Now, before we get all teary-eyed for the carriers and their ’shrinking’ profit margins due to price pressure from competitors, let’s step back for a moment and consider some facts. Fact one is insurance is nothing more than paper and people. There are no “raw materials” (or commodity) needed for the production of the product. It’s an odds game; one of which with success (and a good set of actuaries) has made empires. Fact one leads to fact two….think about television…what products do you see the most commercials? Beer, Cars, Insurance. Get the idea….margins are significant to support the huge budget required to get a lizard with an English accent or a Cavemen a 21st century makeover.

Having worked in the insurance industry, I can tell you first hand the power of the huge margins. This is most evident in terms of payouts to agents, which most consumers have no exposure, as .the more profitable the product to the company, the more generous the commission percentage (and I’m talking significant as a percentage of first year premiums). Additionally, margins are gained as pointed out by the author and consultant, via the concentrated effort of all carriers to bundle. In the case of bundling, while the consumer thinks they are getting a great deal on grouping their auto with their homeowners, marine, etc. (which in relative terms they are getting a deal compared to a single product customer), they still are paying huge margins to the carrier for virtually nothing (until that time comes when your daughter scratches the side of the car….and you have to determine to pay the shop yourself or report a claim…and then your rates will skyrocket….hmmm). The trick stems from the consultants comments that it is easier to ‘work’ an existing customer than go out and develop a new one. Every new product they tack onto the relationship is added gravy to the carrier’s plate. Plus, they have just taken a product from a competitor…with the advantage of one stop billing for our happy go lucky consumer.

The bottom line here is this industry will not fall victim to pricing wars as they have been fighting the battle since the dark ages. Yes they will look for other revenue enhancing products, but I believe we are a very long way away from true commoditization, unless in fact the government decides this is the next area of improvement and then we all should prepare for higher rates, lower returns to carriers, and surcharges for miles driven…..:).

Keep up the great articles.