Agents vs. the $1-Billion Lizard

With last month’s news that GEICO is now spending nearly $1 billion on advertising, I’m reminded of the regulatory emphasis previously placed on how much Florida domestic property writers were spending to acquire policyholders and thus…the relationship between advertising expense and agents’ commissions.

When reviewing rate increases, FS 627.062  permitted, some would say “required”, OIR to examine the “reasonableness” of expenses that underlay the request: reinsurance, underwriting expenses, loss adjustment expenses and acquisition costs such as agents’ commissions, advertising and promotion.

A day gone by maybe but, I recall homeowner’s rate hearings with OIR interrogation on the “reasonableness” of agents’ commissions, specifically; why should agents be paid more based on a commission percentage that doesn’t change when rates go up?

The implication was inescapable–an agents’ remuneration could be “unreasonable” unless the agent is doing more work to justify the additional dollars that result from an increase in premium.

For now, let’s forget the fact that agents costs often rise for the same reasons that premiums go up.  The fact that the questions only arose on “rising” homeowner rates and not with, say…declining worker comp premiums, spoke volumes.  Indeed, it showed a basic misunderstanding of the costs unique to each marketing channel–a misunderstanding that is sometimes shared by many in the industry.

This difference (agents vs. the internet), takes on mammoth significance when you figure that; whether it’s billboards, print ads or television, Warren Buffet’s GEICO spent exactly $993.8 million trying to acquire policies–roughly 10 percent higher than 2010’s $902.7 million and twice as much as 2009.

And, he paid that much whether or not a single policy was actually acquired!

Personally, I’ve looked and looked and cannot find anyone who has ever spent more to sell any product…ever!

Is spending a billion dollars on a talking lizard “reasonable” under Florida’s rating law?  It’s a cost paid by consumers. Couldn’t GEICO’s policyholders pay less if Buffet wasn’t spending so much and isn’t it appropriate for regulators to at least question whether such expenditures are reasonable?

It’s important to note that GEICO’s billion dollar advertising tab is 6.5% of its premium, give or take.  Yet, the industry average is slightly over 2% and none of its competitors spend more than 4.9%.

Of course, agents can be paid as much as 15% for auto and average 12.55% selling homeowners policies for Florida domestics.

But, there’s a difference isn’t there? First, they don’t only sell the policy, they underwrite it, they assist with inspections, photo’s and MVR’s and provide service during the entire term of the policy. Then, they assist with renewal applications, claims and catastrophe’s and a myriad of issues unique to Florida’s homeowners market.

And, agents return their unearned commission if the policy cancels! GEICO can’t get back the dollars it spends on advertising, even ineffective advertising.

This is why most of Florida’s domestic homeowners carriers don’t spend much on advertising.    They don’t need to. Local agents can target less expensive approaches to attract customers.  They have employees who work and live in the local community and hand out business cards. They put target ads in neighborhood flyers or on strategically located park benches for pennies on the dollar, and…they only get paid “if” they first give the company the money to pay them with!

Yet, the reasonableness of GEICO’s rising advertising expense is rarely scrutinized the way an agents commission can be.  Same with domestic homeowner’s carriers like Peoples Trust that, until recently, didn’t use agents but spent 15% of its premium on advertising. With advertising either the money is spent or it’s not. But, when it comes to paying agents the focus can be on how hard the agent was working or what additional work he/she had to do.

But people are paid based on their “contribution” to an enterprise, not how hard they work.  And, an agent’s contribution is helping carriers spend less than they would otherwise have to spend on advertising and other costs.  It costs more to recruit, retain and motivate employee’s the way GEICO does; and pay their health insurance, contribute to their 401K plans, buy them a desk, a phone, a computer then pay  unemployment compensation or get sued when you lay somebody off.

This is partially why, despite immense profitability, GEICO is rarely the cheapest.  Shhhh…don’t tell that to millions of shoppers so enamored with the internet they never look anywhere else–besides, the lizard is so cute, if he promises a 15% savings…it must be true!

Actually, I think more carriers are beginning to realize that advertising sells auto policies almost without regard to price. And, if advertising increases the price, well…who cares as long as it sells and the cost is reflected in the premium.

State Farm Mutual, which was right behind GEICO in advertising, increased its ad budget by 29%  spending $813.5 million in 2011.  As a result, Allstate dropped to third at $745.3 million but has announced it’ll be turning that around soon, too.

I digress!

The point is that agents provide now, what they have always provided, the industry’s cheapest and most efficient method of product delivery.  When the day comes that they also have a well advertised internet presence it will be the beginning of the end for the $1 billion lizard.

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