Updated: Feb 3
In economics, a commodity is an economic good or service that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
Today is the day of the super bowl. I can just about guarantee we will see auto and home insurance commercials provided by the largest companies in America. State Farm, All State, Geico, Progressive, Farmers, and Liberty Mutual. Over the past century we have seen money and policy holders change hands from company to company as each insurer and agent tries to attract and win clients. The GDP of insurance in the United States is 8.9%, that is almost 10% of the entire US economy. On average the combined major companies spend 6 billion dollars on television advertising in order to attract and retain clients. This excessive spending on marketing coupled with inflation and claims expense for the companies has driven rates higher and higher over the years. Keep in mind Geico alone spent 4.5 million dollars on a thirty second advertisement for the super bowl in 2018.
And this doesn't even include the agency force behind these companies. Small business owners typically incur all of the cost associated to owning and operating an insurance agency. A successful agent will usually have on staff an average one employee per five hundred policies, warranting FICA tax, workers compensation, employee benefits and human resources cost such as recruiting, licensing, continuing education, and employee retention.
The Small Business Administration (SBA) recommends businesses generating under $5 million in annual revenue should allocate 7-8% of its total budget to marketing. Further, the SBA says actual expenses will vary by industry and can surpass 20% in certain consumer-focused industries.
So when discussing marketing dollars on a per agency stand point insurance agency owners will typically spend 80,000 per 1,000,000 in agency revenue solely on marketing, not including pay roll, insurance, rent, taxes and other expenses that come along with agency.
I will be the first agent to tell you that insurance is like oil and coal. It's a product that is required to live in a home with a mortgage, rent an apartment, and drive a car. It's required for business owners to protect against liability and claims made against there companies. It's almost as mandatory as paying taxes. All insurance companies will offer the same coverage. Property damage, bodily injury liability, uninsured motorist comprehensive and collision for auto insurance. Dwelling, personal property, and liability for home insurance. With the same type of coverage, what really separates these companies?
How can I choose between company a and Company b? Almost all of the time a client will tell you price. With an average of 3,287 deaths per day and indisputable statistics of the likelihood of getting into an accident you have to depend on more than just dollars and cents. Ultimately what should determine your decision is the agent you choose to do business with. Are they in the office daily? Do they understand how claims, premiums, coverage, and policies work? Do they offer you more than just an "apples for apples" quote or are they taking there time to truly dig into your needs for liability. Many times I have met with clients that are over insured compared to the relative income and amount of assets they have and are paying an excessive amount of premium. Other times I meet with small business owners that don't even realize they have bare minimum coverage.
My deciding opinion on insurance is that as a whole it is very similar to a commodity such as oil and gas. The major companies representing the large oil and gas companies while agency is a delineation of your local gas station, with the differentiating factor between companies being rating classification standards such as Standard & Poor, Moody's, AM's Best, and JD power. A companies ability to hold up and live to the standards of what they promise, while having the financial backing to exercise claims paying capability through an individual and catastrophic level is key. Keep in mind the agent you decide to do business with as well, for they will be maintaining and servicing your policy through the agency. Some of the major companies do not offer an agency force and primarily rely on non traditional brick and mortar methods such as online and telephone servicing. The more reliable your agent and the better the rating classification equally, auto and home insurance becomes less of a commodity and more of a differentiated service.