Do Insurance Agents Matter?
Who needs an insurance agent when a car manufacturer will give you auto insurance for free? Washington and Oregon insurance regulators have approved General Motors’ sales promotion which offers "free auto insurance." General Motors is hoping to lure buyers by offering a free one-year policy to customers who purchase or lease new cars before September 6, 2011. Purchasers who decide not to accept the "free auto insurance" and find their own policy get no discount for doing so.
As reported in the on-line version of Independent Magazine, this is how the program works:
Through a partnership with MetLife Auto & Home, GM is set to start a pilot program in Washington and Oregon on all new 2010, 2011, and 2012 Chevrolet, Buick, Cadillac, and GMC vehicles. During the promotion, purchasers or lessees of each eligible new vehicle will automatically receive free auto coverage for one year from MetLife Auto & Home, paid for by GM on behalf of the customer. Customers will not subject to traditional underwriting criteria (i.e. driving record, age, sex, etc.). The only eligibility requirements are that the customer have a valid driver’s license, that the new vehicle be registered in a state where the program is in effect (for now just Washington and Oregon), that the vehicle not be primarily used for commercial, fleet, or livery purposes and that the new vehicle be one of the makes and models designated by the manufacturer as eligible for the program.
If a customer chooses to retain his/her existing insurance or chooses to purchase insurance from a different company, he/she may do so at his/her own expense and the policy from MetLife Auto & Home would provide coverage in excess of the other policy. Customers can also choose to decline the offer altogether, but the cost of the insurance is not added to the price of the car—it comes out of the manufacturer’s promotion budget.
Bob Lundgren, chief marketing officer of MetLife Auto & Home, says ...GM dealers will not have licensed agents on site and customers will be contacted by the MetLife Auto & Home call center within three days of purchasing the vehicle. Lundgren notes the program is exclusive to GM and MetLife Auto & Home and can’t be extended to other car manufacturers or insurers. The existing contract is for one year with an option for renewal.
People don't read the insurance policies they purchase. Even if they tried to do so after the purchase, the terms are so confusing that few would fully understand what they bought. The small print in most insurance policies exclude, limit or except important protections.
In mass advertising, insurance companies never mention the dangerous small print buried it their product which leaves customers vulnerable. Instead, the insurance company mantra is largely about price comparison and, occasionally, feel-good stories about the insurance company. Little is advertised about exactly what the consumer purchases, and comparisons are always based on price, not the actual insurance products.
Metlife is just one of many insurance companies that markets its insurance as a commodity product, even though few insurance policies can truly be considered standard in their coverages and exclusions. Insurance companies write policies with small print that is different from their competitors. Unless a consumer could keep up with the significance of different words offered the various insurance contracts, it is nearly impossible for a consumer to understand the benefits and risks of different policies. Indeed, the actual contract is not given to the insurance consumer until after the purchase is made.
Traditionally, insurance agents, especially independent insurance agents, have provided the consumer with knowledge, experience and advice about the various forms of insurance and the options available. Gaps and lack of benefits in coverage that leave customers without meaningful coverage in the event of a disaster are often avoided by competent insurance agents, licensed and regulated by states, who honestly explain the insurance products offered and purchased.
Nothing is "free." The mass marketing of important and costly financial products, such as auto insurance, without explanation to the consumer, hides the true costs of the product when it has to perform. The insurance industry invites negative impressions by failing to explain or warn its customers about the hidden costs contained in mass advertisements. These insurance companies are so cheap that they intentionally cut out the cost of the insurance agent, who has the role to explain what it is that is being sold to the consumer and the consumer’s available options.
Good insurance agents do matter. I get the feeling that most insurance companies that mass advertise only pay lip service to how important they really are.
Chip,
Good post on the importance of agents, especially independent agents
.
You also make the broader point that consumers need to understand what they're buying but find it hard to do so. Professor Dan Schwarcz of the University of Minnesota law school has done important research on homeowners insurance showing that policies vary greatly, there's no way for consumers to find out about the variations, and regulators have been asleep at the switch on this issue.
The abstract of his article "Reevaluating Standardized Insurance Policies," forthcoming in the University of Chicago Law Review and now on SSRN.com:
This Article empirically debunks the common claim that homeowners insurance policies do not vary across different insurance carriers. It demonstrates that different carriers' homeowners policies differ radically with respect to numerous important coverage provisions. It also reports that a substantial majority of these deviations produce decreases in the amount of coverage relative to the presumptive industry standard, though some deviations increase coverage.
Additionally, the Article describes the surprising absence of any mechanisms by which even informed and vigilant consumers could comparison shop among carriers on the basis of differences in coverage. It closes by reviewing various regulatory and judicial options for responding to this lack of transparency in homeowners insurance markets. It also considers the broader theoretical implications of the findings for regulatory theory and scholarship on standardized form contracts.
Jay Feinman
Chip, thanks for the comments contrasting carriers who use agents and those who do not.
One of the most misunderstood aspects of the difference is that internet isn't cheaper, or rarely so, anyway. GEICO, for example, spent $502 million on advertising in 2009, more than has ever been spent on any product, ever. Most carriers that use agents rely on the agents local presence for targeted, cheaper, methods of promotion; that's why their price, even on auto, is often lower.
This is why only a few companies don't use agents. It's also why some internet companies, like GEICO, are starting to use agents...it's cheaper.
There is only one company I know of, in Florida, selling Homeowners without agents, and it's price is substantially higher in most cases; still its advertising falsely claimed it was cheaper, BECAUSE, it didn't use agents. GEICO no longer makes this false claim because it violates the unfair trade practices act against false and misleading promotions.
All proof positive that if you tell the same lie often enough some people, even a majority, will eventually begin to believe it.
The truth, more often than not is, that you get less and you spend more when you buy insurance over the internet or without an agent.
Scott Johnson
www.johnsonstrategiesllc.com