This article is taken from 'PA perspective on European insurance', edition,1, 2008. To download a PDF of this article as published, please click on the link on the right.
Online sales have boomed in popularity for many retail products – with the insurance industry being a notable exception so far. But customers are not averse to interacting with insurers online, and the cost and customer benefits of Internet-based distribution and communication add up to a strong argument for investment in redesigned products and superior technology.
Online sales are growing across Europe at a spectacular rate. This trend is expected to continue, with further growth bringing the total to €115 billion by 2010.1 Retailers are poised to take advantage of the growing popularity of online sales and increasing access to the Internet.
Internet usage varies though between countries and age groups, as illustrated in Figure 1 (see PDF file).
Insurers, however, have yet to witness the enthusiasm for online sales of their products. But the slow growth of sales does not indicate that customers are generally averse to online interaction with insurers. Indeed, the experience of many providers is that 80-100% of customers will research their products extensively via their websites, including quote generation, but revert to the telephone or an agent at the point of sale.
Similarly, Internet-based comparison sites, such as Moneysupermarket.com in the UK, are becoming increasingly popular for cross-provider and cross-product research purposes, but do not yet appear to have boosted online sales. However, this highlights the real significance of the internet – not primarily as a sales channel, but as a complementary channel for customer communication and distribution.
Understanding the barriers
An important barrier to the actual sale of insurance via the Internet is that advice remains central to the insurance sales process in many European countries and has become engrained in customers’ buying behaviour. As a result, potential clients are disinclined to purchase products online: the Internet appears to offer only one-way communication and generic written advice that is not tailored to specific needs. Reinforcing this is many providers’ reluctance to develop more sophisticated online capabilities due to the upfront costs and complexity of implementation.
A greater threat to the success of the Internet channel is the large role played by intermediaries. A relatively high percentage of people in some European countries, such as Germany and France, are sceptical about buying online because of strong relationships with their local intermediary. Distributors become redundant if the customer is able to purchase without the need for, or expense of, face-to-face contact. Unsurprisingly, the prospect of disintermediation deters them from encouraging or facilitating online sales growth.
Overcoming the barriers
We believe, however, that the Internet is currently underdeveloped and undervalued in the European insurance market. It has the potential to significantly alter traditional patterns of distribution and communication in all markets for both simple and complex products. Despite the barriers to effective use of this channel, providers can leverage a number of key trends to overcome these obstacles and promote its development:
Online access: Internet penetration is clearly vital to the success of this channel. At present, domestic internet connectivity varies hugely – from 80% in the Netherlands to 40% in Italy.3However, the example of the UK – where about 60% of the population is online, but as much as 40% of personal motor lines business is sold online4 – demonstrates that the level of Internet penetration per se is not directly correlated to the level of insurances bought online. Likewise, the size of the overall market is not a straightforward indicator of where the greatest value per customer lies.
Product design: One of the biggest reasons why customers are sceptical about buying online is the need to speak to someone before finalising the sale – suggesting a lack of confidence about product features. In general, customers are deterred from purchasing certain product categories online, including commercial lines products and complex investment policies, because they think they need advice. This may be correct: such products often have complexity built into them on the expectation that advice will be required.
A shift in provider behaviour to eliminate this complexity in product design, supported by online tools that clearly illustrate the effects of growth and charges over time, will catalyse change in this area. This has already happened in some lines. For example, simple life products such as term assurance are now routinely purchased online and via third parties (such as supermarkets) on a ‘bought, not sold’ basis.
Market dynamics: Consumer banks and retailers in general are moving towards online sales and servicing, creating pressure for the insurance industry to conform to the prevailing trend. Traditional distribution channels are becoming increasingly uneconomic, thanks to fierce price competition and the mounting administrative burden of regulation. Online channels, by contrast, place the onus for data entry and customer interface on the end consumers – who are rewarded with discounted pricing. Providers will take the lead in drawing customers to online channels as the cost benefits continue to become apparent.
Technology: Technology must be deployed to meet and then exceed customer requirements in order to attract and maintain the ‘comfort factor’. Features will need to extend beyond existing sales platforms to include post-sales servicing and advisory functions. Website design will also become increasingly important to draw in customers and direct them through an easy-to-use research and sales process.
In addition, any online proposition will need to cater for regulatory and fiscal policy variations in both pricing and reporting – all the more so if the platform is to be used across national borders. The ability of online propositions to produce accurate and secure audit trails in the face of changing regulatory and security requirements will be more contentious.
These technological challenges can be overcome; many of the necessary elements are already in place for ‘wrap’ platforms – the online aggregators increasingly found in the high-net-worth segment. Wraps have had success in Australia, the US and the UK. Future online insurance propositions for the mass market are likely to share many of their features and will benefit from their development.
Cost: The upfront costs of developing a full online proposition can be significant, but the long-term return on investment is strong, since internet channels pass data entry and servicing to the customer, reducing administration costs. The situation ‘on the ground’ will be complicated by the actions of providers and intermediaries (including banks) who will oppose the move to online sales and produce counter-marketing to sell the benefits of the traditional model, initially increasing acquisition costs. We believe, however, that the benefits of online sales and servicing will eventually become apparent to all market participants.
A clear choice
These developments present insurers with a clear choice:
Commit to the traditional model, limiting investment costs, but keeping the price of distribution, servicing and customer communication high relative to online competitors
or:
Develop a full internet proposition, bringing customers closer to the provider, but risk alienation and unbundling of intermediary relationships.
We believe firmly that the latter approach will prove more advantageous. In this scenario, consumers will become the catalysts for change and their direct relationship with providers will increase their appetite for further online propositions. For example, mobile web portals could enable instant cover to be purchased anywhere – for example, temporary motor products for the purchasers of new vehicles.
Providers will regain control of customers thanks to the disintermediated value chain, increasing the opportunities for cross- and up-sell as well as improving retention and reducing the cost of distribution. Also, the insurer will be able to communicate to customers on a much broader platform.
The role of the intermediaries is less clear: they are likely to concede to Internet sales in segments with weak margins and focus on the mass affluent and high-net-worth categories whose complex needs will still require advice.
Footnotes
1 Mintel 2005-2006 market research
2 and 3 ‘Europe comprises the EU25’, Eurostat, January 2006
4 Association of British Insurers, 2004
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