The credit crunch has severely dented the public’s faith in financial services companies. Georg Wuebker offers eight suggestions to help repair the damage

The financial tsunami is too severe to be fought with cost-cutting techniques alone – and that’s because it’s a revenue crisis, not a cost crisis. For instance, if revenues are down 30%, a cost reduction of 15% won’t fix the problem. So the priority must be to stop further deterioration of revenues.

Customers’ faith in financial products and institutions has been shattered. As a result, they want security and guarantees. Customers have become more willing to sacrifice returns for better guarantees. To be profitable, therefore, volume, price and costs are all important factors.

These eight steps will help your business stay afloat and profitable:

1 Accept lower sales

It is a myth that lowering prices will prevent volume losses. In reality, a decrease in sales does less damage to profits than cutting prices. In times of crisis, sometimes it is necessary to accept a drop in volume in order to keep prices stable. But it is never the other way around. In insurance, although walking away from clients with a higher risk profile may contribute to a reduction in market share, being more selective about who to insure also means reduced risk and fewer claims.

2 Don't engage in price wars

Companies should resist special promotions and discount offers that undercut competitors’ prices. This helps take the pressure off the market and stabilise prices. Cutting insurance rates at a time when rates should be strengthening will place considerable strain on the industry. Only with a hardening market and more disciplined underwriting will insurers benefit from the downturn.

3 Be creative

In light of severe investment losses and rising claims, insurers are widely expected to start charging more for certain types of cover. But in many cases, it is not realistic to impose price rises during an economic slump. All financial institutions should be creative in avoiding rate drops. For example, in order to maintain prices of premium products, less expensive products can be introduced.

4 Give quality advice

More than ever, quality advice will help rebuild customer trust – particularly for wealthy clients who are willing to pay high prices for the best advice. Insurers and brokers should not only review the product offering, but also adjust the sales process and match it with the selling propositions. The focus should be shifted from price to the product features.

5 Take a chance

Insurers are now treating their customers with more caution. Credit-worthiness checks and underwriting procedures are getting tougher as providers try to guard against perceived risks. But insurers that take a chance and offer hard-to-get cover can gain an enormous competitive advantage. The increased flexibility will empower an insurer’s sales force, leading to a positive impact on the company’s revenue. But insurers that do take the plunge should still assess the risks carefully.

6 Be smart about price increases

In packaged policies, customers value some benefits higher than others. It’s important to understand what a customer’s priorities are and what they’re willing to pay more for. Before making any price increases, make sure you investigate and identify customer price awareness and understand their price sensitivity.

7 Strengthen bundling and cross-sales

By bundling and cross-selling, brokers and insurers can capitalise on existing client relationships. The traditional example of bundling home insurance with content insurance has never been more topical as customers come to terms with their residual income not being enough to replace damaged possessions.

8 Entice customers away from the competition

Economic downturns result in customer fear and insecurity, which in turn cause market shake-ups. The more unsure customers are, the more easily they can be convinced to switch to a competitor. Insurers and brokers should constantly monitor how things are changing for their customers and react quickly by adjusting their offering accordingly. Many types of insurance, unlike many other financial products, are a necessity. The defining questions are: what products will customers want to buy, and from whom? Answering these questions will help companies benefit from the current turmoil.