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 Growth Strategies
Market leader 1. Market penetration
Market challenger (Current products to current
Market follower markets)
Market nicher 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) Market leader
B) Market challenger
C) Market follower
D) Market nicher
E) None of the above
Based on competitive positioning, how
would you classify Allstate in the auto
insurance market?
A) Market leader
B) Market challenger
C) Market follower
D) Market nicher
E) None of the above
Marketing Functions and Special Constraints
Functions Constraints
Marketing research Mature product
Market development Intangible
Marketing information Service intensive
Marketing planning Low customer involvement
Advertising ~30% of customers shop
Sales promotion Regulated
Marketing administration
Customer relations
 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 Risk Retention Groups
State insurance funds Need approval only in
WC -25 states one state
Auto - Maryland 1981 Product Liability
Federal 1986 Commercial
Flood Liability (except WC)
Crime insurance Purchasing Groups
FAIR plans Exempt from
Insurance exchanges Fictitious Group laws
Illinois - surplus lines 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