Differentiate to Defy Commoditization in Insurance

Insurers seeking to avoid competition on price should look to other industries for examples of flexible product strategies and then implement the business and system capabilities needed to support execution.


Long gone are the days when local agents were visited in person and given a chance to extol the virtues of their own policy as compared with one from a competing agent. Now, it’s much easier for consumers to conduct their own research online and compare insurance products. And with no agent involved to wax poetic on the benefits of any one policy, price can become the dominant factor in the decision.

Commoditization has become a greater problem in the last decade with the rise of aggregators. These tools make shopping for insurance even easier for the consumer, who is required to provide very little information upfront and is rewarded with a list of quotes from different carriers ranked by price. But for the carriers themselves, it’s a bad deal. They are forced to compete on price, rather than the features of their products. Carriers with a higher-cost product may not even make the aggregator’s list, and therefore have no opportunity to explain to the consumer why he should pay more for a better policy. However, while carriers bristle at the principle behind aggregators, they at the same time are beholden to them, especially if a large percentage of the total market goes through this channel.

The key to avoiding competition based on price lies in an ability to stand out in the crowd; in other words, the ability to differentiate.

Consumer Product Verticals: The Differentiation Role Models

Consumer packaged goods and service brands are masters of the differentiation game, and have over the years provided the insurance industry with countless strategies to follow. One popular way they differentiate is by adopting a multi-brand strategy. With a multi-brand strategy, a single company sells its products under more than one brand. The idea is that the high-value premium brand is retained for channels in which the carrier can get a premium price point, while a separate “good value at low cost” brand is created to compete in the price-comparison market. Toyota is a great example here. The company sells its Lexus brand at a premium price point, while the Toyota brand caters to consumers looking for a good value at a lower price. Carriers can follow this model by offering a stripped-down, low-cost policy under one brand that is sold through the aggregators. A premium brand may be sold through an agent channel, which can do a better job of explaining the benefits and justifying a higher price to the consumer.

A second differentiation strategy involves offering extra features. Let’s look to the electronics industry for an example. Today’s television sets can come with countless features, such as a built-in DVD player or support for 3-D visual effects. There are, in fact, so many features offered that consumers may have a difficult time comparing different models and deciding how much more the extra features are worth. They may simply want a “better” television and be willing to pay more for one that is perceived to have more or better features. They clearly are not choosing only (or even mostly) based on price since there are so many other dimensions of differentiation. This strategy can work well in the insurance industry too. Extra features in a homeowners’ insurance policy, for instance, could include coverage for food spoilage in the case of a loss of power to refrigerators or freezers, or coverage for damage to backyard play structures. In fact, some of these losses might be covered already, but by calling out the fact that potential losses are covered, carriers can turn it into a “feature” of the policy. A product with many features may be seen as more valuable by consumers than just a basic policy. Offering extra features can be an effective strategy as long as the perceived extra value is more than the cost of providing the extra features.

Extra features can also be leveraged in a slightly different way. Rental car companies offer a prime example here. After selecting a rental car company on a price-comparison site, the consumer is directed to that company’s own website, where he is offered several higher-margin extras (such as insurance, car seats, pre-pay for fuel and GPS). Carriers using this strategy can attract the consumer based on a competitive price for a basic policy, and then offer optional higher-margin coverage as a next step.

Bundling — that is, selling an insurance product at the time a related purchase is made — is another strategy that can yield results for carriers. For example, insurance coverage for a pricey piece of jewelry can be offered at the same time the jewelry is purchased. In some countries, auto insurance is sold along with the purchase of a new car. By bundling a policy with a purchased item, the carrier has removed the hassle of trying to find insurance for the item on his own. It also means that the customer does not do as much price comparison across multiple options for that insurance.

Loyalty programs present yet another differentiation strategy. Airlines have the corner on this one, giving customers an incentive to buy tickets consistently from a favored airline, even if a bit more expensive, in order to accumulate frequent flier miles and perks for achieving status levels. Insurance companies have long offered similar loyalty incentives, such as longevity discounts (lower prices for customers who renew over multiple years). There have been experiments with new types of incentives in recent years, such as declining deductibles and airline-like loyalty programs. These incentives are all designed to make policyholders less inclined to shop for an alternative policy, since it would mean giving up the benefits that they have “earned” from their longevity with their current insurer.

Core Competencies Enable Differentiation Strategies

The first step in avoiding commoditization is for a carrier to have a clear strategy for how to differentiate its products. Which of the aforementioned differentiation strategies — or others — will they pursue? And then, in order to put those strategies into practice, carriers must build core competencies into their business. Some of these core competencies are on the business side. They include marketing, channel sales, and bundling and packaging. The other core competencies involve retooling their core systems to execute differentiation strategies economically. Many carriers enter this stage with no clear strategy. Others have a strategy, but no means to execute on it because their systems are unable to support it and the manual workarounds are prohibitively expensive. To avoid commoditization, a carrier must have both: a good strategy and the capability to execute on it efficiently.

The automotive manufacturing industry provides a good example of the use of flexible core manufacturing systems to economically deliver variations on a product that make it suitable for different niches. Long gone are the days when these companies could produce 50,000 of one kind of car and then shut down to retool their facility to make 50,000 of the next kind. Now, their core production systems must be able to accommodate a huge number of variations like different colors, interiors and engine sizes, and all kinds of option kits. Similarly, carriers looking to follow any differentiation strategies must retool their core systems for flexibility — flexibility in offering different products, under different brands, with bundling and so on. By having a flexible core system in place, carriers can avoid the commoditization problem by offering many different target products in an inexpensive way.

Many carriers already realize they must do this, but struggle to see how to get there from what they have today. Changing their existing systems to add flexibility is usually an almost impossible task. Flexibility must be a fundamental design principle of the system, not something that can be layered on later. And many of the packaged systems available in the market historically have been good at supporting the standard products that everyone sells (i.e. commodity products) but were not designed to give carriers the flexibility to be innovative. Today, however, there are modern packaged systems that both manage standard products and have the tools to create product variations and support multiple brands so that carriers can pursue product differentiation strategies economically.

Differentiation — and future success in the insurance industry — certainly requires some creativity and forward-thinking by carriers. But having the tools and resources to execute your strategy is equally important. So after identifying your strategy for growth and differentiation, ensure its success with the core competencies — both business and technology — to support it.

Ken Branson //  

Kenneth W. Branson co-founded Guidewire and has served as the company’s Director of Product Strategy and on its board of directors since 2010. Prior to that, from 2008 until 2010, Branson served as Guidewire’s Functional Architect, from 2003 to 2008, as its Vice President of Product Development and, from 2001 to 2003, as Director of Product Management. Prior to Guidewire, Branson worked in technology development and strategy roles with Ariba, Booz Allen & Hamilton, Cisco Systems, Microsoft, and TradingDynamics. He holds a B.S. in Electrical Engineering from Princeton University and an M.B.A. from the Stanford Graduate School of Business.


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