If you’re looking for clues about what State Farm is doing, don’t just look to the big black building overlooking Veterans Parkway. Look at Rhode Island.
That’s where State Farm is experimenting with a new model for auto insurance. It’s called HiRoad, and it’s basically insurance by app. The app tracks how you drive and charges you more or less each month based on how safe (or recklessly) you drive. It’s fast, with quotes in five minutes and claims that you can file through the app.
It’s a bold direct-to-consumer move for State Farm, a company deeply rooted in selling and servicing policies through its network of agents. In fact, State Farm’s name is barely on HiRoad’s website and app. You wouldn’t even know it’s owned by State Farm.
“HiRoad is a great example of a concept we developed within State Farm to look at auto insurance through a new lens,” said Laurette Stiles, vice president of State Farm’s Strategic Resources unit, which studies competitors and industry trends to guide internal decision-making. “We're operating very successfully on a very short timeline, with a very interesting experiment and test that we'll learn from.”
A major restructuring is underway within State Farm, raising concerns about what it will mean for Bloomington-Normal’s economy. The public is hearing about those workforce changes in bits and pieces. One day, the company says it’s shedding 890 local IT jobs. The next, it says more Claims and State Farm Bank jobs are moving in.
If those moves sound unusual for a company known in the industry for workforce stability, one reason may be that State Farm is facing unusually stiff competition on two fronts. The Geicos and Progressives are still trying to chip away at its 84 million policies, as are so-called “insurtech” startups like Lemonade using technology to disrupt the market.
“It’s a good thing for consumers, but the level of competition has been very acute, very high,” said Steven Weisbart, chief economist for the Insurance Information Institute (III), an industry research group. “There’s new entrants coming into the marketplace with new ideas about how to market and how to deliver insurance.”
State Farm leaders say those competitive pressures require it to be more efficient—both as a way to lower expenses and therefore prices, and to move products and services more quickly to market. State Farm remains the largest insurer in the U.S., with 19.2 percent of the homeowners’ market in 2016, and 18.3 percent of the auto market, according to the III. Its market share in homeowners insurance is down from 21.9 percent in 2010; its market share in auto insurance has been more stable.
Change will be a constant, Stiles said, not a short-term project with an end date.
“With products and services, (we) consider how many people do we need to do that? How can we do that most efficiently? And how does that impact the price of our product?” Stiles said on GLT’s Sound Ideas. “Customers are interested in our products when they're competitively priced. That's all part of the equation.”
(You can also read a full transcript from Stiles’ extended Q&A with GLT.)
One measure of efficiency is expense ratio, the percentage of premiums that an insurer pays out as expenses, like employee salaries, agent commissions, and fees. In general, an insurer wants to control, or even lower, its expense ratio.
State Farm’s overall expense ratio was 26 percent for 2017, according to S&P Global Market Intelligence. That’s higher than competitors like Geico, Progressive, and USAA, but on par with the property-casualty insurance industry average of 27.3 percent.
“There’s a pretty clear trend toward trying to reduce expenses within that increasingly competitive industry,” said Paul Newsome, Chicago-based managing director in equity research at Sandler O’Neill and Partners, who has worked in or covered the industry for over 20 years. He watches State Farm’s publicly traded competitors, like Allstate and Travelers.
Indeed, State Farm CFO Jon Farney said in March’s annual financial report that the company would become “leaner and stronger.” The recent restructuring of State Farm’s three IT departments into one—shrinking its IT workforce by 500 people companywide—will both streamline work and cut costs, company officials say. State Farm Bank is also cutting employees by around 18 percent, or 366 employees.
State Farm is a bit of an outlier when it comes to cutting employees. Around 58 percent of insurers said they plan to add staff in the next year, according to the latest Jacobson Group and Ward Group’s insurance labor market study released in January. Only 11 percent planned to cut staff. Technology jobs are growing fastest industrywide.
Progressive, a Top 5 auto insurer, is on a bit of a hiring spree as it tries to grow profitably, CEO Tricia Griffith told GLT in February.
“We have been growing like wildfire, and it’s been really incredible,” Griffith said. They added 6,660 new external hires in 2016, another 6,000 in 2017, and 1,000 already in 2018.
“The thing that State Farm is known most for is its stability in its workforce,” said Jacobson Group CEO Greg Jacobson. “That may sound surprising given not only the recent announcements on IT, but the last couple years.
“More so than most insurance organizations, State Farm’s workforce is made up of people who grow up at State Farm,” Jacobson added. “That’s kind of a unique thing in the insurance industry. You see people moving from one company to another. You don’t really see that that often from State Farm.”
Stiles, the VP at State Farm, pushed back on State Farm being an outlier.
“State Farm is actually heavily invested in information technology and the solutions we develop through IT,” Stiles said. “So even though we're reducing positions in Bloomington, we're adding hundreds of positions in our hub locations in Atlanta, Dallas, and Phoenix.”
CHANGING CUSTOMER EXPECTATIONS
Other larger insurers have done major restructuring projects too, such as shifting resources toward customer call centers instead of agent call centers, said Tom Super, director of global insurance practice and J.D. Power. It’s all in response to an industrywide shift toward a consumer-first focus, rather than a channel-driven structure (i.e., keeping agents happy).
“(Restructuring) tends to be more visible when a State Farm does it, because it’s one of the largest players in the market,” said Super, adding that State Farm ranks “middle of the pack” on customer satisfaction in his company’s ratings.
The average insurance customer’s expectations have changed significantly, particularly with technology, said Ellen Carney, principal analyst at Forrester Research who studies e-business strategy. Your experience on Amazon.com or a travel website can influence your ease-of-use expectations on an insurer’s website or app, she said. That can be hard to deliver because of baked-in industry challenges, like customers who carry different types of insurance products, she said.
From 2013 to 2015, State Farm fell behind its competitors on mobile (phone-based) services for auto policyholders, said Carney, who does a mobile functionality study each year. But in 2017, State Farm’s score on Forrester’s study rebounded to 78.6 out of 100, slightly above the industry average. Forrester noted State Farm’s improving mobile tools such as a depreciation calculator that helps customers avoid overpaying on coverage as their vehicles age.
“They’ve adjusted quite well,” Carney said. “There was a period of time when they weren’t paying attention to this. It was almost like someone sat up in Bloomington and said, ‘Oh my god, we’re falling behind. This is what customers expect.’”
State Farm, which is accustomed to digital brinkmanship with Geico and Progressive, is now fending off a challenge from a new breed of competitor: insurtech startups.
Take Lemonade, an app-driven insurer that touts 90-second quotes and 3-minute claim payments. And it’s cheap: Lemonade says it’s monthly subscriptions for homeowners insurance start at $25. Its tagline: “Forget everything you know about insurance.”
Lemonade made waves last year when it touted a customer’s claim that was paid in just 3 seconds, including time to run 13-anti-fraud algorithms against it.
“Everyone’s hair was on fire,” Carney said. “And I said, ‘You guys need to be really careful because there’s fast. And there’s good.’ There are some things where you want a human involved. You run the risk of missing the good by pushing more of this stuff onto the shoulders of customers.”
Stiles, the vice president, said State Farm is learning from companies like Lemonade, particularly speeding up the pace of its work like a startup would. HiRoad—State Farm’s insurtech affiliate in Rhode Island—launched relatively quickly, Stiles said.
“In any industry, disruptors are useful,” said Stiles, who’s worked for State Farm for 35 years. “They may not have, any one of them, a long lifespan. But they offer a different way of thinking about and approaching the business.”
— HiRoad Insurance (@HiRoadInsurance) December 13, 2017
Why did HiRoad start in Rhode Island? One reason may be that State Farm didn’t have agents there. (A HiRoad spokesperson said they “evaluated multiple states on various factors” before choosing Rhode Island.)
Elsewhere in the U.S., State Farm’s nearly 19,000 agents remain a central part of its business strategy, said Stiles. State Farm considers agents its “differentiator” as it markets itself to customers, she said. Indeed, its agents are prominently featured in many State Farm TV commercials. State Farm’s ad spending hit $98.9 million in 2017, up from $60.6 million in 2016, continuing an upward climb, according to Kantar Media. (A State Farm spokesperson declined to comment on the company’s ad spending.)
One reason State Farm may be hesitant to turn away from agents: customer loyalty. The average State Farm customer has been with the company for 14 years, well above the average for competitors like Esurance (2.6 years), Progressive (5.1 years), and Geico (6.4 years), according to Forrester Research. Agents are a big part of that, Carney said.
“Because of that duration of the relationship, agents do wield a lot of power within insurance companies. They might want to do digital capabilities on mobile devices or Alexa or whatever, but there’s that fear of, do we want to alienate our agent community?” Carney said.
Stiles downplayed any tension between digital evolution and agents.
“Actually, our agents are enthused about many of the changes we're making because they see themselves the importance of an organization operating efficiently, streamlining processes, and delivering more quickly solutions to customers,” said Stiles.
Officials at the National Association of State Farm Agents did not return repeated requests for comment.
Companies like State Farm and Allstate that use agents tend to have higher expense ratios than competitors like Progressive and Geico that sell insurance primarily online, said Kevin Ahlgrim, an associate professor in the Department of Finance, Insurance, and Law at Illinois State University’s College of Business.
“Having an agency system can be very expensive, but there’s also some benefits, specifically when a policyholder has a claim. Actually having a relationship with one of those claimants can make the difference between a customer being satisfied and not being satisfied,” said Ahlgrim.
Distribution will be a challenge for State Farm and other agent-driven insurers in the years to come, with more people buying insurance online, said Newsome, the analyst.
“From a distribution perspective, (State Farm) is in the wrong general bucket for long-term distribution. It’ll be a challenge for them to change their technology that their agents and company uses to address the changing ways people buy insurance,” he said.
Super, the analyst with J.D. Power, said State Farm remains in a very strong position, with a capital position that’s “unmatched.” And that’s despite a particularly brutal 2017 for insurers across the country; separate California wildfires, hurricanes, and hailstorms last year were among the Top 25 costliest events in company history, a spokesperson said.
“The question is, as all these competitors rise, and look to steal from State Farm, how will the company want to position itself to make sure they’re not losing share to some of these competitors,” said Super. “Specifically around price-driven consumers.”
State Farm’s overall financial strength was cited as it recently lowered auto rates for Illinois customers. State Farm insures about 1 of every 3 vehicles in Illinois.
“As the largest company, State Farm—in some sense—is everybody’s target,” said Weisbart, the chief economist at the Insurance Information Institute.
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