A good friend of mine once described selling as the ‘art of making buyers’. Whether you agree with this perspective or not, the one thing that’s true about the world of sales is that for someone to buy, they need to be motivated to do so. Now apply this truism to insurance. What motivates buyers to buy insurance, especially when it’s a commodity protection product? The buying process is more involved for the sophisticated insurance products you find in commercial lines, reinsurance or life and pensions. That’s a subject I’ll write about another time!
This week, I was interested to look at how protection products are being sold by the new players in the world of insurance tech. This is the world of distribution, where customer acquisition costs, sales velocity and volume are the key performance indicators.
Over the last decade, with the massive growth of the internet age, we have seen the emergence and prominence of the aggregators. These new channels for distributing protection insurance shifted the market, drove down rates and moved the insurance product further towards commoditization. Price became the only differentiator! However, this isn’t a piece about the aggregators, since we all know who they are. We also know that they spend a ton of money on promoting themselves against each other from their never-ending stream of ‘notice me, notice me!’ brand advertising campaigns. From the swaggering booty of the businessman, to the mustachioed opera singer, to the numerous adventures of the little mongoose-like creatures from the Kalahari desert!
This week’s focus is on the next wave of distribution that’s emerging. There are a growing number of new entrants that are purely digital and built on an automated, straight-through processing platform, and for these new entrants, it’s no longer just about price. The new wave of protection insurance is peer-to-peer and it’s social. This is the sharing economy applied to insurance.
In the same way that Zopa created the peer-to-peer lending (P2PL) market a decade ago, we’re now seeing peer-to-peer insurance in the protection market. Arguably, for banking and the bankers, P2PL offers a convenient alternative for them, since unsecured personal lending isn’t overly attractive to the traditional players – it’s a commodity sell and it’s a relatively small segment of the overall lending market (5% of the lending market in the UK).
It’s not quite the same market, however, for insurance and the insurers. Take car insurance, which is one of the largest segments in the insurance protection market. According to the OECD report on Global Insurance Market Trends 2013:
‘Heightened competition in motor insurance markets, typically one of the largest segments within the non-life sector, continued to be experienced in many countries, leading to lower premium rates. This environment, while beneficial for consumers, has raised issues in some countries regarding pricing adequacy and profitability of the segment.’
While markets vary around the world, if we just look at one of the biggest, the US, we see that the average cost of car insurance has stayed largely flat for a decade, going from $830 in 2003 to $815 in 2012 according to the National Association of Insurance Commissioners (December 2014). And this is compared against a rise in the cost of living of around 21% from 2005 to 2014. So who are they, this new breed of insurance providers? Firstly, and continuing the theme of car insurance, is Guevara.
You’re greeted with a cool front page with an animation that immediately establishes the brand image, and then the elevator pitch (which is sales speak for being able to quickly summarize your business to the person you’re selling to when you ‘accidentally’ bump into them in an elevator):
Guevara is a whole new way to think about car insurance. It lets you pool your premiums online to save money. Unlike traditional insurance any money left in the pool at the end of the year stays with the group and lowers everyone’s price next year. If you keep claims low you could save up to 80%.
Simple, social and sharing all rolled into one. It works on the basis that you join a group of fellow car insurers. These can be people you know, groups you ask to join into, or groups that Guevara recommends for you. By joining a group, you combine with others to share a common goal to keep your premiums down by not taking money from the collective pot.
Shared rewards in a sharing economy
What I like is this subtle emphasis on personal responsibility. While most people understand the principles of the pooling of shared risk that sits behind car insurance, what Guevara is doing is linking personal responsibility directly with the pooling of shared reward. Since broadly 70-80% of an insurance company’s costs go on settling claims, Guevara’s sales motivation is a sharing one: we’re all in this together and we know who you are! If everyone drives better and make fewer claims, everyone will pay a lower premium the following year. They back this business model with a digital platform, using a mobile app to capture claims information at the scene, directly into your phone. This all contributes to minimizing the claims costs in the event that this is an incident.
In a recent post, I featured Bought by Many when it won the Fintech Innovation of the Year at the annual Bobsguide Fintech Innovation Awards dinner in March 2015. Bought by Many provides a wide range of protection insurance, including vehicle, travel, pet, gadget, health, home, sport, and professional insurance. Its elevator pitch is simple and to the point: ‘A smart new way to buy insurance. Together, our members are making insurance companies listen’.
The business model is very simple: it’s social and it’s a sharing one. Buyers looking for insurance protection look for others who are seeking the same or similar insurance and they group together. Bought by Many then uses the collective buying power to negotiate a better premium on behalf of everyone in the group. Essentially, this is buying insurance in bulk to achieve a lower premium than any individual would achieve. Or it could be that the group has a special need and Bought by Many will negotiate better terms. Some of the groups I noticed were ‘Thatched House Insurance UK’, and ‘House Insurance in Flood Risk Areas’, and ‘Travel Insurance for People with Heart Conditions’.
Finding specialist protection insurance (or where you have conditions that often preclude cover for general policies) can be challenging. Using this approach of collective bargaining on behalf of groups with common interests is an innovative way to get better deals for consumers, while also helping insurers by bringing them volume.
Finally (for this week anyway), I looked at Friendsurance, a Berlin-based general insurance provider with an innovative social model. The Friendsurance model is based on the concept that everyone in a network shares a small cost of any claim. This in turn reduces the cost of the claim for the insurance company, which then rewards the claimant/policyholder with a rebate on their premium. Their elevator pitch is: ‘Customers can connect to form individual insurance networks, thereby lowering their annual insurance premiums by up to 50%’.
The buying process starts with finding the insurance you want through a comparison service on the Friendsurance platform. People then use social networks to connect to each other through invitations, and in doing so they agree to support each other with a small amount of money (eg €30 max). The more connections that are made, the more claim cover is put in place and the less payout is required from an insurer. And of course, for small value claims, these need never go to the insurer because they can be covered by the network. At the end of the policy term, the insurer will rebate the policyholder against their reduced claim amount.
Friendsurance has built in a safeguard mechanism to ensure that no individual policyholder can over-commit in the network. They do this by calculating the potential payback and using this to limit the exposure in the network.
These are just three of the innovative startups in the social, peer-to-peer insurance space. If I missed you out, then please get in touch and I’ll feature you next time. There’s a lot more to write about in the sharing economy for insurance!
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read the original article here. Illustration: Shutterstock