Opinion: Is insurance a commodity?
May 13, 2020 by Lisa Smith and Chloe Beaini, Capco
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Part One explored why people buy online, and digital advantages. Now we look at whether or not the insurance product has become commoditized.
As digital marketplaces continue to commoditize products, it’s time to look at this industry and wonder if insurance is a commodity.
In the first part of this analysis, we examined why people buy items online, the advantage digital options have in the marketplace, and how advisors help close gaps.
Let’s now look at commoditization of products. Online packages make selling policies easier with default options and point-click-buy experiences. However, they risk mismatching client needs and solutions. Wrong policies, limits, or deductible options can leave clients vulnerable if they suffer a loss or an injury.
Decisions to purchase online are usually fueled by saving money and time. However, the move to direct distribution and online sales lose the concepts of risk management and risk transfer in financial planning.
Carriers are exposed to more risk from product mismatching. Insurers then become risk-averse themselves, modifying coverage limits (i.e., capping water claims) or including coverages that increase complexity, but reduce the likelihood of errors and omissions (i.e., overland water coverage).
Commodity approach
To be commoditized means consumers no longer distinguish differences between the products, regardless of who made them. For insurance policies, coverage would be irrespective of the purchaser, location and insured item. Historically, insurers struggled to differentiate their products, given that industry regulators and market conditions force them to offer similar coverages and definitions.
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However, carriers leveraged freedom in their ratings, market experiences, and services to differentiate. The result? A dizzying set of combinations of coverages, policy forms and rating criteria.
Even if the commoditization of products were to be conceded, carriers spent years distinguishing service and claims experiences. Consider the marketing strategies of Progressive’s Flo with price comparison services or Geico’s Gecko promoting ease of doing business. These companies, while American, often have better brand recognition than Canadian companies. Given the product variations and efforts on market and service differentiation, it is difficult to define insurance products as commodities.
Digital offering design considerations
Insurance policies, even if we consider them commodities, don’t meet the qualifications for the types of products typically purchased online: brand familiarity, returnable and product ‘understandability’ (as explained in Part One).
Despite the misalignments, online insurance offerings are increasingly available. Given this, how can we ensure clients purchase the right insurance? There are three ways to design digital offerings.
1) Redesign products to be intuitive to consumers. Simplify packages and options, keeping them easy to understand. Remove complicated discount and rating considerations; instead, wherever possible, leverage third-party data sources to measure risks.
2) Add risk appetite options to the buying process. Work with the consumers to align products to their needs. Consider options like:
- Financial independence: Can you afford a $500 deductible if a loss happens tomorrow? $1,000?
- Risk appetite (self-insuring): If a total loss happens, does the cover limit meet your financial needs?
- Risk adversity: If a loss of type ‘X’ occurs, are you willing to assume the risk?
3) Use online platforms to support self-education and product awareness for consumers.
Hybrid digital models
Why not a mix? Hybrid digital approaches help guide user experiences and educating customers, while engaging advisors at strategic points to ensure purchasing success. The approach promotes self-service until the user indicates help is needed and/or business rules and conditions indicate potential product misalignments.
This supports continuous improvement when leveraging artificial intelligence solutions. Collecting feedback from consumers and advisors enhances recommendation engines by creating risk profiles; in turn, this helps advisors to provide tailored solutions, decrease purchasing times, and enhance experiences with recommendation options.
Online insurance is inevitable. Proper due diligence in product design and client experience ultimately ensures the success of the industry in maintaining its mission-critical: Providing financial protection to those in need at the time of loss.
Lisa Smith is principal consultant and Chloe Beaini is an associate at Capco, a global management and technology consultancy
Feature image by iStock.com/alexsl
Auto insurance is mandated by the government so it should be considered a public good.
Why?
Rate increases/decreases are regulated by the government yet premiums go up >10% every year because these private insurers “can’t remain solvent” otherwise. But we all know that’s bogus and they’re turning record profits year over year.
Private insurance companies also maneuver around the take-all-comers rule by having their BDRs dictate to brokerages the types of auto risks they want. Brokerages add another layer of red tape by only wanting profitable business, and will impose on producers internal underwriting rules such as no mono-line auto, won’t write Brampton risks, etc.
With accessibility to auto insurance at an all time low, we need to stop thinking about insurance as a commodity and start bringing it to the public realm.