May 1, 2014 by Jeremy Bowler, Senior Director, Insurance Practice, J.D. Power
More than 1.7 million new passenger vehicles were registered in Canada in 2013, up 4% annually, note figures from LMC Automotive. With that many vehicles on Canadian roads, it is no wonder personal auto insurance has grown into a nearly $22 billion business in the country.
For decades, the large majority of Canadian vehicle owners purchased their policies via individual agencies in their local communities. However, today an increasing number purchase their new policies, or service their existing ones, direct from the insurer, whether via call centres or the Internet.
With the auto insurance industry expanding in Canada then, many of the nation’s insurers are fighting to gain market share, but few have a brand name that is top-of-mind for a large majority of those consumers who are actively shopping for a new policy. For those companies trying to sell direct to the consumer, the question then is whether or not the industry is spending enough on advertising?
In the United States, the insurance industry spends billions of dollars each year on advertising. As a result, it is difficult, if not impossible, to watch television, read a newspaper or even surf the Internet in the U.S. without seeing an ad for an insurance company.
Indeed, some U.S. brands like Progressive and GEICO have gained appreciable market awareness even here in the Canadian market, as a direct result of advertising message spill-over from their advertising saturation in every media in the U.S. Ironically, neither of these big brands even sells insurance in a single Canadian province.
BUILDING BRAND AWARENESS
Why is advertising such an important tool for the insurance industry? The answer is quite simply that it helps build brand awareness – without which the likelihood that a consumer will request a quote for insurance plummets. Once consumers become aware of the insurance provider, they need exposure to the brand and its product offerings to build familiarity and trust. Then, and only then, will a consumer actively consider purchasing insurance from that provider.
The J.D. Power 2014 Canadian Auto Insurance Satisfaction Study, released in early May, finds that one in five polled auto insurance customers in Canada have shopped for a new carrier in the past 12 months. Among those who have shopped, 9% went on to switch carriers – the vast majority to a small insurance company.
In fact, the study finds the average Canadian insurance company ultimately captures less than 1% of customers who are either new to the market or are switching carriers.
Why are consumers not moving to the large insurance companies? One reason the big carriers are struggling to attract new customers is because these companies’ brands are not top-of-mind among insurance shoppers today, having historically been able to rely on local insurance brokers and agents to introduce their products and services on their behalf.
As brokers and agents have been losing their near-providing consumer access to market choices, the marketing challenge for insurers has radically changed.
The big national insurance companies as a whole have low awareness relative to their overall size in the Canadian economy, primarily because of limited advertising. Some of the big carriers may be well-known in one city or region, but have little or no awareness outside of that market. In order to grow their businesses, these carriers need to build their awareness, which requires an advertising investment to develop.
REACHING NEW CUSTOMERS
Brand awareness is critical for insurance providers to get potential new customers to even consider purchasing a policy with them.
Think of new prospects – either those customers who are new to the market or are considering shopping for a new provider – as drops of rain. Insurance companies are trying to entice as many new customers as possible to consider them as a provider, much like trying to catch as many of those drops of rain in their particular funnel (see figure above).
The more broadly a company’s brand is established in the market, meaning consumers are aware of the products and services the company offers, the wider the mouth of its purchase funnel. For the majority of Canadian insurers, the number one factor limiting their ability to grow today is the limited awareness each company has in the marketplace – effectively the narrowness of their upper funnel.
Since the typical insurance shopper spends very little time actively shopping for an auto insurance policy, and gathers quotes from fewer than two companies, more prospects pass each carrier by than actively engage and shop that brand.
So how does an insurance company expand the size of its funnel, creating the largest pool of prospects to sell new policies to? In a word: Advertising.
MANAGING THE PURCHASE FUNNEL
Policyholder acquisition is a function of both brand strength and marketing message, which could also be considered the size of an insurance company’s megaphone and the resonance of its message. An insurer’s brand awareness and appeal widen the top of the purchase funnel, drawing in a larger share of shoppers to consider the insurer.
But getting a consumer into the funnel is just the first step in the process. Once a shopper considers an insurer, it falls to the insurer’s value message to convert that shopper into a new policyholder.
Some insurers that possess the most popular brands have a large upper funnel, yet struggle to convert interested prospects into new clients. Other insurance companies have a smaller upper funnel, but once shoppers are introduced to the brand, the company is more successful than the industry average at both quoting and closing the sale.
More than half of Canadian respondents to the survey say they selected their carrier because they were offered a competitive rate or discounts (see figure opposite).
Clearly, then, price is a dominant driver of consumer purchase decisions. Fewer customers indicate price had no impact on their decision to select their current insurer.
Some insurers actively differentiate themselves in the market not solely on price, but rather on the depth and variety of their product offerings, the degree to which they can tailor their services to meet individuals’ needs, and, ultimately, through exemplary servicing of their clients.
Once a provider has a customer, it wants to keep the customer. That means every touch point with the customer is crucial and can be the difference between a loyal customer and a defector.
The study finds the three most critical touch points that impact the likelihood that a new policyholder will renew a policy are as follows: the annual or semi-annual renewal notice, when a customer contacts their insurer for non-claims-related reasons (62% of customers have made a non-claim-related contact either directly with their insurer or with an agent in the past 12 months); and when a customer files an auto claim (12% of customers filed an auto claim in the past year).
No matter how hard an insurance provider tries to keep its customers, it will lose a percentage of its customers each year for a variety of reasons – the customer has a life-changing event, rate hikes, etc. One of the best strategies to improve customer retention has proven to be delivering a highly satisfying customer service experience.
The survey shows a majority (77%) of those customers who are most satisfied with their insurer intend to renew with their current insurer. In contrast, only 6% of those who are dissatisfied plan to remain a customer of their current auto insurer.
But before a provider can concern itself with retaining new customers, it first needs to attract and sell to them. The best way to do that is to build as large of a funnel as possible, and a proven approach to doing that – which also requires a financial commitment – is advertising.