Property and casualty insurers can have a tough time connecting with their customers.
Insurance is a low-touch business. Most consumers purchase an insurance product only every three to six years. In developed markets, just half of customers have had any contact with their insurers for any reason in the past 12 months. It's hard to foster loyalty under such circumstances.
Insurers can find themselves in a situation where their customers don't love them, don't appreciate them and don't stay with them. Because customers don't discern much difference between insurers, companies end up competing largely on price, and that can lead to a downward spiral of cost-cutting, profit erosion and customer churn. In a word, commoditization.
But some leading insurers have figured out how to break out of this destructive cycle. In what may look like a paradox, these companies are winning in insurance by offering their customers services beyond insurance. They're helping their customers live safer, healthier and more productive lives by providing them with a constellation of noninsurance services known as an ecosystem. These offerings include security sensors for customers’ homes and safe-driving monitors for their cars.
While insurance-led ecosystems are still relatively new, customers are already big fans. In major markets around the world, more than 80% of insurance customers are interested in, or open to, ecosystem services, according to Bain & Company’s survey of 172,000 P&C and life insurance customers in 20 countries (Customer Behavior and Loyalty in Insurance: Global Edition 2017). Among customers interested in ecosystem services, a majority in all markets are open to having their insurers provide those services.
When insurers offer ecosystem services, they increase the frequency of customer interactions. And engaged customers are much more likely to be loyal customers. In the US, for example, home insurance customers whose carriers offer three or more ecosystem services give their companies loyalty scores more than twice as high as customers whose carriers offer no ecosystem services.
Loyalty is good for business. Carriers that win the loyalty of their customers find that they stay longer, buy more products and recommend the company to their friends and colleagues. Higher loyalty means lower churn, and that can help companies reduce costs and expand margins.
Ecosystems are still in their infancy. In most of the countries surveyed, only a minority of customers use at least one or two ecosystem services, and just a tiny fraction use three or more. Still, the results show that insurers that offer ecosystem services not only do better at keeping existing customers, they also have an edge in pulling in new ones.
One indication of how powerful a lure these services can be: In the U.S., 42% of home insurance customers who are interested in ecosystem services are willing to switch insurers if their own carrier doesn’t provide them. They’re willing to switch, and they’re willing to pay. More than one-third of US home insurance customers who use ecosystem services say they’re prepared to pay higher premiums for those services.
In addition to bringing in new revenues, ecosystem services have the potential to improve profit margins. Customers whose homes and autos are protected by sensors and monitors are likely to have fewer accidents and, when they do, less damage. That means fewer, and smaller, claims, which helps the insurer’s bottom line.
Insurers considering building an ecosystem face a series of strategic choices, not to mention some intense competition. As the boundaries between industries blur, noninsurers are jostling with insurers for control of customer interactions. In automotive ecosystems, for example, Volkswagen, Tesla and other manufacturers offer insurance to car buyers, a strategy for putting the auto companies in command of the critical customer interface.
Insurers that succeed in creating — and leading — an ecosystem make sure they deliver innovative services that are regularly updated and refreshed. They use technology to make it easy for customers to move seamlessly between insurance and noninsurance services. They pick their ecosystem partners with care and drive for scale quickly.
Ecosystems, when done well, can become a virtuous circle — the very opposite of the downward spiral now besetting much of the P&C industry. With a carefully crafted ecosystem strategy, insurers can expand their offerings, differentiate themselves in the marketplace, build and sustain loyalty, lift profits and successfully fend off the threat of commoditization.
Henrik Naujoks is a partner in Bain & Company’s Zurich office and leads the firm’s Financial Services practice in Europe, the Middle East and Africa. Harshveer Singh and Darci Darnell are Financial Services partners based, respectively, in Singapore and Chicago.