The power of BRANDING

This is not another article about the sad reality of our cyclical industry. Facts are facts. Over the last 30 years, our industry has generated an average return on equity (ROE) of barely 10%. Although recent years may have been better, the scars from the spectacularly bad 2% industry ROE in 2002 are still pretty fresh. The reality is that we are all competing in a slow-growth industry with excess capital. So while it may not be popular to say, I predict that cyclical markets are likely to be with us for a while.

Instead of mourning reality, it is more productive to discuss why our industry is so distinctly cyclical relative to other slow-growth industries, and what we could/should be doing to moderate its painful peaks and troughs. I want to focus on what I believe to be one key driver of that cyclicality, a driver over which we have far greater control than we do over the growth rate in Gross Domestic Product. That driver is value.

PRICE VERSUS VALUE

“Price is what you pay; value is what you get.” –Charles Munger, Vice Chairman of Berkshire Hathaway Inc.

In a world of pure commodities, price is the only variable. Too often we are told insurance is “just a commodity,” and thus we excuse the hand-to-hand price wars we so regularly fight. But insurance should not be “just a commodity.” Putting aside our industry perspective for a moment, let’s think about this issue from the perspective of the consumer. In my case, I buy food and drink water and coffee like everyone else, but I readily pay premium prices for certain food products with brands I trust, or from stores that have brands that signal quality. I pay extra for certain brands of bottled water. I will walk past two other coffee shops to get to my preferred brand location. Water and coffee are commodities, but successful companies have built compelling value propositions for these products based on unique customer insights and have, through this process, created value for me and for their shareholders. Why can’t we do the same with insurance?

Most consumers do not buy anything on price alone. Yes, price is important, but perceived value is what most influences our choice of one product over another. Unlike price, value is multi-dimensional and largely driven by our own unique mix of emotions and psychological needs. If price were the only factor, premium brand coffee shops could not compete. It is perceived value that causes some to pay significantly more for a designer coffee or for the added self-esteem that comes from wearing one label versus another.

Insurance is the ultimate perceived value sale. It has a core intrinsic value and a high ratio of emotional and psychic benefits relative to the cash paid out. Since the vast majority of customers rarely — or never — make a claim, for many insurance is a purchase that delivers zero cash back for cash spent. Yet, year after year, consumers buy insurance for the peace of mind of knowing that they are protected if something bad happens. But how many insurance consumers today voluntarily pay extra for one brand over another, knowing in their hearts that they are getting greater value? How many insurers are investing in building brand value to support this desirable behaviour? And how many companies are thinking from a customer-centric perspective and creating innovative, distinctive and branded product solutions to meet unique needs? You know the answer.

THE POWER OF BRAND

Amazing as it sounds, today there are no “famous” retail intermediated property and casualty companies in Canada. Research shows that no broker company has more than 10% “unaided” awareness among consumers. Yes, there are well-known direct writers and well-known captive agent companies. But not one “broker” company. This is a fascinating issue for our industry and in particular for the broker channel. As hard as it may be to explain to some actuaries, brand marketing works. But intermediated insurers in Canada generally do not have the margin to support brand marketing so there is almost never any sustained investment in brand power. Without brand power behind them, both companies and their brokers are exposed.

Why is it so serious an issue? Because brand is a forward-looking statement of promised value, a way to convey the inherent quality of a product. Companies allocate huge budgets to brand marketing for this reason. No one is immune to the power of a strong brand. Insurance products from companies with known brands increase customers’ comfort level, assuring them that if they make a claim, it will be paid. Without brand, what else do you have to fall back on? Price! And thus the slippery slope.

SELLING VALUE

Brand by itself is not enough. The brand promise has to be true. It must be based on a powerful customer value proposition genuinely rooted in customer understanding. Being customer-centric is a prerequisite for successfully selling value. This means knowing your customers and what they truly value. It means understanding their needs, how they feel about those needs and providing a solution that satisfies their needs. It also means understanding that customers can be different and that customers segment themselves. Different customers perceive value differently. Do we segment insurance customers effectively?

Let me give a practical example: long-haul trucking. Insurance is a major cost-driver in this industry; as a result, trucking companies are particularly sophisticated insurance customers. To satisfy the varying needs of long-haul trucking customers, some insurance companies offer both captive and traditional “guaranteed cost” policies. Why? Because some trucking companies have a greater risk appetite and prefer captive solutions that allow them to self-insure part of the risk and assume more ownership of their individual claims experience. Other companies find this route fundamentally unattractive and prefer annual guaranteed cost products.

By segmenting these different insurance buyers, we can deliver unique value to each segment. Brokers who understand these buyers best will know to offer both options, but recommend the one most suited to the customer’s need. In the end, the customer and their broker can decide what is right for them.

BROKER AS TRUSTED ADVISOR

The complexity of commercial insurance creates a tremendous need for professional advice. Customers need a broker who understands their business and the market in which they operate. No software will ever capture the knowledge, experience and judgment a professional broker can offer. No program will ever deliver the professional expertise, the true understanding of risk exposures and the capacity to choose an insurer that best matches a customer’s needs that a well-trained broker can provide. No computer — no matter how ‘intelligent’ — can forge a collaborative professional relationship with a customer. The broker as trusted advisor is indispensable.

The threat to brokers comes if they focus not on their advisor role, but on their more limited function as “price-checkers.” With the Internet, today’s personal insurance customers no longer need professionals to check price. Selling insurance as a commodity based on price alone is the express route to obsolescence. Just ask your friendly neighbourhood travel agent (if they’re still around).With the Internet and sites like Expedia, the travel agency business is dying. As the Internet expands its capabilities, it will continue to transform other industries — music, video rentals, etc. And the Web is just getting started. Company size is no protection; commercial insurance will not be immune.

PARTNERING TO CREATE VALUE

So what to do? Work together. Companies need to invest in their brands. Companies and brokers need to develop more customer-centric insights and increase the actual and perceived value of their solutions. And brokers need to appreciate their own brand value is enhanced when the
y sell the value propositions of good companies with powerful and respected brands.

Today, it’s unfortunately true that too many customers do not know who their insurer is, or that they are insured by an established, financially stable company managed by dedicated and trustworthy professionals. By not sharing this knowledge, brokers not only diminish their own value, but also miss out on the benefit of telling customers about the value delivered by their insurer. Brokers who do not sell strong brands with pride risk losing business to captive agent companies or direct writers that invest in their own brand value.

THE BOTTOM LINE

Cycles aren’t going to stop any time soon, but the peaks and troughs can be smoothed if our industry learns from other industries about how to break free from the pure-commodity, price-play game. Working together, brokers need to help their companies build stronger brands. Brokers need to help their companies become more customer-centric. And companies need to help brokers demonstrate their professional value as trusted advisors.

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Brand is not enough. The brand promise has to be true. It must be based on a powerful customer value proposition genuinely rooted in customer understanding. This means knowing what your customers truly value.

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Cycles aren’t going to stop anytime soon, but the peaks and troughs can be smoothed if our industry learns from other industries about how to break free from the pure-commodity, price-play game.