Insurance companies struggling to retain customers might actually be punishing customer loyalty

Findings from a 2018 study by Which? – a UK organization that provides consumer insurance information, advice and recommendations – show that customers who choose to stick with their current home insurance provider can actually end up paying a “loyalty penalty”. The study’s key findings include:

  • Loyal customers pay an average £75 more per year than new customers: Home insurance customers with a combined building and contents policy paid an average of £270 annually, while new customers paid just £195 for the same policy.
  • The loyalty penalty grows over time, customers who stay with the same insurer for 20+ years pay about double what new customers pay: The average premium for a policy 20+ years old was £396 – £201 more than what new customers were paying.
  • 70% of insurance customers are paying a “loyalty penalty”: Out of 7,000 respondents, 70% said they had been with their current insurer longer than a year.
  • Customers need to cheat to beat higher prices: To get the lower prices, Which? found that some customers decided to cancel their policy and re-purchase it to qualify for the new customer discount.

When asked about the findings of the study, the Association of British Insurers (ABI) admitted the insurance market was “not working as well as it should”. Said ABI spokesperson Malcom Tarling, “we recognise that the insurance market is not working as well as it should for many long-standing customers. We want everyone to get the best deal in a competitive market, which is why we have launched an industry initiative to help those customers who do not shop around. This will include insurers reviewing the policies of customers who have been on their books for five or more years to ensure they are getting the best deal for their needs.”

However, Which?’s money editor, Harry Rose, observed that, “It is unacceptable that longstanding policyholders are taken for granted by insurance providers and hit by these excessive premiums. Customers who prefer to stay with one provider are at risk of being exploited by these vastly overpriced premiums when little has changed in the service they receive. Insurers must make sure existing customers remain a priority and are not sidelined by the push to attract new business.”

This study by Which? also highlights something which remains a fundamental dilemma to the insurance industry as it struggles to adapt to the new digital landscape: how can insurance companies build loyalty and retain customers in an era of increasing competition from non-traditional insurance products and companies?

The problem: It’s hard to stand out when you almost never interact with your customers

Insurance is a highly competitive marketplace in which consumers purchase insurance policies based almost entirely on price without concern for brand.

A 2016 report by Majesco based on a survey of US insurance buyers who are “18 or older and who make or share household decisions” identifies an additional difficulty: “insurers are increasingly challenged with the emergence of aggregators, comparison sites, alternative channels and new entrants that are redefining products, processes and engagement.” The report identifies aggregator websites that allow consumers to bypass insurance carriers and agents altogether – which further reduces touchpoints between insurance companies and their customers.

The obvious problem this poses is that it is difficult to stand out in a crowded marketplace when you rarely interact with your customers. 

The nature of insurance is such that customers only need to think about insurance when it is time for renewal or if they have a claim. According to Bain, “Worldwide in the product categories of home, auto, life and health insurance, most customers purchase an insurance product only every three to six years. In developed markets, just half of the customers have had any contact with their insurers for any reason in the past 12 months.”

And when consumers do need to interact with insurance companies by making a claim, that process is tedious and difficult. The Majesco survey asked young consumers to rank business categories by how easy they were to do business with in terms of product research, purchasing and customer service. Younger consumers ranked insurance dead last:

Which raises a second conundrum insurance companies need to address if they want to solve the problem of creating and maintaining customer loyalty: the generational shift in attitudes toward insurance means that consumers are increasingly dissatisfied with insurance offerings.

Insurance companies are not adapting to changing generational attitudes about insurance

There has been a generational shift in attitudes toward insurance loyalty. Digital-only insurance customers, who tend to be younger, are on average less loyal than those who use multiple channels, including insurance agents or call centers, to connect with insurance companies.

Says the Majesco report, “the generational gap reflects an insurance industry steeped in tradition, where business models, business processes, channels and products are becoming rapidly irrelevant for the younger generations”.

Further,, insurance companies are currently failing to address the shift in attitudes. According to Majesco, there is a gap between the needs and expectations of younger consumers and what they are being provided. The failure to fill that gap leaves the industry open to disruption, as customers find themselves shopping around to find insurance that fits their needs. According to the report, “in North America for both P&C and L&A insurers combined, this puts $1.4 trillion of premium at risk.”

What does this mean for insurance companies struggling to catch up?

Large companies looking to retain their market position need to find ways of attracting consumers that don’t rely solely on new customer discounts. Such discounts are effective at attracting business in the short-term but may end up being counterproductive in the long-term – as it is far cheaper to retain existing customers than it is to attract new customers. Insurance companies also need to survey consumers to identify the needs of younger consumers so they can offer products and policies geared toward younger consumers.

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About the Author: Anna Kreider