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The Insurance Manufacturing Enigma

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At a recent social gathering, casual conversation turned to trends in product development (all industries).

In passing, I happened to mention that many insurance companies today call themselves manufacturers. Turns out, everyone was just fascinated by that idea, or at least by their understanding of the idea.

The ensuing exchange made me realize how dramatically the insurance business models have changed and how little the insurance public knows about the industry that wraps their multiple risk exposures.

First, more about the conversation. One couple asked many questions about this “insurance manufacturing,” as they called it. From the give and take, I began to realize that the M word was being interpreted as nuts-and-bolts manufacturing–the making of something from raw materials by hand or machine, as the Merriam Webster Dictionary puts it.

The couple even wanted to know if people can go someplace to watch this insurance manufacturing going on, as they do with, say, candy manufacturing.

Before you ask, the answer is no, these people were not dunces. They just did not hear the M word in the way some insurers use it. They thought companies had created some type of physical process associated with making their products.

“Well, if it is not that, what is it?” they wondered.

We talked about how insurance firms do indeed have a process for making products but that this is not done at a factory or with heavy machinery. It’s done with computers and brainpower. We talked about how certain firms use manufacturing as a metaphor for building, rolling out and supporting their intangible products from the “raw materials” of time, talent and business tools.

“But why do they call it manufacturing?” they persisted.

That is a good question. It’s doubtful the answer will be of any value to consumers, but it is certainly one that impacts people inside the industry–because the answer reflects an emerging business model in the industry.

As NU readers may recall, many insurance companies started calling themselves manufacturers in the mid-1990s. It was part of firms reinventing themselves as providers of products designed to be sold through multiple distribution channels. Such companies decided they would make and underwrite their products, market and advertise them, and support them administratively, but they would leave sales responsibilities to their distributors.

Think of car or PC manufacturers, and you’ve got the idea.

Many such firms have cut back or stopped altogether the training of field forces (with the exception of dog-and-pony shows to promote their products, of course). They said, and still say, “We’ll sell our products through any channel as long as the distributor meets our criteria.” The training and education functions increasingly have shifted over to the distributors, marketing organizations and third-party professional education/designation programs.

Not all insurers have adopted this model, and not everyone in the industry is on board with the trend. But it is here all the same. Many variable insurance companies take this approach.

Insiders quibble over whether it is good or bad for the industry and its customers.

Proponents say the approach enables insurers to focus like the proverbial laser beam on building exquisite products that are consumer friendly and state of the art in design and performance. Some maintain the model also helps carriers mitigate certain promotional costs and limit certain liabilities having to do with sales (both now increasingly shouldered by distributors), making for better bottom-line results.

Critics charge that manufacture-type carriers are trying to distance themselves from the marketplace end of the products they make. This is reflected, they say, in shrinking long-term support, lower commission levels and/or higher production requirements, and legal barriers between field/home offices. Many like the products and the online administration that various manufacturers provide, but they question the depth of some manufacturers’ commitment to the marketplace.

Consumers can’t “watch” this process going on, and if they understood it, most of them likely would not care whether their own carrier is a manufacturer or not. Their main concern is getting coverage for a good price that will be there when needed.

But insiders definitely do watch the process. Some are part of it. And they do care because business models drive revenues for everyone in the food chain. Ultimately, the results of the manufacturing leaders will determine whether the concept goes mainstream or not.


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