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This study evaluates the different distribution channels available to personal automobile insurers  focusing on the differences between independent agency writers and direct response writers—-two divergent paths in the evolution of the distribution function. We examine why the differences are so poorly understood  looking at the shortcomings of traditional accounting methods and metrics. The study identifies opportunities and strategies for insurers using each of the different distribution channels  with particular attention to the softening underwriting cycle.

Table of Contents

1. Introduction
2. Executive Summary
3. Changing Channels in Personal Auto Distribution
   • A History of Insurance Distribution
   • Summary
4. Cost Structure of the Channels
   • Expense Ratio Differences
   • Expense Ratio Components
   • Summary
5. Factors Obscuring Channel Differences
   • Components of Underwriting Expense
   • Shortcomings of the Expense Ratio
   • Expense Ratio Distorted by Average Premium per Policy
   • Distortions Based on Geographic Differences
   • Vehicles-Per-Policy Differences Can Also Distort Expenses
   • Summary
6. The Importance of Marketing Discretion
   • Market Cycle Discretion
   • Summary
7. Implications for Insurers: Issues and Strategies in a Softening Cycle
   • Strategy: Direct Writers—Capitalize on the Underwriting Cycle
   • Strategy: Agency Writers—Attack the Weakness
   • Issue: Performance Measurement—A Challenge for All Segments
   • Issue: Expense Allocation Tied to Cost and Value
   • Issue: Customer Value Analytics
   • Issue: Agency Value Analytics
   • Closing
   • Summary
8. Appendix

Introduction

For insurers competing in the market for personal automobile insurance the task of attracting and retaining clients presents an evolving set of marketing challenges. Personal auto mobile insurers not only face competition from multiple different distribution channels but also companies are pressed to open and manage new channels to reach targeted markets. The economics of the different channels are not always explained by traditional accounting or by publicly available data adding another layer of complexity to the marketing function. These challenges however create opportunities. Thorough analysis of the channel economics indicates that personal automobile insurers using each of the different channels can develop successful strategies specific to their comparative advantage.

This study examines the differences among the various distribution channels with particular attention to insurer-specific characteristics that can distort some of these fundamental distinctions. Our research indicates that an insurer's decisions about where to market and who to target can produce a deceptive picture of the company's expense structure.

Our goal is to identify opportunities and strategies for insurance companies using each of the different marketing channels with particular attention to the softening underwriting cycle.

Research in this study is based on analysis of publicly available data. In most cases the NAIC Annual Statement Database via National Underwriter Insurance Data Services/Highline Data is used. It was necessary however to draw on other publicly available sources including SEC filings state insurance department filings and company marketing literature to complete the research.

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