How Insurers Get Out of the Red Ocean

Reinvention of an existing product with new vision can be enough to move an insurer into a Blue Ocean. Just look at iTunes.

Insurance has experienced high levels of price competition. Consumers often choose the cheapest offer in such a market, where demand is limited and supply is nearly endless, especially when mainstream products are highly similar. Thus, insurers are in a Red Ocean, a term used for markets where competition is high and profit margin is low. Moving from the Red Ocean to the Blue Ocean -- a market with high demand, low competition and strong profit margins -- is usually linked with product or channel innovation. This innovation would not have to be like the invention of the wheel. Reinvention of an existing product with a new understanding and vision is also valuable. Apple’s iTunes is a good example. Apple created a market by transforming traditional music sales to the digital environment and has been unrivaled for years. Another way of moving from the Red Ocean to the Blue Ocean is by creating an emotional connection between brand and customers. Today’s consumers may make purchasing decision based on their feelings about the brand rather than the specifications of the product. Brands that build strong connections with customers could get out of the Red Ocean. Think of Starbucks; although it sells almost the same product as other coffee shops, it has a very loyal customer base. See also: How to Create a Blue Ocean in Insurance   Why Is Insurance a Red Ocean? This is basically caused by the corporate insurance approach. The insured pays premium; the insurer pays claims. The relation between the parties sounds quite mechanic. It’s like a financial exchange rather than a consumption or purchase. Some may liken insurance to a boring lottery. Companies are also not investing enough in product development, and the oligopoly (few operators) structure of reinsurance deepens the problem. Thus, giant insurance companies compete with similar products, service level and brand identities. How Can Insurers Get Out of the Red Ocean? It might be more effective to answer this question through an imaginary case study. Let's consider there was a company operating in the car insurance business where price competition is high. The company, Amisos Insurance, had been operating in this line for many years and had 5% market share. The company had aimed to get out of the price competition and gain a loyal customer group. But how? The company had started by creating an identity to its brand. Generic rhetoric about being trustworthy, deep-rooted and powerful meant nothing to anyone, so the company decided to position itself as the “good driver’s insurance company” in line with the targeted consumer segment. To create a marketing strategy, the company focused on answering these questions:
  • What do good drivers expect from an insurance company?
  • Why is Amisos Insurance the company of good drivers? What offer is unique for them?
  • How can Amisos Insurance reach them and convince them to be loyal?
Trying to answer these questions had helped to the company to understand what the satisfaction gap for customers was. To fill this gap, the company developed a product that has a rewarding mechanism for good drivers, who had paid premium for years but got nothing from an insurance company or had few claims. The product pays claims in case of a car accident like existing ones do but also gives drivers 50% of their premium back if they spend a year without any claim. For example, if you paid $1,000 for car insurance but have no claims for one year, you earn 500 Amisos points. And you can spend these points to get benefits like a weekend holiday or gym membership. You feel valued. Is it Applicable? Of course, there is a cost of these benefits, and this cost needs to be reflected in premiums. However, this cost would not be high as thought, for three main reasons:
  • Because benefits would be bought in bulk, their cost to the company would be much lower. With a 30% corporate discount, a $500 holiday would cost only $350 to company.
  • Second, these offers would be more attractive to people who are unlikely to make car accident. So “good drivers” more likely to choose this company. Thus the quality of customer portfolio would be improved.
  • Third, customers would be more careful due to they cannot get their “good driver” benefit in case of any claim. Even, small claims may not be reported not to lose these benefits. And it helps to manage moral risk of insurance.
See also: A Game Changer for Digital Innovation   Considering all these predictions %15 price increase would be enough to maintain existing amount of profitability in the short term. (Assuming rewarding mechanism will %25 decrease in loss frequency) In medium term company would have a unique brand identity and a loyal customer segment. So, it would be easier to increase profit margin of the product. However a complete project management would be the main success code of the strategy. In practice following issues needs a close attention;
  • Terms of the product and rewarding mechanism should be explained to customers clearly. Being transparent is essential to avoid overpromise and to handle trust issues.
  • Customers should be informed enough about their benefit at the point of sales. Dreaming to customers about the rewards that they get after a year without claims should be the key part of the sales process.
  • With the launch of the new product, including all existing customer to the good driver product’s campaign would have great impact on the customers. Mouth to mouth marketing effect would support the new strategy.
The strategy implemented by imaginary Amisos Insurance is not the only way of getting out of the red ocean. Even, it maybe be the wrong way for the company in this case. Moving from the Red Ocean to the Blue Ocean is a journey of innovation, needs to continuous tries, failures and retries.

Hasan Meral

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Hasan Meral

Hasan Meral is the head of product and process management at Unico Insurance. He has a BA in actuarial science, an MA in insurance and a PhD in banking.