Does customer loyalty within insurance still exist?
“Loyalty that is bought with money, may be overcome by money”. Seneca’s famous proverb might be a few thousand years old but couldn’t be more current and relevant. When looking at consumer behaviour over recent years across industries and product categories, there is a common trend - brand loyalty is less relevant; consumers becoming ruthlessly focussed on price rather than brand. Convenience when switching, which used to be a hurdle, is not considered an issue anymore with the advent - and now dominance - of marketplaces and price comparison platforms.
The insurance industry is a good testament to this. Insurance customers used to pay the price for remaining loyal to one provider, with new customers getting the best deals - commonly referred to by the term “loyalty penalty”. Switching providers, however, was often arduous and involved a fair amount of research and deal comparison that not many customers were willing to undergo. The introduction of price comparison sites offered customers a quick and easy way to compare deals and switch, and has now become the mainstream option when buying or renewing policies.
When the regulator investigated the “loyalty penalty”….
The so-called loyalty penalty has recently been under scrutiny by the FCA. The regulator found “hidden discrepancies” in the amounts customers were paying for a service, and warned general insurers that it “will not hesitate to intervene” if firms fail to meet their obligations to customers₁. The detailed results of the report released early in October revealed that “insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch”. They also found that “6 million policy holders paid high or very high prices in 2018, and if they paid the average for their risk they would have saved £1.2 billion”2. This is a very significant regulatory finding representing a shift towards pricing regulation which could transform the way insurers do business. However, this is a move long anticipated and something that insurers saw coming. Some especially were quick to react in anticipation of the report findings; Saga is now offering a three-year price promise on car and home insurance, while Aviva has introduced AvivaPlus which offers a renewal price guarantee. Others such as Zurich and LV= confirmed they had “no planned changes at the moment” but are fully supportive of the FCA’s review.
How can insurers respond to the forces that are changing the economy? A process orientated view
In this environment of fierce competition and brutal pricing, insurers are forced to constantly innovate, reduce bottom line, adapt, and respond quickly to a changing economy and society.
Bottom line requires rationalisation and standardisation. For many years, identifying process improvements has traditionally been a well-proven but heavy, slow, and manual process. Ensuring the analysis is representative and factual has required multiple engagements to cross check and test within an organisation. Advances in technology and the advent of process mining tools address many of the legacy challenges of process improvement, benefit realisation, and sustainable improvements. It allows clients to link core systems & technology through API’s to visualise live end to end process to understand critical issues in performance, variation and compliance.
Typically, there will be a common path that is frequently used, but not always the most efficient. Within a matter of weeks, it provides a deep process analysis and clarity on potential automation and process improvements. Additionally, process mining delivers an enduring connection to the core systems and dynamically visualises the impact of change. Be it new customer onboarding, procure to pay, change of details, or new product development, process mining offers process transparency in its raw form. It also enables rapid standardisation which is essential for driving cost efficiency and offering the necessary room and platform for adapting, changing, and scaling.
When process mining addresses the need for rationalisation, standardisation is addressed with new technologies that offer configurable rules engines automating existing processes and avoiding lengthy approaches to change. These solutions offer rule-based modelling, expressed as configurable and repeatable rules within the application. Not only does this cut back operational effort but avoids the likelihood of manual errors and process related incidents.
The answer from a tech view
One of the main drivers for adaptability and change is the ability to deliver scalable digital capabilities at a faster pace. Advanced analytics, IoT and cognitive applications demand technology capabilities that are scalable and flexible. Cloud providers constantly evolve their capabilities and work with system integrators to create tailored industry solutions. Market participants can tap into powerful ecosystems that will provide them with the flexibility to make quick business decisions.
Making the most of cloud technologies requires robust medium and longer-term planning, especially when it comes to deciding which legacy systems to migrate to the cloud and when. Criticality and complexity should determine when to migrate to the cloud and the effort required to do so. For that reason, a phased cloud migration plan would act as the most effective way to manage change of this scale and to also allow the required room for the deployment of new applications.
In addition, by migrating legacy systems on Cloud not only gives flexibility but allows the organisation to maintain these at a fraction of the cost. With the introduction of new API platforms, migrating to the cloud is no longer onerous. Interfacing with cloud platforms (see Mulesoft, Dell Boomi, etc.) not only simplifies but also expedites the process of connecting data, applications and legacy systems across on-premises to cloud computing environments.
Elsewhere, blockchain has been used as a lever in the battle of reducing bottom line and responding to downward pricing pressures. Distributed Ledger Technology (DLT) and Blockchain has been the epicentre of insurers’ focus, mainly in understanding how this can be used to collaborate with competitors better and drive down costs. Proofs of concept have established the ability that DLT has, but only a few market players have gone past that stage. AIA in Hong Kong recently launched a blockchain-enabled bank assurance platform allowing the bank distributors and the insurer to share policy data amongst themselves as well as policy documents real-time, hence streamlining the customer onboarding process, improving transparency and reconciling commissions automatically, something that would take a few working hours to complete.
AXA in Europe is offering flight delay insurance cover through a blockchain platform with smart contracts and by including other parametric triggers. Whilst we won’t see immediate application of blockchain, the industry is set to undertake more meaningful and tangible blockchain initiatives that will completely change the scale and shape of insurance operations.
When product innovation is more than just a buzz word
Flexibility should not only transcend in the tech stack that insurers should be using, but to product and policy development that responds to customer needs such as customisation, personalisation, and greater control and self-management. An example of this real-time, as and when needed self-managed coverage is Trōv. Trōv is an on-demand insurance agency that uses an application which allows customers to insure single items they purchased (e.g. cameras, tablets or other digital devices) with a coverage that can be activated and terminated as and when needed and can be switched on and off through the app. InsurTech innovators are looking to disrupt not only how policies are currently offered to consumers but also tapping into new niche markets, some of them not pre-existing.
An example of this is startup REIN, backed by Liberty Mutual, that offers a platform offering customised coverage for the newly developed drone market. Another example is InsurTech company Bought by Many, backed by Munich Re who offered a channel to buy niche travel insurance for people who travel but have pre-existing medical conditions. Product development can be accelerated by backing InsurTechs that do not face the usual policy and legacy burdens. Personal insurance has been the main focus of these companies, however it is expected that life insurance and commercial will soon be the target leveraging the technology deployed and available through auto and home insurance, such as sensors, analytics and DLT.
Time will set apart leaders from followers….
All of the above are topics which are often discussed within the insurance world, and which are at the front of mind of any executive within the industry. Each insurer can decide to address each on their own right or as part of a wider coordinated effort.
However, the broader fundamental challenge lying ahead is how insurers will create the springboard and set themselves ready for adapting and keeping up with changing customer and wider societal shifts. The very blurring of the boundaries between industries owed to the sharing economy and the generation of vast real-time data, is set to create gigantic shifts presenting new market opportunities and threats.
Traditionally, the insurance industry has been good at monitoring and recognising these shifts but reluctant to change or disrupt the status quo. The more traditional mentality within insurance is still a big believer that brand strength, capital access, and market complexity act as barriers to entry or disruption. However, when the market - and for that matter - customers understand the possibilities lying ahead, insurers will be forced to make these changes and respond quickly. The key elements for this will be getting the basics right; embracing new technology as an enabler and designing services rather than products in a collaborative manner through the use of an ecosystem. These challenges are not set to become the industry norm soon, but it will all depend on who is the quickest to react first. Time is ticking away.
Authors: Tony Farnfield and Panagiota Kovani