Motor insurers can boost profitability by improving customer loyalty
UK motor insurance is an extremely competitive market, and profits aren’t easily found. Every ounce of margin has been squeezed out of the claims experience, so the answer isn’t likely to be found there.
Many insurers have embraced incredibly detailed analysis of pricing in the marketplace, but this too is not the key to finding profitability. Endless price matching can be a dangerous path; cheap introductory rates will not engender loyalty, and constantly driving aggressively for new business is financially exhausting.
The industry is too focused on the competition, and not paying enough attention to the most important party of all – the customer. For some insurers, a strategy of focusing on customer loyalty, rather than cutting prices, may be the key to unlocking profits. This is the opposite path to organisations that actually punish loyal customers by charging them higher premiums; the equivalent of airlines doubling their ticket prices for frequent fliers.
For organisations looking at customer retention, they first need to quantify the impact of loyalty among different customer segments. There is a correlation between longer policy age and better profit margins. Customers who have stayed with insurers for longer tend to have better loss ratios, whereas shorter-term customers are often more frequent claimants; they move so often because many claims lead to expensive premiums.
This means that the right approach for certain insurers is to keep hold of the loyal, long-term customers. Analysis is the key. By looking at which segments – based for example on geography, gender or age – are most profitable, an insurer is able to understand exactly which policyholders are desirable customers. Additionally, companies also need to determine whether any will become loyal in future. Certain subsets of younger drivers may become loyal customers in the future, even if they’re not at the moment.
Once a company has identified the customer segments that tend to be loyal, they need to develop a growth strategy for each group. For example, low conversion rates (the number of quotes that result in a policy being purchased) among a loyal demographic group may be due to high premiums, suggesting this is a price sensitive group.
Alternatively, if a group is relatively insensitive to price changes, targeting it with tailored products would be more appropriate. For instance, older age groups may be more loyal if offered additional features like extra roadside assistance.
If quotation rates are low in a particular segment, it would indicate that these consumers either are not aware of the company or don’t find its products attractive. The right response therefore will be increased levels of marketing to improve awareness, and alterations to product design to suit the group in question.
Once an insurer has begun a strategy to grow its base of loyal customers, it is important it doesn’t end there. Companies need to keep assessing whether their attempts to grow the more loyal segments are working. Building a strategy around customer loyalty is clearly a significant task, but UK insurers that move first in this direction will win the battle for profits. IT
George Maher is principal, and David O’Connor is senior consultant, at Towers Perrin.