Why insurance customers are churning back-and-forth

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By: Wise Marketer Staff |

Posted on December 28, 2006

In recent times, the UK's providers of home and motor insurance have been finding themselves continually needing to slash premiums and increase advertising spend to make themselves stand out in an increasingly crowded and ever more competitive marketplace, according to research by GfK NOP.

The research noted that consumers often find themselves bombarded with price-related messages from insurance marketers, each guaranteeing to beat their renewal quote or promising to save them a large sum of money when they switch providers, meaning that lower premiums are now expected as a matter of course.

Defections rising
The proportion of the insurance market accounted for by switchers has risen over the past few years - possibly due to a desire to save money, or possibly due to learned behaviour from other markets such as utilities. However, this switching market in which UK insurers are competing is fairly small: only 12% of the home insurance market and 21% of the motor insurance market is made up of switchers. But this group is relatively easy for insurers to acquire, if they are willing to incur the very high acquisition costs.

One key question, the research suggests, is whether or not these switchers can be retained when their policies come up for renewal after the first year. According to GfK NOP's report: "It is our hypothesis that, as we also suspect in the credit card market, there is a core group of purchasers who 'go round in circles', switching provider year after year in order to obtain the best possible deal."

Identifying the target
But who are these people? Based on data from the company's Financial Research Survey, it tends to be the younger switchers who are more active in terms of quote activity in both the home and motor insurance markets. Potential switchers (defined as "those getting high numbers of quotes but choosing to renew with their existing provider rather than switching") tend to be concentrated in the older age groups.

The report says: "If we look into the likelihood of FRS respondents to switch insurer in the next 12 months, we can see that the most likely to switch (and therefore the customer type insurers will no doubt most want to avoid) are those who switched in the last 12 months after obtaining five or more quotes."

Is it a worthwhile target?
But do the insurers really want these customers? Although it may be easy to bring in these groups on a pure price proposition, the report warns, retaining these customers for longer than a year is relatively unlikely, so profitability is low.

The company reports that many direct-only insurers have recently taken a very high share of the new business market (particularly in motor insurance, where the top six brands are all direct providers), but further analysis revealed that high proportions of switchers and potential switchers within those insurers' customer bases means that they will need to continue their heavy acquisition activity just to keep their customer numbers level.

Break the cycle quickly
So, for the insurers' sake, the cycle must be broken. For this to happen, the company suggests, the market needs more than a price-only proposition in order to retain customers for more than the first year. Interestingly, many insurers are already moving away from price-focused messages toward customer needs, focusing their advertising more on levels of cover, innovative products, and peace of mind.

An increasing numbers of survey respondents citing "features of policy" as the reason for choosing their insurer appears to confirm that this is a proposition that is not only good for the insurers (who will no longer need to focus so much on providing the lowest possible premium) but also for consumers (who appear to be more concerned with products that are tailored to their specific needs).

Next steps
GfK suggests a starting place for insurers: To think carefully about their acquisition processes, and decide whether or not it is sufficient to bring in large numbers of customers who will only stay for a year - or should their focus be on the careful targeting of new customers, attracting more profitable customers who are less focused on getting the cheapest premium available and more focused on finding a policy that suits their needs?

The report explains: "Qualitative research has told us that consumers are wary of insurance providers, seeing them as untrustworthy and adversarial, but would welcome the opportunity for a relationship with their insurer rather than brief, one-off conversations. Could this be why retention levels are higher for bancassurers and brand extenders? It seems that the market is ripe for change, and that a higher level of differentiation between the hundreds of insurance providers in the market could well be the key to reducing the high level of churn present in the market today."

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