Insurance companies are facing a customer loyalty crisis - here's what they should do

The industry is ripe for change. In truth, the circumstances driving sector-wide disruption has been in place for some time but have not yet reached a tipping point. That may all be about to change as regulatory, competitive and most importantly customer pressures ramp up.

The UK Financial Conduct Authority’s fair pricing regulations – designed to provide customers with better service at fairer prices – are currently being implemented. That is occupying the minds of all insurers as they re-evaluate their pricing models and consider their risk profiles.

Competition has increased with the growth of some InsurTechs as well as the Big Tech players. The major insurance companies can no longer hold back the tide.  Just 17% of consumers were willing to buy products from Big Techs in 2016.  Fast forward four years and the figure stood at 44% in April 2020, according to Capgemini and Efma (European Financial Management Association). These new entrants have diluted customer loyalty to traditional insurance companies.

In the UK in particular, the aggregators and price comparison websites dominate distribution and general insurance has become commoditised. While price will always be an important factor as customers make their insurance choices, the only way insurers can mitigate the power of the price comparison websites is to win back the relationship with the customer by earning their loyalty. That will only happen by changing the perception of insurance from an over-priced commodity to a service that provides peace of mind and real value for money. High levels of churn and pressure on margins will continue unless insurers create value that customers believe is worth paying for. Change on this scale will require fresh thinking from insurers and a recognition of the need to rethink the way they operate.

The route to true loyalty

Customers are not happy. They have infrequent, transactional contact with insurers and wonder why the experience is inferior to what they enjoy in other sectors. Customer satisfaction and customer loyalty have been falling and in April 2021 only 15% of customers said they value their insurance company’s products and service, according to Guidewire.

But all is not lost. Guidewire also reported that 55% of customers would consolidate their insurance needs with one company if they were offered a simplified, easy-to-buy, personalised policy that bundled together all of their needs and which recognised and rewarded their loyalty.

Some traditional insurers are alert to the challenges the sector faces and are innovating. Multiproduct cover with home and motor combined into a single policy is one example but companies still have a long way to go to earn customers’ trust and wrestle back relationships  from the aggregators and price comparison websites. In the next section we outline some of the innovations that insurers should be turning to if they want to build stronger relationships that earn them the loyalty of their customers.

Innovations that build customer loyalty

In the quest to find new ways to create value, here are some of the innovations that insurers should consider:

• Policy bundles – simplified, integrated policies that ‘bundle’ a range of insurance needs in one policy allowing customers to pick and mix from a menu of options.
• Usage-based pricing – usage-based pricing across the customer menu that wraps everything into a subscription-style model.
• Preventative alerts – alert services to send warnings/reminders in advance. For example MOT, policy and car tax renewal dates.
• Non-insurance products – offer of non-insurance products via a network of reliable partners.
• Self-serve tools - portals/apps that enable customers to review their existing cover, make amendments and be able to see in real-time the impact on their premium. 
• Balancing high tech and high touch - so that customers can self-help and get access to high quality, well-trained advisors when they need to.
• Upskilling and reskilling advisors – through a comprehensive learning and development programme to ensure advisors are multi-skilled and trained in more complex, high-value work.
• Rewarding loyalty – loyalty schemes that reward customers who stay longer and buy more products but beware ...“Loyalty schemes don’t always drive loyalty. They can damage loyalty if they cause friction with customers”.
• Encouraging and rewarding behavioural change – by offering non-insurance products like fitness trackers to encourage and reward healthier lifestyles. 
• Building relationships with customers over time – by providing helpful advice and relevant, personalised offers that demonstrate an understanding of the customers stage of life.
• Increasing speed and urgency - with a few exceptions, the insurance sector operates at a pace that is out of kilter with the speed at which most people live their lives. This undermines trust and confidence.
• Eco-system delivery – create an eco-system of suppliers who can develop and provide products and services of value to customers.
• Cultural change – the rhetoric from the insurance sector is that they put customers first but the reality – with some exceptions – is different. The customer perspective is that operational efficiency and compliance is job number one and empathy for the customer and common sense a distant second.

The challenges of implementation

Successfully implementing a business-wide customer loyalty strategy is easy to say but difficult to do.

The approach that is right for your company – whether it be phased, starting in one part of the business and expanding across the organisation or a big bang, company-wide approach – will be determined by:

• Your start point…where you are today.
• Senior executive support/alignment.
• The scale of your ambition.
• Degree of urgency.
• Resources you have available.
• CX maturity and your expertise.

There is a body of CX best practice to guide your implementation – in the same way that finance, marketing and IT have an expert body of knowledge. The CX best practice ‘toolkit’ that cp2experience has developed includes a framework for managing the CX initiative – identifying what to do and in what order – and best-in-class tools and protocols which help save time and enhance implementation rigour.

Tapping into the CX body of knowledge is important but a toolkit cannot provide insight about what works, what doesn’t and the pitfalls to avoid. Just as you would not appoint someone to the CFO or the CMO role who did not have the right background and experience, so you should not appoint someone to lead the CX transformation who does not have the credentials. This is the first of our ten top implementation tips set out below.

Ten implementation tips

The following ten tips are gleaned from our many years of leading CX transformation at companies including Permanent TSB, O2, Sainsbury’s Bank, British Airways, AIB, Symantec, HSBC and Standard Life as well as our ongoing study of global best practice.

1. Ensure the CX initiative has the expertise and the leadership to succeed.
2. Develop a customer experience strategy and plan.
3. Visibly engage the senior leadership, including the CEO, early.
4. Start with customer insight and a focus on target customers.
5. Design a ‘Branded Customer Experience'.
6. Build relationships with customers through data.
7. Create an eco-system of partner businesses.
8. Pay attention to the employee experience.
9. Focus on behaviour change.
10. Measure what matters to the customer experience.

See more detail on these and other implementation tips here.

Measuring the benefits of customer loyalty

The sixty-four-thousand-dollar question is do the benefits of increased loyalty outweigh the cost? Let’s look at that question in more detail.  

Loyal customers create value in two ways:

1. Buying behaviour: the amount they spend over a given period on a company’s products and services.
2. Referral effect: the impact of positive comments by existing customers on the buying decisions of potential customers.

Many organisations know how much a customer spends with them but in our experience, few companies know – or even acknowledge – the value of the referral effect.

In addition, studies have shown…

• The word of mouth (WOM) effect is greater for purchases that are made infrequently.
• Negative WOM spreads further than positive.
• Every two customers spreading positive comments bring in one new customer every year.
• A highly dissatisfied customer making negative comments ‘destroys’ almost as much revenue as one new customer would bring in.

ROI – an example

So, how could the numbers play out?  In the following example we model three levels of impact that can be achieved with a successful, 12-month, CX initiative:

1. Reducing churn - retaining customers who would otherwise have switched to a competitor.
2. Increasing promoters - these customers are the most profitable. They tend to stay longer and buy more products.
3. Measuring WOM - additional customers are generated by the word-of-mouth impact of additional promoters.

• A twelve-month customer loyalty intervention with external fees of £350k.
• We achieve a 1% reduction in churn which equates to 8,000 customers.
• A customer spends on average £250 pa (1.2 products) and stays for 2.75 years.
• Promoter numbers increase by 3,500 and each promoter spends £374pa (1.8 products per year).
• Every two additional promoters generate one new customer who spends £250pa.

The calculation

• Additional revenue in year 1 = £3,746,500 (£10,302,875 over 2.75 years)
• Costs £350,000

ROI year 1 = 10.7X

ROI over 3 years = 29.4X

* There is evidence to suggest that highly satisfied customers cost less to serve. These potential cost savings have been ignored in this calculation

As this example has shown, the financial benefits of a customer loyalty strategy can be significant even in year one. The impact is likely to improve further in subsequent years as new experience becomes embedded.  

To sum up

Change is coming to the insurance sector and the only questions are how fast and what will the shape of the industry look like in five years time. Many traditional insurance companies are in denial and their response has been timid. There are some exceptions but even the exceptions do not go far enough to close the gap between customers expectations and the reality of what is being delivered.

There are plenty of challenges to be overcome – distribution, brand, pricing and risk, product development, legacy technology platforms, cultural and more. Carriers that are prepared to embrace the need to change and rethink they way they operate will thrive and increase true customer loyalty. Those that don’t will struggle.