(Image credit: Dollar Photo Club.)
When I was approached to write this article, I was planning to write about what insurers can do to avoid price competition, which has always been part of the insurance business. On reflection, price competition is, in fact, a good thing; the alternative—a monopoly—is trouble for everyone, especially the consumer. Instead of fearing price competition, insurers must embrace it, and focus on highlighting their other merits to stand out from the crowd.
It is unfortunate when any offering—product or service—is evaluated solely on price. It’s a bit like a fruit salad with only apples. Consider the consumer airline industry. Price competition is rampant in this industry, thanks to pricing tools like Priceline and Travelocity that enable price discovery and simplify the consumer’s ability to comparison-shop. An unwelcome byproduct of price competition here, however, is a host of hidden costs tacked on by the airlines that aggravate consumers. Service is poor; booking fees, baggage charges and a number of optional service fares are now common industry practice. The economic imperative that the airline industry is under, in which it is totally price-commoditized, is a negative. And, ultimately, the consumer suffers. Eventually, those apples get churned into sauce. It may have simple appeal, but it leaves a lot to be desired.
Race to the Bottom
Insurers can opt not to participate in this type of “race to the bottom” by changing the game to mitigate price competition. An effective way to do this is to differentiate based on an insurer’s offering. This could be a product, of course, or even how the product is delivered, perhaps an intuitive, efficient customer experience across various channels? Other options for differentiation include highlighting the integration of services that are ancillary to the insurance policy, such as roadside assistance, or the creation of targeted product offerings for specific markets. By identifying the needs of a customer using a wider scope and delivering solutions covering this expanded opportunity, insurers create an “apples-to-oranges” scenario that drives the consumer to a value comparison. This is the kind of fruit salad that delivers more: it’s not about just one thing, like apple sauce, but about the combination. Price will be a component of that comparison, but it will not be the sole evaluation criterion. Determining when and how to differentiate becomes an active pursuit for the insurer, creating the need for new organizational and environmental conditions. [I explore these ideas further in my blog series.]
Containment of cost structure is an important option in responding to price competition as well.
Over the past decade or so, insurers have begun to recognize that the era of simply collecting premiums at any rate and remaining successful has vanished. The organizational and cost structures tied to that paradigm aren’t viable for the long term. So there’s an urgent need for modernization of the insurer’s entire organizational and cost structure—and its legacy systems are a part of that.
The core system environment is a huge focus of insurers’ costs. Legacy core systems are expensive to maintain and too rigid to adapt to evolving consumer demands. They are also typically unable to accommodate market segmentation, a critical component in responding to price competition that involves understanding each segment’s market and aligning offerings accordingly.
Thinking More Strategically
Certainly, changing a core system requires money and time, but it’s a critical step that must be taken in order to get to a lower run rate. And then there’s the benefit of automation, which is less about replacing people, and more about allowing the insurance knowledge workers to get more done faster, with less effort, and augmenting their skilled judgment with things that can be done systematically.
Unfortunately, the rules of competition can’t be suspended, and insurers can’t focus exclusively on serving a subset of price-indifferent customers. By embracing price competition, and using it as an impetus to think more strategically about how to differentiate, insurers can avoid falling into the price commoditization trap. Instead of having only apples to offer (that are slowly being ground into sauce), find a way to deliver a fruit salad full of value.