A few years ago, GEICO ran ads bragging that they cut out the middleman, implying that buy selling insurance directly to you they save you the invariable markup this guy in the middle charges. Indeed, the biggest reason people buy their insurance direct instead of through an agent is undoubtedly because they think they will save money. But is this actually true?
In my office, I compete against direct insurance writers every day, especially when it comes to Auto insurance. What I have found is that there are times that a direct policy will cost less than what I can offer, but there are many other times that I can offer as good or better a price as what someone found online.
But how can that be? What about the commission my agency receives for its services? How can this commission be added to the price yet the price still be lower? I believe there are four main reasons why the rates I offer are often lower than what you might find online, and I’ll explain these reasons in this post.
Reason 1: All insurance companies have acquisition costs
You might think you are saving money by cutting out the middleman like GEICO said, but did you ever stop to think how much GEICO spent in advertising costs to get you that message? I just googled it myself and the figure seems to hover around $1 Billion per year. (That’s Billion with a B.) Think of that: One insurance company is paying a billion dollars to try to get you to buy their product! Where are they getting this money? I assure you their billion dollar advertising bill is not being paid via their money tree; it’s coming out of your pocket, as a part of the premium you pay! In fact, a 2013 study showed that nearly seven percent of premium paid to GEICO went directly to cover their advertising costs.
Let me be clear, I’m not saying this to criticize insurance companies with large advertising budgets. What I am explaining is that all insurance companies have acquisition costs. Before you can buy insurance from a given company, you first have to hear that the company exists, and you have to be convinced that it would be a good idea to consider them. It costs an insurance company money to make this happen.
In my agency, we represent a mix of insurance companies whose names may sound familiar (Progressive, Travelers and Nationwide) and other carriers you probably never have heard of (such as IMT, Ram Mutual, State Auto and Itasca Mutual). The primary difference between these carriers is how much they spend on advertising. You see, the carriers you have never heard of have to rely on insurance agents to bring them customers, and they compensate their agents to do so.
“But,” you say, “I found my insurance company online! It wasn’t a result of advertising!” Think again. Chances are that if you bought your insurance directly from a carrier after a Google search, that carrier paid quite a bit for Google to show you their name. In fact, insurance is the most expensive Google search category, according to this website, which indicates that when you google the word “insurance” and click on a sponsored result, that insurance company may be paying Google up to $50 just for your one click, regardless of whether you buy anything from the company or even whether you stay on their website for more than an instant. Again: Who pays Google $50 per click? You do, as part of your insurance premium when you buy from a carrier who markets via Google.
So the question is not whether you are willing to pay acquisition costs as part of your insurance premium; it’s simply a question of who you will pay acquisition costs to support. Will you pay your acquisition costs to support Google, CBS or ESPN, or will you pay them to support a trusted local agent who will work with you to provide you a good insurance value both now and down the road?
Reason 2: Good agents help keep your rates low
For you as a consumer, the purchase of insurance is a bit more complex than buying bread or milk. There’s a lot to understand about insurance, and making a mistake in the coverage you buy could be financially catastrophic down the road. This is a reason so that so many people turn to trusted agents to assist and guide them.
What you may not be aware of is that the reverse is also true – insurance companies rely on trustworthy, ethical agents to assist them through the complexity of selecting the right customers to insure at the right price! In order to keep their rates low, insurance companies need to insure risks that fit into what they are priced to be able to cover. They also need accurate information about the nature of the risk so that proper rates can be charged. If a given carrier is constantly writing insurance policies with bad or only partial rating information or that don’t fall within their plan guidelines, they will soon find that they are paying more in claims than what they are taking in for premiums. Rate increases are sure to follow next.
Good insurance agents help the insurance companies they partner with write the insurance business that falls within their guidelines and with rates based on accurate information. This helps insurance carriers keep their rates low. And it explains why some of our carriers with names you’ve never heard of may be able to beat the rates of the carriers trying to sell you insurance without the assistance of a professional insurance agent.
Reason 3: It also costs money to money to provide you service
Insurance companies who sell direct have ongoing costs to serve you. Every time you call or inquire online regarding a bill or to add or remove a vehicle, someone has to be paid to take care of this for you. It’s either going to be a faceless employee in a call center receiving these service dollars, or it can be your local professional insurance agent and their staff. Now I know that many insurance companies have online service portals, but there’s a fair amount of money spent keeping that technology working properly as well, and there are certain issues that come up that artificial intelligence just isn’t equipped to resolve. Servicing your account costs money no matter how you cut it.
Reason 4: Bundling saves you money
Most of the big direct online insurance sellers focus primarily on Auto insurance, and for good reason. Auto insurance is much easier for them to write without the assistance of a local agent, compared to other lines such as Homeowners or Renters coverage. If these guys offer Homeowners insurance at all, it’s frequently almost an afterthought, and often they are partnering with a different carrier to even insure your home since they don’t actually write home coverage themselves. But when you buy your Auto insurance from one provider and purchase Homeowners or Renters insurance somewhere else, you typically pay more to buy these policies separately. Your local agent can help you save money by bundling your auto and home protection together.
Beyond the initial premium you pay
It’s important to conclude this post by pointing out that a good insurance value is about more than just the price of the premium. It’s about professional, trusted assistance in making a good decision in how you set up insurance to protect your risks. Many people buy their insurance online without really understanding what they are buying. Perhaps they think all insurance is the same. It’s not. Perhaps they think their insurance needs aren’t any different than the next person’s, so all they need is an online button or call center employee to take their order for a one-size-fits-all policy. That’s not true either. At some point down the road, you may need your insurance to cover a loss, and there’s no substitute for a trusted local agent in helping you increase the odds that you’ll have the right protection in place to cover it.
Ken Cobb is owner of Pine Country Insurance and has been active in the insurance industry for over 15 years. Meet Ken.
Coverage descriptions found in this blog are summaries provided for general educational purposes and cannot fully detail the terms, conditions, limitations or exclusions of a specific insurance policy. Please read your policy carefully.