PA's work with motor insurers across Europe suggests that enhancing profitability will no longer imply selecting either a revenue growth or cost containment focus. To the contrary, institutions that thrive will demonstrate skill and creativity in pulling on both these profit levers simultaneously.
Profits under pressure
Customer buying habits are a key determinant of profitability, both of a market overall and of the players within it. Profits are squeezed when footloose customers choose a provider primarily on the basis of price.
Traditionally motor insurance customers have, at time of renewal, either approached their current insurer exclusively or a small number of companies to get a quote. Insurer selection was on the basis of a familiarity with, and trust in, a particular company. And high customer retention levels reflected the combined effect of customer inertia and customer service (both perceived and actual).
In many markets this traditional model is little more than a distant memory. Scouring the market for the best deal, once the practice of the very few, is now commonplace; many customers ‘play the field’ when selecting an insurer, a process made easy because most insurers offer quotes over the telephone and Internet. These distribution channels pander to the needs of the most price-aware customers but, as the channels grow in relative importance, they help set a low-price norm across the market and dramatically increase price sensitivity.
In many European markets motor insurers are already facing a severe profit squeeze and those that have not yet suffered are right to fear the prospect. This reflects factors that have a significant and mounting negative impact on each of the key profit drivers.
Ensure the business is focused on the customer
The likely threat to profits as competition increases masks an insidious problem. When competitors seek new business almost exclusively on the basis of price, less value is captured from customers in the first place. This fundamental problem is compounded by an increase in the number of competitors, which results in value being more thinly distributed between rivals.
By viewing the sector in value chain terms we are seeing an increasing incidence of motor insurance being marketed as a commodity, reflecting:
- greater reliance on low-touch distribution channels (such as phone and Internet) as opposed to high-touch distribution channels (such as tied branches and agents)
- promiscuity on the part of customers that feel obliged to ‘play the field’ but who are ill-informed about non-price product attributes and are disinclined to expend the significant effort to plug this information gap.
If customers buy a commodity this tends to define both their expectation and their experience. Why, then, should a motor insurance company committed to profitability offer a product and service that is more closely attuned to customer need? It is quite simply unlikely that customers will notice and remain loyal at a higher price in the future.
As a result customer expectation becomes the reality and the elements of the value chain are configured to deliver administrative functionality at minimum cost (shaded in orange in the diagram). It is ironic that there are many product benefits (eg guaranteed courtesy car in the event of accident irrespective of fault) and service attributes (eg ease of claim notification and speed and transparency in claims processing) that could underpin differentiation. But the fact that customers engage in comparative shopping, while discriminating badly between alternatives, driving the market towards stalemate price-based competition.
Motor insurers must take the lead if they wish to avoid this self-fulfilling prophecy. Those with differentiated product and service today should take every opportunity to reinforce the advantages that accrue to their customers as a result. And those locked in stalemate competition must develop a detailed understanding of customers (profiling both needs and preparedness to pay using research techniques such as conjoint analysis that looks at the relative importance of features in any purchasing decision) and be creative in determining how they can satisfy them cost-effectively (possibly working in concert with others to achieve this). It is crucial that customers should be encouraged to pay a premium for a differentiated proposition.
Our conclusions are straightforward:
- profitability demands a focus on the customer (with the primary emphasis in each element of the value chain shaded in green rather than orange)
- failure to recognise customers’ needs and demands will result in undifferentiated suppliers squabbling over a profit pool that is insufficient to cover their combined cost base
- it may be better to work with others (one entity, for example, focusing on the brand-building elements shaded dark blue on the value chain and another on the back-office capability shaded light blue) to create real customer value and then partition the spoils.
The article goes on to suggest how companies can make astute choices to underpin profit.
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This article is from PA Perspective on European Insurance - To request a copy of this publication, please e-mail: insurance@paconsulting.com
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