The Farmer From Merna: A Biography of George J. Mecherle and a History of the State Farm Insurance Companies of Bloomington, Illinois by Karl Schriftgeisser

Summary

  1. The life of George Mecherle and his founding of State Farm Insurance

Key Takeaways

  1. Mecherle’s ancestors were German farmers and immigrated to America, eventually settling down in Bloomington, IN. The rule of George’s household was integrity. It was their duty to become trusted members of the community. George showed early signs of being sharp, independent, a leader, a potential baseball star, a “doer” in whatever he was responsible for
  2. George was not content to do things one way just because that was the way his father, or anybody else, did them. He was always studying and reading about what the other fellows had done
  3. Left a couple jobs just because he didn’t like how his bosses ran the business. He wanted to use skills, his farmer mindset, and his connections to form a statewide auto insurance to the farmers of the state of Illinois, at rates which they could afford. He worked tirelessly to bring his farmers the lowest rates that could possibly be justified. George became so obsessed with his idea that he eventually became a “pest”, wanting to discuss all aspects of insurance with anybody that would hear him out.
  4. There were three provisions that were fundamental foundation-stones of State Farm which were diametrically opposed to the standard methods of automobile insurance: the clauses setting up the membership fee, the premium deposit, and the six-month term of insurance. The membership fee exempted people from further membership fees for similar vehicles. The premium deposit got the customers to lower their risk profile as they had some skin in the game. The six-month term of insurance allowed State Farm to adjust rates as needed, this allowed them to be more adaptive than other insurance companies who only adjusted annually
  5. Insurance was the third largest industry in the US in 1921
  6. He had, and this was what counted most of all, the faith and encouragement of his wife
  7. Mecherle had the ingenious idea of installing a theft and movable object collision clause which said that the policyholder would pay for anything less than $10 and State Farm would pay for anything above $10. It was his theory that if a farmer had to pay for minor repairs he would be more careful with his automobile. It also would save the company from a flood of petty claims each time a member scraped a fender or dented a mudguard
  8. From the very beginning, the agency force was the heart of the company. People who are “more than order takers, for the selling of our insurance requires a man of ability to create a demand, sell the insurance, take the application, and complete the whole deal in one call if he hopes to make a success of this business. These men seem to be a rare article.”
  9. In the early days, George sent out a list of 14 questions which helped him determine pretty accurately how the idea was being received around the state
    1. Don’t you think our proposition the best insurance plan for farmers that you have seen?
    2. What did your board of directors think of it?
    3. Would you like to save your friends and the members of your Farm Mutual Ins. Co. some money?
    4. Would you like to make some money for yourself
    5. Are your Farm Mutual members satisfied with Old Line or Reciprocal rates and their method of settling claims?
    6. Would you endorse our proposition if you found, after a thorough investigation, that it was worth of your endorsement?
    7. Will you write to Mr. SB Mason for his opinion of our proposition?
    8. Will you write for information concerning us?
    9. Will you write to Prairie Farm about our proposition?
    10. Did you see our advertisement in the April 29th issue of the Prairie Farm?
    11. How does the fact that Mr. JW Coale wrote 32 applications in two and one half days appeal to you?
    12. How much time could you devote to selling our insurance?
    13. If you had the time to devote to our proposition, could you do as well or better than Mr. Coale?
    14. How soon would you like to have our Special man spend a few days with you to explain the plan to your neighbors?
  10. Great companies always look different
    1. “During the years of its growth to the commanding position of the largest automobile insurance company in the US, the secret of State Farm’s success was a continual source of puzzlement to the insurance fraternity. The incontrovertible figures of its annual statements proved that it was a financial success, and the findings of the examiners for the insurance departments of the various states in which it was licensed to operate revealed no flaws in its method of doing business. But questions were forever being asked. What was the secret formula that allowed this company, almost alone of all automobile insurance companies, to undersell the market and still show such amazingly large figures on the right side of the ledgers? How did it actually work? One obvious answer to the first question was the organizational genius of the “super-salesman” who was at the head of all its operations. In George Mecherle, who had come to the business at a time in life when most men have long since reached the peak of their ability, State Farm owned a chief executive of exceptional talents. He had been at the forefront of every progressive move the company had made, and as the years went by he had chosen those capable associates who had worked so well under his all-seeing direction. Especially in the early years was it true in his case, as Emerson said in a rather larger conception that, “an institution is the lengthened shadow of one man.” But there was really more to it than that. There was, for one thing, the philosophy underlying the institution that was his lengthened shadow. State Farm was different than anything that had preceded it but, paradoxically, there was little that was original in its plan.”
    2. No companies previously had attempted to establish a basis for selective risks, based on geography, age, etc. By taking this information into account, State Farm was able to operate for nearly 40% less than its stock competitors. They charged its members every six-months which was easier for most people at that time to financially handle than the lump sum annual payment other companies required. They also required a smaller unearned premium reserve. And an inadequate, or excessive rate, could be corrected at the end of six months rather than waiting until the end of the year.
    3. Another feature that contributed to operational economy was the issuing of policies by the home office rather than by the agent in the field. Relieved of this clerical work, or of the expensive necessity of hiring someone to do the work for him, the agent could concentrate on selling. Since his income depended on sales, he could afford to work for less than the agent who had to keep an office force.
    4. State Farm policies, once written, were not rewritten and replaced each policy term. This greatly saved expense, work, and time. The same policy remained outstanding until the policyholder bought a new car – and, in those days of agricultural uncertainty, the farmer did not turn in his old Ford or Chevrolet for a new car each year, by any means – or made a major move or change of coverage. This feature was borrowed from the standard practice of life and accident companies; but it had never previously been tried out in automobile insurance companies before
    5. Also borrowed – this time from mail order houses – was another feature, one never before used in automobile insurance but one that had been found efficient in the operation of many accident and health and several life companies. This was the system of billing and collecting renewal premiums by the home office, or by branch offices after they were established. This relieved the agent of the task of collecting renewals, and thus obviated the necessity of compensating him for such collections. This, of course, resulted in a material saving in expense for State Farm, which was passed on to the policyholders. Agents were, however, paid fees and expenses for adjusting losses. This, at first, was on a per diem and mileage basis, but later was changed to a percentage of the premiums, largely for ease of administration.
    6. All premiums had to be paid in cash in advance, avoiding the expenses of establishing a credit system
    7. The most novel feature of the State Farm plan was the lifetime membership fee system. Any person who joined State Farm did so for life, or at least for as long a part of his life as he remained a “good risk.” His membership did not cease even if he should allow a policy to lapse for some time. State Farm’s advantage was that it charged the member the cost of solicitation and the sale of the insurance policy only once. Since State Farm renewal policies contained no provision for new business costs, this factor alone provided a large part of the price advantage which State Farm enjoyed over its competitors. This membership fee, it is interesting to note, was not a premium. It was, instead, an admission and inspection fee. It was not returnable. For this reason, no unearned premium reserve was set up on it. This allowed the company to not be burdened with reserves, typically a big issue for new businesses. But, in this case, new business was paid for by the new clients. The phenomenal growth rate of State Farm could not have been realized without this innovation, and yet the very plan that made this growth possible also provided a price advantage to create this growth
    8. The 80-20 plan was adopted from other insurance companies, where the policyholder assumes 20% of the risk and the insurance company 80%. The sound psychology of this lay in the fact that it gave the policyholder an interest in keeping his losses to a minimum
    9. Mecherle devised a system of classing all automobiles by list price into seven classes, from A to G, rather than having hundreds of different rates for each car. This system was easy to understand and to apply. In the first agent’s manual – a masterpiece of simplicity there was an uncomplicated formula by which anyone could readily determine the amount of insurance that could be written on any car, whether new or old.
    10. Another saving for the policyholder came about through lower average losses resulting from the careful selection of business. The restriction of those eligible to membership in State Farm, and such clauses as the drunken driver clause, not only appealed to farmers, with their more rigid code of morals, but also saved the company money.
    11. There existed no contractual obligation on the part of the company to pay any dividend to the policyholder at the end of the term. This system had the merit of favoring the continuing policyholders and discouraging lapses, much after the system of surrender charges generally in use in life insurance companies
    12. All of these economies, acting together, enabled State Farm to do business in the early days for nearly 40% less than the stock companies!
  11. Created an internal publication to get new policies and any other information across to the nation-wide network of agents and offices. It was directed mostly to the agents and sent them the company message, the news of what the various state agencies were doing, the pertinent facts, figures, and news of the entire organization. It was also a medium for the expression of George Mecherle’s messages – his inspiring talks.
  12. The goal had always been to build an honest insurance company, one focused on service and square dealing, giving to each member equal and just consideration; and to build the organization grounded on the principles of true equality and right-dealing as between men
  13. Even through the Great Depression State Farm continued to grow, thriving in tough times. “We have truly learned that what we really keep is what we give and that the returns are immediate. Therefore, under this new philosophy, the standard of success will eventually be the measure of service given.
  14. The service fee bonus gave each agent an opportunity to participate in that underwriting profit in his respective state in an amount not exceeding 25% of his annual service fee compensation, provided his own business was also profitable. It not only augmented the agents’ income but also provided an incentive for each agent to use care in the selection of drivers to be insured and to render efficient claim service. In placing a bonus fee along with the service fee it makes every agent careful of his record; if an agent secures unprofitable business it puts him on the spot as far as the rest of the agents in that state are concerned
  15. Mecherle was adept at picking high level employees. He demanded and got the same loyalty to the company which he himself gave. He established an esprit de corps that was remarkable and that left its imprint on the organization long after it had grown beyond his wildest imaginings. Most of the roots of the company came back to loyalty – loyalty to State Farm and loyalty to the “Chief”. In the eyes of most people the man and the institution were inseparable
  16. The paternalism of George Mecherle evolved into a scientifically controlled welfare program that approached its human problems on five fronts: physical welfare; financial welfare; morale of the workers; training and education of those who chose to make State Farm a career; other problems not connected with the others
  17. State Farm was the height of enlightened industrialism. The steadiness of employment, the lack of “unrest” among the employees, is traceable in good measure to this system. In a larger city, with more diversified amusements and cultural interests, it might not be as necessary to all concerned as it is in the flat prairie city of Bloomington where, without this self-interested setup, boredom could well result
  18. If needed to shrink, they would wait for employees to retire and then not replace them. “We have a responsibility to our present force. We wouldn’t do anything that would break that loyalty. The big factor in productivity is morale.
    1. Left a red rose on the desk of all employees on their birthdays
    2. Handed out pins denoting length of service in ceremonious presentations. Today, there are also cash bonuses for five-year periods, ranging from five to thirty years’ service
    3. Held “Coke parties” on each floor whenever an employee passes a ten-year service milestone, and all employees who have been with the company for fifteen or more years are honored annually at a special dinner party
  19. “As we have become more independent, we are becoming more conservatively minded. This – I am satisfied – is natural, and comes from maturity. It should be our greatest desire to build for permanency on a sound business policy rather than to attempt too great a volume from this time on.”
    1. Permanency through honesty 
  20. “Our plan is very simple when boiled down to its essence. It will consist primarily in establishing a contact and working agreement between local banks and our agents, so that the bank will finance the purchase of automobiles for deserving policyholders and will accept our policy, with proper safeguards on the loan. Such a plan, when carried to its utmost possibilities, will open the door to a vast new field of business, in view of the fact that two out of three sales of new and used cars are one deferred payment basis. Furthermore, we will be able to retain many policies which we are now losing when the policyholder trades in his old car one new one and finances the deal.
  21. As State Farm was not a factory, they could not be “converted” during WWII. Others said that they should focus on other lines but Mecherle turned a deaf ear. State Farm might lose as much as half its business, he stated firmly, but it would come out of the war as clean as a hound’s tooth and without resorting to diversification. This long-term mindset would pay off only years later when massive pent up demand for new cars, repairs, insurance, and more would be let loose once the war was over
  22. One of the keys to the growth was the fact that since establishment, State Farm paid losses promptly and satisfactorily. In the long run, Mecherle felt, this may have been the greatest factor – this and the confidence of the agency force in the company management
  23. When George was beginning to step away from the business he asked, “The only thing I insist upon is that you do not depart from the membership plan, the continuous policy, the six-month’s premium, and the happiness of our agency force. Those are fundamental. Beyond them there are no restrictions. So, go to it.” He would step away from the business, allowing the new generation to lead but still kept every detail of the business at his fingertips. He kept the facts and figures of State Farm up to the very last minute in his worn loose-leaf books. He knew what was going on in every department. In spite of the growth of State Farm, he still kept his interest in the individual welfare of the staff, and knew the names and personal histories of an incredibly large number of them.
  24. The secret to his success – “A man has to live and sleep with his business if he wants to make a go of it. You have to take it home with you at night, so you can lie there in the darkness and figure out what you can do to improve it. In fact, you have to become sort of a ‘nut’ about it, so that you become so enthused that you will bore your friends talking about it. You have to become a one-man crusade.”
  25. Good character above all else
  26. “An institution is the lengthened shadow of one man.” – Emerson
  27. The greatest troubles we have are what we bring on ourselves
  28. Remember this: every man who accomplishes anything worthwhile in this life will leave behind him many temples still unfinished when he departs this life
  29. From his associates on every level he demanded three things: willingness to work hard, faith in the organization, loyalty to the “spirit” of State Farm. Few were those who did not give him all three in good measure. In return he gave to his associates what he demanded from them. He was no swivel-chair commander, but the hardest worker of them all. His faith in the high purposes of State Farm as an organization dedicated to the service of its members was all-absorbing. And his loyalty to the men and women who were loyal to him and his ideals was legendary
  30. “Things do not happen – they are brought about by careful planning, diligence, application, and direction. The tiny seed planted in the year 1922, which has been nurtured by the sunlight of agency devotion and sustained by the life-giving waters of policyholder persistency, has grown in root and branch – spreading a mantle of service and protection throughout the nation – until today the ripened fruit of its many branches is falling as a benediction into the lives, homes, and hearts of our people.”

What I got out of it

  1. Slow book at times but learned a lot about the George Mecherle and the “honest-first” business he created. There are timeless business and overall life principles that we could all learn from and incorporate into our jobs and lives