The Race to The Bottom Continues in Insurance

Several months ago, I had a chance to speak with a number of insurance industry executives about pricing strategy and execution.  One of the most common comments I got about their pricing was “it’s a race to the bottom”.  That is, industry practices keep focusing on price discounting to win business. 

This morning’s articlefrom Reuters talks about how Aetna is getting hit due to rising medical costs and that they are pursuing a “strategy of corrective pricing”.   Funny, I’ve been studying pricing strategy and tactics for over twenty years and have never heard of the strategy of corrective pricing.  Certainly, if costs are going up, prices have to go up as well–if that is “corrective” then so be it.  I don’t think that the article points to the real problem in the insurance industry.

Insurance is sold by agents to companies and people.  Those agents are pretty good at lining up a bunch of insurance underwriters (the guys who provide the insurance) on a spread sheet and going for the lowest cost.  The problem is that the lowest cost provider could have lousy customer service or  stringent payment policies which actually hurt the real customer–the employee–when they most need it.  To make matters worse, even the good insurers have a lousy vision of where and how they do provide value and succumb to this mindless price competition.  The entire culture of the insurance business is to play this game. 

To make matters worse, not only are their costs rising, but they don’t know what their real costs really are.  This causes them to succumb to cost averaging which makes their high profit business look less profitable than it really is and their low profit business appear more profitable.  It puts them at a competitive disadvantage where they are most profitable.

Lost in this process is the poor sales and services people.  They spend their days responding to requests for quotes, knowing that they can only win a small percentage.  They never get a chance to sell value because their companies don’t understand what it is.

Yes, it is a race to the bottom.  The government has actually encouraged the race by putting some of it’s TARP funds into insurance companies that have reached the bottom.  The sad truth is that it doesn’t have to be like this.  There are a few companies out there, Liberty Mutual is one, that have a good understanding of their value, expect their salespeople to have confidence in that value and prices when they sell, know their costs and don’t chase unprofitable business for the sake of revenue.  No, it’s not easy to do this.  It takes courage and sometimes it takes nerves of steel.  I will say that it’s a heck of a lot better than the alternative.  Just ask Aetna.