Is insurance a commodity product, a burden to consumers, or can it be viewed as a good thing to have? Tim Crossley explains

While scanning Berkshire Hathaway's annual report (2004) over my cornflakes, I came across Warren Buffett's diagnosis for the insurance industry and what he attributes to the industry's poor return on equity.

He made the observation that insurers have generally earned poor returns for a simple reason: they sell a commodity-like product, with little scope for brand differentiation (think Hoover, Coke, Bic).

In fact the trend towards affinity sales and white labelling only accelerates this commoditisation as, in most cases, the insurer is invisible to the insured prior to contract.

His recommendations to succeed under economic pressures are attributed to managerial success and being a low-cost operator. For example, Berkshire Hathaway's wholly-owned direct motor insurer, Geico, has some seven million policyholders.

So it got me thinking: is insurance condemned to a commodity-based market or is there a chance to break out of the mould?

On the tube on the way to work, I saw one advertisement after another from insurers. The messages seemed clear and consistent: "Save this percent on insurance", "Lowest cost ever", "We'll beat any renewal".

Then when I opened the newspaper, the impression was further reinforced with: "Save up to £100", "Home insurance 20% off", "Switch and save up to £150", "12 months for the price of 11", and so on.

You get the picture. Is price the only differentiation between insurers. Is that what the customer wants and only wants - lowest cost insurance, and hang the consequences?

The consumer is clearly conditioned to differentiate between insurance products on price, not on service, and certainly not on claims service.

Why is this? Does the industry not wish to draw attention to the inalienable fact that people buy insurance so that they can claim replacement, repair or refurbish when it is justified and appropriate to do so?

What would be the impact on the industry and its reputation if insurers started advertising: "We pay out £400m in claims every year."

I am reminded of the scene in The Incredibles, in which the superhero is a claims handler. He is naturally 'hauled up' for trying to help a customer. How many millions in the worldwide audience nodded wisely at this point?

Of course, attitudes vary in different countries. A recent visit to Russia highlighted the low expectations of the Russian consumer. Insurance is seen as a tax, so few people actually think to claim.

In the US, there does seem to be a different slant on the way that insurance is marketed.

Less time consuming
Here are some examples. One of Progessive's slogans is: "We make insurance easy." Its focus is on price, but it also focuses on making the whole claims process less time consuming and less inconvenient, so preventing the claimant from feeling unsure.

Allstate takes a stand for consumer interests. "If you need help who would you call? Not the company, the person. You deserve a relationship with a person."

Main Street America says: "Insurance is a relationship business and service is a key differentiator." It goes on to a tell the tale, in its annual report, of an insured who spent 30 minutes on the phone discussing a billing inquiry and then asked to be transferred to the manager.

One would assume a complaint would follow, but on the contrary, the insured simply wanted to commend the employee to her manager on handling the billing inquiry. The manager then of course went one step further and wanted to thank the insured for thanking the insurer. As a token of appreciation the manager sent a a couple of jugs of finest locally prepared maple syrup. How's that for service.

It is clear from the current trends towards introductory and 'switching' discounts that the industry has decided to focus on getting a bigger share of the pie rather than increasing the level of cover that people have.

The point at which most consumers would consider switching or shopping around is at renewal. While the most likely trigger for this is an increase in premium, the other strong motivator is the claims experience, if there was one. Poor claim handling for sure will make a policyholder jump ship, and the internet is making this switching process easier .

Perhaps one way out of this vicious circle is the approach of market segmentation, offering choices of service levels with corresponding premium rates, and focusing on the high present value and high potential value segments.

Modern client-centric claims systems can of course make automated decisions on claims. They can fastrack claims resolution or even support no-touch claims pay-out for 'gold card' clients or customers with an exemplary track record of fair and honest no-fault claims. (Not 'no claims', as I would argue this is not an indicator of honesty, just good fortune.)

Better customer oriented integration between claims and underwriting and a focus on understanding the client in more depth will surely pay dividends in terms of a sustainable business based on more longer term customer relationships.

To conclude, it is worth stating the obvious - it costs far more to attact new customers than to keep current ones happy. There are only a very small number of interactions that an insurer has with a customer each year, so it is of paramount importance to make the most of these 'moments of truth'.

Perhaps by continual reference to these principles, the insurance industry will finally be able to break out of the lowest cost commodity product mould? IT

' Tim Crossley is vice president and general manager, UK of Guidewire Software (UK)