Personal lines auto: The differentiator’s dilemma

The good news story for Progressive’s auto insurance business continued with the release of its December 2018 Earnings Report. The company’s 2018 auto growth of more than 1.6 million policies, with a P&C combined ratio under 90, further accelerated a larger auto insurance industry trend many years in the making. For traditional brand differentiators, Progressive’s recent results will deepen competitive concerns and intensify the search for new growth levers.

The U.S. auto insurance market is highly concentrated with the top 10 insurers accounting for 72.3% of all written premium in 2017. Members of this select group pursue one of three distinct business and brand strategies: cost leadership, nonprice differentiation or customer intimacy. Customers drift away from companies pursuing more traditional differentiation strategies, and toward those competing primarily on price or customer intimacy has been the key feature of industry structure in recent years.

Of the current top 10 auto insurers, the seven that pursue nonprice-based brand positioning shed 5.6 percentage points of market share from 2008 to 2017, with all but two (State Farm and Liberty Mutual) experiencing market share declines. Price/value leaders Geico and Progressive, along with customer relationship-focused USAA, combined for a market share increase of 9.6 percentage points over the same period on a direct written premium basis.

Related: U.S. auto insurers see best underwriting results in a decade, says Fitch

Traditional brand differentiators have a choice to make

Underwriting profitability has been challenging for the seven traditional brand differentiators over the same period, with the group posting an average P&C combined ratio of 102.16 compared to 94.15 for those pursuing low-price or customer intimacy strategies. Most troubling for the traditional brand differentiators is customer satisfaction results. Despite their substantial investment in brand messaging related to customer confidence and advocacy, the 2018 J.D. Power Auto Insurance Study shows that customers now rate traditional differentiators and cost leaders at near parity, with USAA continuing to dominate all others in customer satisfaction.

These traditional differentiators face a dilemma: Continue to harvest existing share and compete for an ever-shrinking industry segment, or significantly alter the historical business models originally responsible for their market position. The recent ascendancy of Geico and Progressive to the #2 and #3 auto market share positions, respectively, punctuates an industry re-alignment that has been many years in the making. Traditional brand differentiators should anticipate an acceleration in these trends, and face three new realities as they re-think enterprise business and brand strategy.

Related: Marketing strategies for maximum insurance agency visibility

1. Lower-cost business models

Lower-cost business models are a source of sustainable competitive advantage in this industry. Conventional wisdom holds that cost leadership strategies don’t yield sustainable competitive advantage because operational efficiency is relatively easy for competitors to emulate in the near term. However, the large, functionally-integrated insurance company model that pervades the industry is very expensive. A 2017 industry expense ratio of 39.39% ranks P&C insurance near the top of all industry sectors in selling, general and administrative expenses. A clear line of separation is seen in the 2017 unweighted average expense ratios of traditional differentiators (41.27%) and firms pursuing cost leadership or customer intimacy (27.23%).

In an industry with as much structural inefficiency as P&C insurance, it is perhaps no surprise that lower cost business models have accounted for nearly all market share growth in recent years and are poised to continue to do so. Price is half of the customer value proposition. In a time in which customer access and the overall customer experience is improving across all industry players, the ability of traditional differentiators to justify higher-than-market prices for a product increasingly viewed as a commodity will be diminished.

Related: The modern insurer’s guide to profitability

2. Sources must be exploited differently

Existing sources of differentiation must be exploited differently. Brand differentiation solely on the basis of customer confidence, advocacy or empathy competes in a crowded field. Traditional brand differentiators must look to exploit already-existing competitive advantages in different ways to present a compelling value proposition to customers.

If the emergence of new digital customer channels for auto insurance was the story of the past decade, stitching them together with producer and contact center channels in truly seamless omnichannel customer experiences will be the story of the next. Many of the seven traditional brand differentiators enjoy significant advantages in producer networks and local community presence relative to the cost leaders. Digital strategy for these players must be pursued in a manner that recognizes and modernizes these already-existing advantages, rather than chasing the approach of others.

Likewise, many of the traditional differentiators have also built extensive product stables, and enjoy vast volumes of historical product and customer data upon which to produce new insights. Deepening core competencies and exploiting these difficult-to-replicate competitive advantages in new ways is the clearest path to refreshing the nonprice elements of a firm’s value proposition.

Related: Personalizing the future of auto insurance

3. Growth will be nonorganic

The path to growth for traditional brand differentiators will be nonorganic. As market dominance of the traditional differentiators has been challenged in recent years, consistent organic growth has given way to trading market share with industry peers, and ultimately to ceding share to cost leaders. Long-term trends in consumer transportation preferences and vehicle automation will likely compound the difficulties for traditional brand differentiators to grow organically by depressing overall industry revenue growth. This, combined with the fact that nearly half of industry market share is distributed among seven players sharing essentially the same business model, makes the industry ripe for consolidation. The firms best prepared for industry consolidation will be the ones that have taken aggressive steps to drive costs out of operations and optimize their Information Technology assets and processes for large-scale integration and data migration.

Related: Commercial auto insurers map out a path to profitability

Chad Sands CPCU, CLU, FLMI is an enterprise architect and P&C industry analyst. He can be reached at cmsands@empathus.org.