Price Rules OK?

Last spring, former King of Spin Charlie Whelan was mad at the insurance industry and Churchill in particular. He bought a motor policy and had to make a claim. But he was disappointed with the service he received and wrote about it in his column in Insurance Times.

Whelan admits his examination of the policy was minimal. "The AA had signed us up with Churchill and I knew it must be OK because of that great advert with all those nodding dogs," he says. "I guess it relies on the fact that people like me just carry on paying for years without ever thinking about it."

The scenario is typical. Customers buy on price without really considering the cover and are then surprised that they don't get what they haven't paid for. In customers' minds most personal lines products have become commodities: homogeneous products bought and sold purely on price.

One only needs to take a look at adverts for home and car insurance to see this. Slogans such as "Phone for the lowest price" and "Save £££s" predominate. Do you ever see an advert focusing on the cover that is given and the claims service? Rarely.

This phenomenon is not new. The motor insurance market has been commoditised for more than ten years, in part due to improvements in technology and the advent of the direct writers. And the household and other personal lines markets have been steadily moving in the same direction.

But, it seems, the time has come to de-commoditise personal lines products. At the Insurance Times Strategy 2002 conference, industry leaders recognised the issue as one of the most significant problems facing the personal lines market. AccidentCare managing director Clive Nicholls describes the situation as "staggering". And Zurich retail financial services managing director Ian Owen says that the problem has reached such a level that the industry "no longer sees the value of what it does".

But is commoditisation really a bad thing? Doesn't it mean that consumers can shop around for the cheapest premium?

Yes, but the problem is that consumers fail to appreciate that there are differences between products and end up buying the wrong one. Consequently, so-called horror cases end up in the personal finance sections of the daily papers and the industry continues to be saddled with a bad reputation.

Informed decisions
The way forward is to improve communication with customers. Zurich's Owen says: "Some people just want to base their decision on price alone. That's OK. But people should not be stopped from deciding on other factors such as cover, service and claims. It is bad if people do not know the differences between products and are unable to make informed decisions."

Commoditisation wastes money, says Biba chief executive Mike Williams. "Because consumers see products as the same, insurers have had to rely on branding to encourage people to buy. They have had to grow brand awareness, which is expensive and not very efficient."

Williams also says that churn rates - the rate at which policyholders change insurers - have increased. "It is expensive for insurers and brokers to acquire new business," he points out.

Commoditisation also makes the broker's job more difficult. Private client manager Peter Making, of Halifax-based broker Wilby, says: "We try to sell as best we can on cover. On motor for instance we try to sell the benefits, but we are not the cheapest. While people can be quite receptive, the direct writers do tend to have the edge. We can compete, but if we were too expensive, we would struggle. "

So why is price valued over other benefits? Hiscox chief executive Bronek Masojada says it because the industry is lazy. "People sell on price because it is easy. The value of the product is seldom communicated. It is simply down to laziness. It is too much effort to explain the product to the client; it is easier to sell on price than on quality of cover."

Owen adds: "The insurance industry lacks the calibre of people who can truly understand how to differentiate the products and how to compete. We have fallen into the trap of giving an easy marketing message based on price."

Easy process
Structural changes, such as electronic trading and a greater streamlining of the sales process have also contributed to the problem. And the advent of Direct Line and other direct writers was instrumental in this change. Prior to their arrival, people were doing business mainly through brokers. Direct sales meant that customers could access quotes quickly over the telephone and later on the internet.

Williams says: "The direct writers turned purchasing into an easy process, automated and efficient. They made the product simple, streamlined and a commodity. The rest of the industry followed this approach in relation to high volume products."

The change to simple, price-led products is not unsurprising given the nature of insurance policies. Legal & General head of marketing Steve Bryan argues that commoditisation has been led by the intangibility of the product: it is only represented by a piece of paper and has no value until a claim is made. And MMA Insurance household manager Jane Coppard says that as insurance is a grudge purchase it is largely sold on price.

Crawford & Co senior vice president Jonathan Clark places some of the blame on customers. "The complexities of the products meant that insurers started to commoditise them to make them easier to sell. Consumers demanded it."

Supermarket sales
Critics also argue that the sale of insurance products through supermarkets has contributed to their commoditisation. Tesco, for instance, includes motor, home, pet and travel insurance among its financial services products. The retailer has also launched an instant travel policy that customers can pick up off the shelf and pay for at the counter.

Is it surprising that consumers view insurance as a commodity when they can purchase a travel policy at the same time as their milk, bread and cornflakes?

If commoditisation is a bad thing, can de-commoditisation be achieved? Zurich Financial Services speciality business director Dave Parry thinks it can. "Look at supermarkets. People don't shop at them on price alone; they are influenced by brand, range of products and quality of goods. Supermarkets also target different demographic groups."

Parry argues that insurers need to target niche markets. A whitewash approach that simply targets all insurance buyers only succeeds in encouraging customers to treat all insurance products as the same thing, he says.

Consumer education is an important strategy. Williams says: "There needs to be an effort on the part of the industry to educate customers. Customers need to be able to differentiate. They need to learn what they should be judging a product on, other than price. They need to be told that every product is not the same.

"Regulation by the FSA should improve the situation, as it will look at product differentiators."

The FSA's consultation document, CP160: Insurance selling and administration, contains proposals for a number of product disclosure requirements prior to the consumer being bound by the contract. These include disclosure of key information, including a description of the main characteristics of the policy.

Does this go far enough?

Chubb personal lines manager of Europe John Sims says that advertising and PR are vital to the education process. "The industry needs to be more proactive; it needs to promote to a wider audience, not just through trade magazines, but through the national media. Insurers need to demonstrate the specialist nature of what they do and make it difficult to replicate."

Recruitment is a further area that needs to be addressed, says Masojada. "We need to recruit and train people who can understand and explain the differences between products. We need better people, better services and better delivery of service."

Recruitment is another thorny issue for the insurance industry at the moment.

Service delivery is a key point, argues Masojada.

"Branding cannot be a differentiator on its own," he says. "There needs to be substance such as an excellent claims service behind the brand if it is to be successful. Branding is a reflection of what you do.

"Cover is a difficult differentiator. It is easy to copy. The way cover is delivered - the service - can be the differentiator."

Customer service
This focus on service delivery is acknowledged by Tesco insurance head Paul Baxter: "In selling any brand, it is important to sell on customer service. It is not sustainable to only compete on price.

"Good customer service is not complicated. It is about recognising that people have bought a product and that it provides the service they want. People are concerned about service, and we have an obligation to meet that expectation."

Clark agrees: "We need to develop products that are relevant and focused on individuals' needs.

"The way claims are handled is important to de-commoditisation."

Creating a proposition based around fulfilment - providing what the client wants - is to be encouraged, says Clark. "Insurers need to go beyond the processes and understand what consumers want. People want different things; they have elements of homogeneity, but they are all different. If you design your products around the customer and the market then the products become less commoditised.

"The retail sector has created a customer experience and its products are less commoditised as a result, even seemingly similar ones. But even for non-commodity products price is still important."

There are signs that de-commoditisation is beginning to take place.

Parry says: "Direct writers have subtly changed their marketing. Direct Line for instance is emphasising its valeting service. And Marks & Spencer is advertising that it is selling a high quality product; it is looking to sell to a market that is not simply after a low price."

General insurance associate director Brian Brown, of analyst Defaqto, argues that products are becoming more dissimilar. "Insurers are starting to differentiate their products. They are offering more options and variables, giving customers a menu to choose from. This gives rise to a standard set of core covers that vary around the edges. Legal expenses insurance is just one example of an add-on."

Brown cites mortgage payment protection as an example of the move away from commoditisation. "Two to three years ago you would buy it from your mortgage provider. It is now being sold by direct writers as a stand-alone policy with options for extended cover and extras. It is no longer a simple cover, sold off the shelf, but a complex one."

It is clearly evident from the Insurance Times Strategy 2002 conference how passionate people are about this subject and how important it is.

Do we want an industry where con-sumers do not see the value in our products and as a consequence the skills of the men and women employed by insurers and brokers? The answer must surely be no.

And the FSA is certainly not going to let the industry continue in this price-fixated mould. Consumers need to be better informed. There is no getting away from it.

What do you think? Email your views to
michael@instimes.co.uk