Surviving in a Commoditised Environment.
It is not a great time to be a traditional insurance provider. With the advent of new market entrants developing more targeted and focused products, traditional providers are discovering that any competitive edge they may have had with brand loyalty is rapidly diminishing.
Saga’s recent profits warning is a good example that even traditionally loyal demographics such as the over 50’s are leaving them in droves. And why would they want to stay?
Recent research conducted by Citizens advice found that home insurance companies profit most from loyal consumers, who pay on average twice the amount on their premiums compared to new customers. The report also pointed to the fact that a significant proportion of the profit was derived from customers who have been defined as potentially vulnerable and may not have the means or capability to switch providers.
Attititudes to Customer Centricity are Changing Insurance
Based on the current trajectory of the market, it is difficult to believe that this revenue model will continue to be viable in the future. Customer’s expectations are changing, and price is king. Traditional providers will need to think about how they respond to this change as the sector tends towards commoditisation.
However, the fact that the market is becoming more competitive hasn’t deterred new companies from entering the market; only last month did two seemingly different businesses make their intentions known.
“It (the product) will be much more compelling than anything else out there. We have direct knowledge of the risk profile of customers and based on the car, and then if they want to buy a Tesla insurance, they would have to agree to not drive the car in a crazy way.” – Elon Musk – Tesla
“There is currently a gap in the market for life insurance policies for people who smoke and wish to quit tobacco and nicotine all together or switch to scientifically substantiated reduced risk alternatives to smoking. As such, to meet this need PMI unveiled reviti to “challenge the status quo” in the life insurance category. – Philip Morris Insurance
Customer centricity seems to be a key enabler to market entry, and is indicative that outside of customer knowledge, the barrier to entry is low. This would explain the market is attractive for large multinationals such as Amazon to startups such as Zego who provide products for the gig economy.
Where Transformation Fits In
In such a competitive landscape it is very tempting for traditional providers to “react” to market developments and respond at pace with transformation projects. A recent Harvard Business Review surveyed executives about their companies’ progress on transformation. They found that only a third of them had achieved significant results from their transformation initiatives. Insurance and other financial institutions, specifically, lagged even further behind.
The most common reasons for poor outcomes included; 1. Siloed mentality, 2. insufficient resources and 3. lack of internal expertise to maximise technological benefits; within insurance specifically the impact of legacy systems and the lack of a PMO were also cited as key reasons.
It’s interesting that the top reasons for failure are not “technology problems”, but centre around people issues: siloed organisational structures, an unwillingness to commit resources and central oversight to ensure that project selection and delivery are value accretive to the company. Without taking the steps to align people and processes, projects will continue to deliver sub-optimal or even destruction in value.
Examples of poor outcomes from transformation projects:
- Reduction of heads or budgets that impacted on the ability to serve end customers
- Reduction of heads or budgets that resulted in additional costs incurred by other departments or on a different budget line (i.e. temp staff)
- Investment in process technology automation but not redeploying staff time to undertake value-adding activities.
- Investment in dashboard technology to measure operational performance but focusing on metrics that are not aligned to business priorities.
Doing it Right
To maximise the value of future transformation projects, companies should first look to unlock the value from within by aligning their people and processes. The key to success is to view processes as a service to customers (both internal and external). These customers should be asked whether the service that is being provided is 1. valued, and 2. does it meet their expectations both in terms of under and over delivery.
By reviewing all processes in that manner,
- services that deliver no value can be stopped
- services that over deliver can be dialled down
- services that under deliver should be increased as they are value generating
This allows the company to “right size” the staff count and ensures that they are undertaking value–adding activity. But, to achieve the maximum value of this process re-engineering, staff need to be incentivised in a way that aligns with the desired outcomes.
A significant amount of value can be derived by taking an introspective view of a provider’s processes and people all for practically nil cost.
In such a competitive landscape, it is important that transformational changes are undertaken on a foundation of solid value-generating processes and people incentivised and aligned to the correct outcomes. This is key to surviving in a commoditised environment.