We often look at beautifully compiled market statistics that, for example, show increasing importance of direct sales, diminishing role of brokers, solid performance of banks and a slight breakthrough in mobile distribution. Unfortunately, nobody explains why these things happen. Industry analysts tend to study the development of various channels without an in-depth consideration of fundamentals underlying success or failure of particular means of distribution. It is disappointing when market tendencies are simply explained by presenting phenomena that unfold right before our eyes. Rapid proliferation of technology is something that is obvious to everyone. But it does not mean that everything, including financial services, has to be suddenly sold online or through mobile, or mobile online. Nor does it mean that such businesses will be successful. Proliferation of technology and global development of a particular customer communication channel are not fundamental factors that make technology-driven insurance sales necessarily successful. Of course, with massive marketing spending anything can be done. But we are looking for efficient and effective distribution mechanisms that do not cost much to execute and are profitable at the same time.
It is the question we have asked insurance executives for nearly a decade: the most important factor in insurance distribution that starts with ‘P’ and isn’t ‘price’ or ‘product’. The answer is proximity. Understanding different types of proximity helps identify settings in which insurance distribution could have potential to be a success.
Risk Awareness Proximity
Proximity to risk awareness is the most important factor determining a success or failure of an attempt to sell insurance. Ideally, insurance point-of-sale is close to an event when the customer suddenly becomes aware of certain types of risk. Such an event can be buying a car or a house, getting a loan, or crossing the UK border. We like to call such events balance sheet events – occurrences in which new assets are acquired and/or liabilities emerge.
Insurers, often unknowingly or without defining it that way, have capitalized on proximity to risk awareness for decades. Banks are successful at selling property insurance and payment protection insurance because they themselves change people’s balance sheets by issuing credit. They are in a perfect position to succeed in selling insurance products. And they do. In the past, insurance agents were using proximity to risk awareness, too. While in executive rooms it is believed agents are walking around towns knocking on people’s doors, the most successful agents carefully observe what is going on around them: if a neighbor is selling an old car, probably he is getting a new one; if a neighbor is moving out, most likely someone will move in; if a neighbor is pregnant, very soon a child will need insurance cover – these are easy sales driven by proximity to risk awareness.
Risk awareness is the most important factor. But to make the most of it, consumers have to have a possibility to obtain insurance on the spot – right when they feel insecure and are most risk-averse. If they do not obtain the product at once and continue to be exposed, the longer they are exposed without experiencing a loss the more difficult it becomes to sell insurance. They become comfortable with their risk and their perceived exposure diminishes. The ability to collect premium is what we refer to as transactional proximity.
Banks are exceptionally successful at selling certain types of insurance products because they enjoy both strong risk awareness proximity and transactional proximity. When a bank issues a mortgage loan, it has all the information about its customer and their property, as well as has the ability to offer insurance and bill the customer on the spot.
In certain cases, transactional proximity is also important from the psychological standpoint. When one visits an internet bank, usually the purpose is money transfers or payments. Therefore, the person is psychologically prepared to part with her money. In telecom world, sending a text message entails the same.
Changing Nature of Proximity
For decades, both types of proximity discussed above had been linked to geography. Bank branches were physical, cash was physical, agents were (clearly) physical, while insurance policies were hard papers and in some cases followed a strict format set by the law. Proximity to risk awareness and transactional proximity were geographical in nature.
All that has changed significantly. Thanks to technological progress, both types of proximity are increasingly becoming informational in nature. While in the ‘60s a proxy for determining a traveler would be an application for American Express credit card and hence targeting her required having a seat at a bank, today we determine a traveler by her use of mobile network. Unlike in the ‘60s, we do not need hundreds of bank branches to provide insurance cover to hundreds of thousands of people scattered around the world.
Mobile Operators and Proximity
Mobile operators enjoy spectacular transactional proximity. Clearly MNO’s bill customers, including (increasingly) for third party services. It is a tested and reliable way of getting paid. Consumers are used to it. It’s nothing new or unusual.
Crucially, operators also enjoy risk awareness proximity. They flood the world with new and increasingly expensive assets: phones, laptops, tablets, etc. These assets could be protected. Customers are often signed for long-term contracts that imply multiple payments for years to come. These liabilities also need protection. These, however, are strongly related to operators’ core business and, unlike banks who are pure financial institutions, operators don’t always wish to engage in what sometimes is perceived as an excuse to increase a price of a phone (in case of handset insurance) or load monthly payments (in case of bill protection insurance) – even though our strong belief is that both insurance products must be available to customers.
Wireless operators do enjoy proximity to risk awareness unrelated to their core revenue generating activities. Obviously, they know when their subscribers cross the border when traveling. This is the perfect timing to sell travel insurance. Some have been doing this for nearly half a decade now: https://www.emt.ee/en/era/teenused/reisikindlustus. Others are seizing the opportunity as well. Very few don’t get it, but they will have to change their mind. The model offers the simplest, most convenient way of getting a single-trip travel insurance. The size of the client base provides enough bargaining power to obtain very attractive terms from the insurance market. Insurers are happy too. Unlike many things in the telecom world today, it is a triple-win: for consumer, operator and VAS provider.
Why Is This Important?
One can attempt to fight lack of proximity through enormous and – most importantly – continuous marketing spending. However, in highly competitive environments this cannot be sustainable for a long period of time, due to limited profitability that most insurance products offer.
Understanding proximity is vital to any insurance distributor, as well as insurance companies’ channel managers. Proper evaluation of access to various types of proximity can help determine an efficient and effective insurance distribution strategy.