Project a Policy’s Total Cost of Ownership When Competing for a Sale

Surprise. The actual cost of an insurance policy is always more than its quoted premium. This truism is something you can needlepoint on a pillow – or better – use it to your sales advantage. There are myriad costs beyond a contract’s stated price. These expenses, in combination with the front-end premium, make up its Total Cost of Ownership (TCO). This is a view of insurance that is seldom considered, as many prospects and insureds fail to see anything other than the dollar sign on their quote or renewal. Use TCO to help them perceive the bigger picture.

The Concept

TCO is easy to explain to buyers with two common purchases: computers and vehicles. There is, of course, more to the cost of a computer system than its initial hardware and software expenses. There are also maintenance costs, support, training, upgrades, backup, accessories, etc. The dollar value of each item, combined, makes up your automation TCO. Viewed in terms of a car or truck, there’s the base purchase price (or lease payments), financing, gas, maintenance, parts, insurance, depreciation, etc. Similarly, a commercial policy’s initial purchase price is never its final cost, as there are extra outlays to consider. This unsavory fact is a useful ally when competing for new commercial accounts.

The Costs

TCO, used as a sales persuasion device, requires the combination of direct expenses with indirect costs. While not an exact science, it is a different and revealing approach to running insurance numbers.

Direct costs are accounted for outlays that mainly include the initial premium plus any taxes, fees, financing charges, and anticipated adjustments due to audits and endorsements.

Indirect costs vary by policy and are less transparent. To estimate them you must assign a subjective dollar value to a prospect’s mostly unpleasant experiences with his present carrier, agent and protection. Here’s how to approach them.

During routine fact finding interviews with new prospects, seek to uncover any insurance-mandated changes or other negatives that were recently encountered. For instance, if you learn that the prospect has had to change his accounting methods to accommodate an auditor, reassign an employee, or spend money to meet certain loss control recommendations, include the value for the applicable item in your calculations. If a prospect laments that he filed a small property claim that later “counted against him,” build that in too.

Another indirect cost is priority to the agency. If your prospect is a tiny fish in the proverbial big pond, then any excess time spent seeking service should be considered a downside cost of owning their existing policy. Prominently feature this if you are a small agency battling a larger competitor. Prospects want to know how important they’ll be to you if you win their business.

Also, if you routinely include helpful summaries and schedules with each policy, and your competition does not, add it as a cost. The “coverage gap cost” of having to modify business operations to reduce the chance of an un-or-underinsured loss is another indirect expense. Lastly, the dollar value of time spent seeking and reviewing alternative quotes should also be counted.

Show Your Work

Prepare individual TCO worksheets for each policy in a commercial proposal, as projected costs may vary by contract. Distribute them when you begin to discuss the premiums you propose. Use the indirect costs as a device to focus your prospect’s attention on the problems they are having with their current program. Ask them to evaluate each expense you have itemized. Handled professionally, you can fan the flames of their discontent to offset a rival’s reasonable dollar advantage in the direct cost section. These crunch time discussions are why it’s so vital to verbally present your analysis, instead of just tucking some unexplained worksheets into your proposal.

Test It Out

TCO has the potential to make a prospect buy from you even though your initial premium is higher than your rival’s. Work out the procedure on several smaller leads before making it a permanent part of your arsenal. Used fairly and objectively, TCO helps you to spot sales advantages that you may have missed, and in turn, perk up your closing ratio. As for the needlepoint pillow, it might look nice in your den.