Travelers Launching Low Cost, Segmented Product in New Personal Auto Strategy

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by Young Ha

The Travelers Companies Inc. is adopting a new strategy to become more price-competitive in personal auto insurance.

Travelers’ CEO Jay Fishman explained his company’s personal auto strategy at the Barclays Capital Global Financial Services Conference in New York last week.

Travelers said it will begin launching a new private passenger automobile product — called Quantum Auto 2.0 — that would offer more customized and segmented services, more competitive pricing features, and new discounts for consumers.

The new Quantum Auto 2.0 would eventually be offered in all but three states. Initially, it will be launched in Arizona, Colorado, Illinois, Missouri, Nevada, Ohio, South Carolina and Wisconsin, starting later next month, according to Travelers.

In states where the product becomes available, new accounts would be sold under Quantum Auto 2.0, and the product would be available to agents at their discretion for existing accounts.

Base Commission in Quantum Auto 2.0

Fishman also said Travelers decided to lower the base commission for Quantum Auto 2.0 by approximately two points from Quantum Auto 1.0. But he assured the total compensation program for Quantum Auto 2.0 will be “very competitive” when compared to other large national carriers.

“We have taken a thoughtful approach to the commission structure for our new auto product and developed one that supports a lower price position,” a Travelers representative told Insurance Journal. “The structure allows us to provide a more competitively priced product for agents and consumers. We value our partnership with agents and continue to invest in the independent agency channel to help them grow and succeed in today’s increasingly competitive environment.”

During his Barclays Capital presentation, Fishman clarified that Travelers’ strategy of seeking improved rate continues for business insurance.

“We remain very pleased with the execution of the strategy of seeking improved rate and we remain committed to it in our business insurance business. We continue to seek improved rate gains. We continue to seek improved profitability, as we continue to seek mid-teens return on equity over time,” he said.

But Travelers wants to be more price-competitive in the personal auto market. “This is what’s been happening in the personal insurance marketplace — carriers, particularly direct writers, are spending extraordinary amounts in advertising, significantly focusing on saving money for the customers,” Fishman said.

“Consumers are responding to all of that — with a meaningfully increased, but I would argue not exclusive — focus on price in the purchase decision,” he said. “It is not independent of other factors but it’s becoming increasingly more important.”

Impact of Comparative Rating Technology

And among independent agents, the adoption of comparative rating technology has enabled them to meet the demands of customers who were seeking a greater emphasis on price far more efficiently and more easily than it was previously, Fishman said.

“The way comparative raters work — the agent gets customer information, puts it into a simultaneous multi-carrier quoting engine,” he noted. “We participate in these — have been from the early days. There is an immediate response, showing a comparison of carriers, and the agent will make a preliminary carrier selection.

“Then subject to the customer’s agreement, they will actually go out and order reports. That’s when money begins to get spent, so there is an important step in there. It will confirm the selection and they end up with a bindable quote,” he said. “It also tells the agent what discounts are being applied and shows various discounts by different carriers.”

‘If You Are Not First or Second…’

He said the data is compelling: “If you are not first or second in this selection process, the likelihood of actually getting the business is low.”

“You don’t have to be first in terms of low price. There are other things that are considered,” Fishman said. “There are other things considered by the agent, predominantly, but also by the customer. But being in the first or second position is critical for the long-term success.”

It is changing the business in a couple of ways, he explained. He noted that the number of actual auto quotes for Travelers delivered through the comparative rating technology has doubled in the past four years, from approximately 1.4 million quotes (predominately for new business) in 2008 to just under 3 million quotes in 2012.

“If we are on the agent platform, we will be quoted along with anybody else who is on that platform,” he said.

In contrast, “our proprietary system is declining in terms of quotes,” he observed. “We suspect this will continue, and more and more of the quotes will be delivered through the comparative rating technology. About 80 percent of our auto quotes are coming through that platform.”

Turnabout in Strategy

Fishman said that in the personal insurance business, also dating back to 2010 and into 2011, Travelers took “the exact same approach” that it took in commercial — because of the interest rates and changing weather patterns, “not just in auto by the way, but in homeowners as well, and because, in auto specifically, of changing loss patterns, we made the decision to raise price.”

“We were hopeful that that would be sustainable, and it turned out that two things happened,” Fishman said. “One, our profitability most certainly improved — margins began to expand.” But unfortunately, he added, “the effect on new business has been significant and negative.”

Back in the first quarter of 2011, the company was doing $171 million of new business in Travelers’ agency auto — personal auto insurance market. But by the first quarter of 2013, the new business shrank to $86 million.

“That’s not acceptable. That’s a strategy that simply didn’t work,” he said. “We suspect it worked as it relates to profitability, but it didn’t work with respect to volumes. And so we are actually changing that.”

He noted that Travelers announced the first step in the second quarter: “In that second quarter, we announced an expense reduction program of $140 million.”

“It’s critical –absolutely critical — for a long-term success now in this business to be a low-cost producer with a very effective pricing segmentation. Those are going to be the keys for a long term success,” he said.

Further commenting on the new Quantum Auto 2.0, Fishman said the goal is to be “a low-cost manufacturer of a highly sophisticated and segmented auto product that successfully competes in the marketplace from a pricing standpoint, and generates an appropriate return.”

He said the company — in the process of taking all underwriting data from Quantum Auto 1.0 and funneling it into Quantum Auto 2.0 — found that it could leave out some of the more stringent underwriting elements.

“We have found that we are going to be waiving the 4th and 5th year minor violations for drivers who have been incident free for three years,” he said. “We had a more stringent underwriting element in Quantum 1.0. But as we back-tested it, it turned out it didn’t matter. It was competitively problematic, and it didn’t produce the desired loss trend. So this is a change we are making.”

Additionally, there will be youthful driver leniency for tenured families, he said. “Again, we are not just making this up — this is a result of eight years of experience with Quantum 1.0 and actually seeing loss data from it.”

Compensation Program

“We are of course changing pricing in the cells to reflect the underwriting experience and improve returns,” he said. “It will of course incorporate a $140 million expense program that we announced and also, we’ve made the decision that we are going to lower the base commission by approximately two points from Quantum Auto 1.0. This is a significant financial change here.”

“People will ask, ‘How competitive is your compensation program?’ We absolutely believe that the total compensation program for Quantum 2.0 will be very competitive with other large national carriers,” Fishman said.

“There are certain large carriers that continue to pay base commissions that are lower. There are certain large carriers that will pay more,” he said. “We will fit in comfortably in the arena of compensation.”

“We are starting to roll the product out. We will do so in all but three states where we will not be subject to approval because I suspect credit scoring is really the limiting factor in those three states,” Fishman said. “It will be used for the new product — meaning all new accounts will be sold under Quantum 2.0, and the product will be available to agents at their discretion for existing accounts.”

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  • October 2, 2013 at 3:09 pm
    Stephen says:

    Was impressed with the start of the Travelers in this area. I think there should be stabilization in the insurance business in all personal lines. the companies have the right to pick and choose the business they accept and they do.They are able to check the driving record, the claims record, the credit record etc. Then they have the right of cancellation at their pleasure ( some jurisdictions have s small limitation on this).
    It is interesting to note that of the three trial states mentioned one, Arizona has a limitation on the company’s right to cancel the policy.
    Please note in practice I am finding out that the insurance regulator is either un willing or unable to protect the consumer in my view.

  • October 3, 2013 at 5:37 pm
    Barry Rabkin says:

    I expect more P&C insurers to do this, particularly in personal lines auto. Insurers with Data Science departments should have an edge if the quants in these departments are creating extremely granular customer segments – and running revenue and profit models by adding in various value-add services which customers can purchase with their auto insurance (or perhaps instead of purchasing auto insurance).

    • October 4, 2013 at 4:50 am
      abcagent says:

      Travelers did a “fine” job with this product change. They reduced the agent commission but forgot to provide the agents with a streamlined operational platform to enable the agent to absorb the reduction in revenue. Agent operating expenses could be reduced notably if carriers like Travelers would focus on collective operational improvements that would benefit the agent and carrier. Instead carriers saddle agents with cumbersome and archaic processes systems and give agents no choice in that matter. With a commission reduction of 20% Travelers is asking agents to handle the business below the break even point for most agencies. On comparative rating technology, Travelers wants to blame agents for over utilization of the tools…when in fact the only reason agents must use the comparative rating tools is because carriers have adopted rating formulas that use variables that are invisible to agents without doing the rating to include carrier specific credit scoring. Shame on the carriers for blaming agents for use of these tools when they originate from the carriers’ specific strategy rather than the agents. We agents are just trying to do the best job for our clients with the processes that carriers require us to follow….most of which are cumbersome and inefficient to the agency community.

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