The Right Way to Think About Bundling

Bundles currently encourage customers to buy based on price, but insurers can use them to become trusted advisers on risk.

Insurers are shooting themselves in the foot – and sparking a race to the bottom when it comes to price. How? By thinking they can earn customer loyalty and sell existing customers new types of insurance by offering discounted bundles of products, such as a package containing home, auto and personal umbrella insurance. Instead, this bundling is encouraging consumers to buy insurance based on price – rather than on what should be the real goal: shielding a home or other valuable asset from loss. The upshot: Consumers are focusing on the minimum amount of insurance they may be required to hold, say, to secure a mortgage or own a car. It’s a situation that ultimately doesn’t benefit the consumer – or the insurer’s bottom line. Insurers can change this so that bundling is a win both for themselves and for their customers. To begin, insurers must help guide consumers to think more about protecting themselves and their assets. Companies could then recalibrate their own business model and focus more on providing advice to customers on what insurance meets their actual needs. Some companies – including Allstate and Progressive – are taking steps in the right direction. But they’re doing so for narrower tactical reasons. Instead, they must act strategically and become genuine partners that provide customers with the coverage they truly need to safeguard their financial security. Such an approach would set these companies apart from rivals – and arrest the downward price spiral that has turned their bundled offerings into a commoditized product. Insurers don’t need to discard the concept of bundling to achieve this. The thinking that goes into unbundling can actually help, because it forces companies to break products down to the granular level. Those pieces can then be reassembled into packages customized to the needs of each customer. Does discounting reflect the true value of product bundling? Currently, insurers offer a bundling discount, also known as a cross-product discount, and position the value to the customer as “saving money.” The approach may look like a no-brainer, thanks to the marked success of the current model of selling two products together as a bundle, with the “discount” as the differentiator. Consider the following: -          Insurers selling two products together have long seen customer retention improve. Customer retention rates are higher among renters who bundle an auto policy: 91% among those who bundle vs. 67% among those who do not, according to J.D. Power. -          The perceived value of a bundle is reflected in the fact that a greater proportion of customers buy multiple products from the same insurer. According to J.D. Power, 77% of customers bundle auto policies with additional policies, and 58% bundle their auto and home insurance policies with their existing insurers. But when we analyze the factors that go into premium calculation, real savings for insurers depend on many factors that vary greatly between insurers, states, individual customers’ own situations, etc.  Those factors can produce inconsistent savings calculations for bundles, varying from 5% to 20%.  Consequently, customers need to shop around thoroughly, comparing prices (both for the individual product and the bundle) and choosing the right combination from the right insurer. The various factors can work together so differently that a customer may sometimes save by buying products from two different insurers – rather than a bundle from one. For insurers, the incremental value in all this translates into higher customer retention. There is no real incremental value realized from the product itself, which is core risk management. How is the industry responding? Insurers have been responding to the emerging need to serve as risk managers for their customers. And they’ve been fine tuning their bundling strategy accordingly. Some insurers, for example, have crafted their bundling strategy to make it easier for customers to manage their risk profile through a single insurer; this also consolidates billing and payment. While this is rudimentary, it still provides an easier way to serve the customer – and to increase loyalty. The following insurers approach bundling by advising customers as well as crafting suitable packages that allow their customers to manage risk: -          Allstate provides an “all-in-one” product through its Encompass unit, which covers homes, cars and home-based business. It’s aimed at wealthier customers. For more mass-market customers, Allstate provides “Bumper to Bumper Basics,” based on states’ minimum requirements for auto insurance. -          GEICO offers an advisory tool allowing customers to build a customized policy based on their individual circumstances. -          Progressive provides a “Name Your Price” feature for its auto coverage, under which the customer states her budget, and Progressive sorts the options based on cost. The plan closest to the customer’s budget is shown first. Progressive states on its website: “Once you fine tune your price, we highlight any areas where you might have too little or too much coverage, so you can get your entire package just right.” The insurer also gives customers the option of bundling both auto and property insurance. -          MetLife Auto & Home’s “GrandProtect” program allows consumers who purchase multiple policies – such as home and auto – to pay one deductible in the event that several of their insured assets are damaged by one event, such as a storm or hurricane. These examples underscore that while insurers are shifting toward an advisory-led coverage bundling within a product, they’re still beginning from a tactical standpoint. This narrower approach remains limited to customizing coverage within a product and tactically bundling other products with it. Though insurers have been slow to adopt product bundling on a more strategic basis – i.e., being an end-to-end risk portfolio manager – they are actively pursuing the goal of leveraging cutting-edge technical capabilities. So, where does the potential value reside? The real value of bundling – for both customers and insurers – lies in the individual insurance products.  Every form of coverage within the bundle covers a specific risk, and so is a “mini product” on its own. However, insurance products have become commoditized as products have become more unified so they can be sold easily to customers over the Internet. There, many customers simply select the desired coverage amount and deductible. “Save Money” and “Discount” marketing diverts customers toward an affordable premium and, often, the wrong coverage – people opt only for those policies mandated by law (like automobile liability insurance) or, in the case of a home mortgage, a lender. The deductibles chosen often are high, which can prove disastrous for a customer if calamity strikes. Insurers can deliver real value for themselves and their customers by:
  • Gathering customers’ relevant information
  • Assessing their risk
  • Building the right coverage mix to mesh with customers’ needs
  • Suggesting customized products based on a customer’s risk profile
How might this work? Say a customer’s car is more than two years old. The insurer could recommend the customer get an extended warranty as well as a roadside assistance plan. The insurer, in short, could deliver real value by acting as the customer’s risk manager. This approach also would help the insurer to select the right customers for the right risk portfolio – and to weigh the moral hazards when a customer opts for a different package or coverage combination. Once the individual insurance products are de-commoditized and customized to fit the customer’s risk profile, this advice-based approach can be extended to multi-line product bundling. Customers will move from a mindset of, “I’m required to have homeowners insurance to get a mortgage,” to a mindset more in line with, “I need to cover my risks and ensure a financially secure future.” Customer retention and satisfaction will go up – along with the insurer’s revenue. How to unlock the true potential of product bundling? The goal of achieving strategic bundling hinges on insurers’ building their advisory capabilities and customizing coverage and products based on a customer’s risk portfolio. The core building blocks of coverage and pricing will not change – but the superstructure could be anything from a chapel to a cathedral, based on a customer’s risk profile. Cutting-edge technical capabilities such as mobile communications, sophisticated analytical tools and so-called “big data” are among the options insurers can tap to build their customization and advisory capabilities. Extensive use of external data (e.g., credit scores and medical data) as well as internal data (e.g., loan delinquency rates) along with analytics will help insurers predict a customer’s risk portfolio with fair accuracy.  Social media platforms such as Facebook and Twitter are other evolving (though not always reliable) generators of external data that insurers can use to gather customer profile, risk and behavior data. Strategic bundling from a risk portfolio management perspective also requires customers to share personal information outright. Customers, especially millennials, seem willing to their share personal information in return for personal advice. This offers the potential for insurers to accelerate strategic product bundling. Insurers can thus capitalize on customers’ need for advice-based risk portfolio management leveraging leading-edge technology to deliver what customers want. Insurers that show agility and speed in building these capabilities can succeed in achieving strategic bundling – and attain the coveted status of a preferred risk portfolio manager.

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