrow where ‘out of sight’ equals ‘out of mind.’
At Zinsurance, we believe the customer must come first and we do not aspire to be a brand name that everyone sees on TV or at the top of a search engine list, with highly paid celebrities and influencers touting our product. We will never pay millions of dollars for a 30-second advertisement during the Super Bowl. Instead, we intend to use inexpensive data and technology to attract the best ‘passive’ insurance customers to our product, by making it simple, easy, and the best insurance solution they have ever seen, all at a much lower price.
Here's how we save you money...
Our price will be lower than most because we will not spend 15-20% or more for advertising and intermediaries that only make it harder and more costly for consumers to get quality insurance protection and service.
- We market our product directly to you
- We use public data to identify preferred risk homes
- We leverage technology to lower overhead cost
