Lee Gladwell does a little exploding

There’s a lot of talk about increased commoditization in insurance these days. The concern is that organizations are increasingly selling standardised products based on price, reducing the need for advice in the future.

Comparisons are made with the retail sector as an example of what can happen at the so called ‘commoditised’ end of our own market. Some approaches to selling personal insurances are compared to selling baked beans in supermarkets. A particular concern has been the drive to place SME business using a similar model to the personal lines market, so that commercial business also becomes increasingly ‘commoditised.’

There may be something in this, but not much. Better perhaps to be sceptical of any prediction that’s just based on what’s happened in the past.

To start with, it’s not clear that commoditization is such an issue in retailing these days. What is more obvious is the proliferation of choice. Just how many varieties of Coke do we need? I saw some research on consumer choice a while ago. I think the conclusions were something along the lines that consumers react to this increased choice in different ways:

- some love it and find it empowering (I guess they just like shopping)

- some find it confusing, maybe overwhelming

- some get frustrated because they can’t easily see what is the ‘best choice’

- some just ignore it and do what they’ve always done

The point is that even with basic products, imaginative product development, new routes to market and more efficient manufacturing are often more likely to lead to wider choice rather than to real commoditization. Add to this the well worn argument that many people have less time to make informed decisions.

What does that mean for insurance? Probably that for most of the market, commoditization is a bit of a myth. Our industry has also developed many more options for customers recently – different distribution channels, different product options, different technology options. How many insurance customers really understand the different terms provided by different motor and travel policies? How many understand the difference between direct insurers, brokers, brandassurers and MGA’s?

Maybe we shouldn’t assume that commoditization is going to reduce the need for advice. If anything more choice increases the need for advice. Perhaps there’s just room for a different approach though?

Lee Gladwell is director of general insurance markets at the CII