Finance 431:
Property-Liability Insurance
Lecture 4:
Marketing and Distribution Systems
Marketing and Distribution Systems
Marketing - developing strategies to get and keep
customers
Measuring the market (2006)
Premium volume $444 billion
Number of insurers 2,648
Measuring market share
Company NWP (Net Written Premium)/Total NWP
-by line, by state
Measuring competitiveness
Concentration ratio
Herfindahl Index (2006) 344
4 firm market share (2006)
Total Property-Liability
29.5%
Property-Liability Insurance Product
Product differentiation
Contract - restricted by state regulation
Price
Service
Philosophies of Marketing Management
Production Concept - cost
Product Concept - quality
Sales Concept - sales effort (needs of the seller)
Marketing Concept - market segments (needs of the
buyer)
Based on the TV commercials you have
seen for GEICO, what philosophy of
marketing management do they have?
A) Production Concept - cost
B) Product Concept - quality
C) Sales Concept - sales effort (needs of
the seller)
D) Marketing Concept - market segments
(needs of the buyer)
E) None of the above
Based on the TV commercials you have
seen for Allstate, what philosophy of
marketing management do they have?
A) Production Concept - cost
B) Product Concept - quality
C) Sales Concept - sales effort (needs of
the seller)
D) Marketing Concept - market segments
(needs of the buyer)
E) None of the above
Key Marketing Decisions
Whom to serve
Product market specialization
Product specialization
Market specialization
Selective specialization
Full-service multi-product/multi-market insurer
What products and services
Product life cycle
Product development process
Marketing Objectives
Growth
Profitability
Innovation
Diversification
Satisfaction
Marketing Strategies
Competitive positioning
Market leader
Market challenger
Market follower
Market nicher
Growth Strategies
1. Market penetration
(Current products to current
markets)
2. Market development
(Current products to new
markets)
3. Product development
(New products)
4. Diversification
(Correlated products)
Based on competitive positioning, how
would you classify State Farm in the
auto insurance market?
A)
B)
C)
D)
E)
Market leader
Market challenger
Market follower
Market nicher
None of the above
Based on competitive positioning, how
would you classify Allstate in the auto
insurance market?
A)
B)
C)
D)
E)
Market leader
Market challenger
Market follower
Market nicher
None of the above
Marketing Functions and Special Constraints
Functions
Constraints
Marketing research
Market development
Marketing information
Marketing planning
Advertising
Sales promotion
Marketing administration
Customer relations
Mature product
Intangible
Service intensive
Low customer involvement
~30% of customers shop
Regulated
Distribution Systems
Insurance Market Intermediaries
Unique characteristics of insurance marketing
Legal status of agent
Agent - represents insurer
Broker - represents policyholder
Powers and duties of agent
Listed in contract
Powers - Lines written, binding authority
Duties - Accounting, rules
Apparent versus actual authority
Attributes of Insurance Intermediaries
Ties to insurers
Compensation methods
Salary
Commissions
Flat
Contingent commissions
Ownership of expirations
Types of Insurance Distribution Systems
Independent Agency System
Agents own expirations
Exclusive Agency System
Direct Writer
Direct Response
Combination Systems
INA - 1970s
Allstate - currently
Expense differences
Alternative Marketing Systems
Involuntary Market
Auto
Assigned Risk Plans
Joint Underwriting Associations (JUAs)
Auto Reinsurance Plans
State Funds
Property
FAIR Plans
Beach and Windstorm Plans
Workers’ Compensation
Alternative Marketing Systems
Governmental Insurance
State insurance funds
WC -25 states
Auto - Maryland
Federal
Flood
Crime insurance
FAIR plans
Insurance exchanges
Illinois - surplus lines
Risk Retention Groups
Need approval only in
one state
1981 Product Liability
1986 Commercial
Liability (except WC)
Purchasing Groups
Exempt from
Fictitious Group laws
Mass merchandising
Marketing Management and Agent Functions
Branch Office System
Functions Performed by Agents
Managing General
Prospecting
Agency System
Sales
Independent business
Risk analysis
Performs branch office
Policy issuance
functions
Collection
Appoints agents
Claims handling
Primarily excess and
Consulting
surplus lines and
specialty areas
Distribution System Decisions
Geographic location
Expertise and reputation of producers
Nature of existing business
Ability to service products
Markets to be targeted
Insurer characteristics
Degree of control required or desired
Comparison of Distribution Systems
Independent Agency System ~ 50% of P-L market
Higher in commercial lines
Lower in personal lines
Slower growth rate
Higher expense ratios
Examples of successful exclusive agency insurers
State Farm
Allstate