Low-Risk Clients, No Agents Lets Insurance Firms Offer Low Rates
In one state Department of Insurance pricing survey after another, a few companies show up offering auto policies at rates considerably below those of California’s biggest sellers.
Wawanesa, 20th Century and Mercury in the most recent survey, released this week, listed often markedly lower-priced policies than the leading sellers--State Farm, Farmers, Allstate and the Auto Club. Executives and spokesmen of the low-priced companies, and some of the companies that were undercut, point up two salient facts about those that offer the lowest rates:
- Virtually all these companies are “preferred” sellers. In other words, they choose very carefully who they are willing to insure, and in almost all cases it is the low-risk drivers. These drivers’ claims are accordingly low, and they need not be charged as much for the companies to turn a profit.
- Most, but not all, of the low-priced sellers are “direct writers.” In short, they do not have agents.
‘It’s the Direct Mail’
Spokeswoman Jennifer Nicholson of the Automobile Club of Southern California, asked Thursday why it is that the Auto Club and other big sellers are being undercut, replied:
“It’s the direct mail. You cut out the agent’s commissions. You don’t have all the offices to set up. . . . You’ve got tight underwriting (selection) standards. The bottom line is they take the good drivers who are not involved in as many accidents.”
And spokesman Jeffrey C. Beyer of Farmers declared:
“They’re writing at lower rates in certain areas because they’re being more selective. We’re writing more business of a wider variety.”
Farmers and the Auto Club, as do the other big sellers in building a high-volume business, are accepting clients who by and large are going to make more claims, cost the companies more money and therefore must be charged more.
Companies Prospering
But in offering lower prices for those who can qualify, the low-price sellers are prospering. Most of these companies are showing tremendous annual growth in their California auto insurance business.
Wawanesa, a comparatively small seller with corporate headquarters in Winnipeg, Canada, bases its U.S. operations in San Diego. Last year it sold only $24 million in auto insurance in this state, mostly in San Diego and Orange counties.
But Wawanesa, which frequently listed the least-expensive rates in this week’s survey, is spreading out. Its annual growth in California over the last five years is said by its U.S. manager, David Goss, to be 28% to 35% a year.
“We’re a direct-response insurance company,” Goss said. “We deal directly with the public. We do not employ agents. Therefore, in our premiums we don’t have to charge the overhead that many companies do that have an agency force.”
Reduces Costs
Goss said Wawanesa estimates that not having agents allows it to charge 15% to 18% less.
“We are also a preferred-risk insurance company,” he said. “We’re looking for the preferred driver.”
In the Department of Insurance survey, Wawanesa indicated that it would not take as a new policyholder a couple who had a drunk driving conviction between them, a young driver with a chargeable accident or a driver with three speeding tickets in the last year. It quoted prices for only three of the six examples the department offered--all involving drivers who had neither accidents nor citations on their record.
20th Century, another of the lowest-priced sellers, is much larger than Wawanesa. With more than $500 million in auto premiums written last year and 678,000 customers, it has become the state’s sixth-biggest seller of auto insurance.
But in some respects it is even more restrictive than Wawanesa in who it is willing to accept as a customer. It responded to only two of the six examples offered by the Department of Insurance for pricing. Unlike Wawanesa, it would not take a young woman driver as a new client, even if she had a totally clean record, no accidents and no citations.
‘That’s a Big Savings’
Bill Mellick, senior vice president of field services, said that without agents: “We don’t have to pay the agents’ new business commission, which can run 10% to 20%. . . . That’s a big savings.”
But, he said, the careful selection of drivers is important, too. Mellick pointed out that 20th Century will not accept the Department of Motor Vehicles three-year records as sufficient proof of being a good driver. It questions its prospective policyholders on their record going back five years.
Mercury does have agents. But its vice president in charge of marketing, Bruce Norman, emphasized that it is “strictly a preferred company.”
He noted that Mercury passes on to Mercury Casualty, a related company, less preferred customers, those with citations or accidents, rather than reject them altogether.
The issue of agents is controversial. Companies that have agents and agents’ trade associations contend that the service they provide is worth the additional expense.
Personal Service
Joe Annotti, vice president for public affairs of the Independent Insurance Agents and Brokers of California, said: “You can buy insurance by mail if you want to. With the agents, it’s a matter of personal service and value added.”
The companies without agents, however, maintain that they offer just as efficient service, and 20th Century, in particular, has ranked favorably alongside companies with agents in Department of Insurance studies on the number of consumer complaints.
Another question that often arises with the low-priced preferred sellers is whether they will cancel a policyholder more quickly if they have an accident or citations.
The officials of the low-priced companies who were interviewed said they would not cancel on a first accident or citation. But they were less clear about exactly when a cancellation would be triggered.
