Is Insurance becoming a commodity?

By George Mazis, KPMG

What effect has direct insurance had on the South African insurance industry and what could be in store for the Czech market.

The introduction of direct marketing insurance into the personal lines insurance markets world wide has raised the question: Is insurance becoming a commodity being purchased by the man on the street or does it still remain a service which is provided by the broker and insurer? For policies sold over the phone or internet, price is becoming more and more important, while the relationship with the insurer and broker is taking a back seat.

Direct marketing insurance however is not clearly defined. In its narrowest form it refers to insurers that only market their products through direct contact with their customers and as such negating the need for the middle man.

Direct marketing insurance and South Africa

Direct marketing insurance in South Africa commenced at the beginning of the new millennium with direct insurers initially focused on personal lines business only and specifically the property and motor classes - their main claim to fame being, that they cut the middle man out. Anyone who has ever done some investigation and research on insurance companies will realize that insurance does not come cheap. Monthly insurance premiums can be quite expensive especially when seeking cover that will adequately replace your precious personal material valuables in the event of loss or damage. As a result and along with increased inflation and rising interest rates cutting into consumers income, South Africans have changed their preference as to what ‘the best’ insurer is supposed to provide. Lower premiums and not the service that is provided by the broker and insurer more often than not have the final say in terms of choice. This has allowed direct insurers to capture significant market share over the past couple of years. 

The South African experience is also not dissimilar to that of other established markets most notably the United Kingdom. Direct marketing insurers initially used price and other special offers, including premium refunds, to attract customers. This resulted in increased churn in the market with customers shopping around on renewal for the best deal available and accepting insurance cover quoted from the cheapest sources. The perception that direct marketing insurers are less expensive is not factually true. This perception is aided by their superior risk selection and pricing ability. What is becoming clear is that the customer is king in the current environment. His preference will determine which channel he uses to transact with the insurance market. If a specific underwriter is not able to provide the customer with this choice the customer will look elsewhere. At present the United Kingdom market is increasingly looking at innovative ways to improve customer retention as oppose to merely attracting new customers.

What the saturation level for direct marketing insurers in South Africa is, is not yet clear. What is clear is that intermediary supported insurers will remain under pressure from direct marketing insurers for the foreseeable future.

Direct insurance’s popularity is increasing in the Czech Republic

On the other hand, direct insurance is relatively new in the Czech Republic. Having only been launched recently as a way for insurance companies to attract new customers, it still is limited to only a few players in the market, with only one insurer having adopted a purely direct writing-based business model. The lower premiums offered via direct distribution channels have prompted traditional insurers to offer discounts on premiums to consumers in order to stay competitive. Furthermore, as policyholders become more accustomed to being able to buy insurance over the phone or the web, the range of products on offer is widening. The developments in the Czech Republic are confirming the increased trend for consumers to purchase policies directly from insurers. It is still early days in the Czech context to see whether price will be the dominant factor, or whether convenience and service will play a decisive role. However, it is an evident emerging trend that direct insurers will play a bigger role in the developing Czech insurance market.

From a marketing perspective it is clear that the consumer is looking for choice in transacting with insurance companies. There are those that see insurance as a commodity where price plays a major role while there will always be those that value the personal interaction provided by an intermediary. What is, however, important is that intermediaries will have to review their value proposition as customers continue to prioritize price and increasingly do not perceive much value in an intermediary relationship devoid of personal contact.