Car Insurance (from McKINSEY ODYSSEY 2002 Prep Guide)

Until recently, most car insurance was sold to car owners by insurance brokers.  A car owner would call or visit a broker who would suggest a range of different policies sold by different insurance companies.  Insurance companies would pay a commission to a broker for each policy sold.

More recently, car owners have started buying insurance directly from an insurance company over the phone.  We were asked to work with a leading car insurance company that had been very successful in selling policies through brokers to help them figure out whether they should start selling their policies “direct” to customers over the phone.  If you were a car owner what might be the advantages of buying insurance direct from an insurance company over the phone versus buying from an insurance broker?

For example, an insurance broker may be able to provide a service in comparing different policies from different insurance companies.  However, buying direct from an insurance company over the phone may be both cheaper (since there is no commission that has to go to a broker) and may be very convenient if done efficiently over the phone.

What things would you need to consider to decide whether the insurance company should start selling car insurance over the phone?

You would have to think about:

Potential Market Size:  What is the existing market for direct selling? What is the market’s growth potential?  How many people will prefer to buy direct over the phone instead of visiting a broker?  Will the company’s existing business through brokers be in danger of declining?

Competition and Profitability:  How profitable could the players in the market be?  What profit do the current direct sellers make versus what the companies selling through brokers make?  How competitive is the market; are there many players already?  Are there companies already selling direct that have a “head start,” such as a well known brand or many policies, which allows them to have lower costs?

Capabilities:  How good could this particular insurance company be at this business?  What would they have to be good at to do well in this business?  Do they have these skills?  Could they get them?  At what cost?

Impact on Existing Business:  Will selling direct to customers adversely affect the business sold through brokers, and does this matter?  Would brokers stop selling the insurance company’s policies if they knew that the company was also bypassing them and selling direct to car owners?

At this stage, an interviewer could follow up on any of the points raised in more detail.  For example, he or she could ask:

How would you figure out how big the market for direct selling may be in 5 years’ time?  Say at the moment that 20 percent of car owners buy their insurance over the phone directly from an insurance company.  How could you figure out what percentage this could be in 5 years’ time?

What do you think an insurance company selling direct to car owners over the phone has to be good at?