The partnership distribution model holds a lot of promise and can help insurance companies overcome the typical barriers they face in the evolving world of online insurance sales.
The findings discussed here are related to the Danish insurance market. Denmark serves as an interesting case study, since it ranks high on the EU Commission’s table of digitalisation. The insurance industry in Denmark (and the other Nordic countries) also delivers an extraordinary combined ratio in the P&C segment (starting in the low 80s in the private segment, with a customer loyalty of approximately 90%) — KPIs few companies can outperform.
The findings from this case study are applicable to other markets and can serve as an indication of how the future of insurance sales can unfold.
That future is one in which insurance companies can increase the customers convenience and reduce their cost per sale by increasing their online sales through distribution partners, such as banks, unions and auto manufacturers. Costs are kept lower by using the distribution partner’s existing online presence to drive customers to an insurance calculator while using the partner’s trove of consumer data to simplify the purchasing process. The result is a better overall experience for the customer and higher profit margin for the insurer and the distribution partner.
Customers Are Ready for the Online Sales Channel
In 2001, a young and eager Law and Economics student had his first shift at his new job. He lifted the company phone from its cradle for the first time and spoke into the receiver.
“Good evening, sir. My name is Esben from Fair Insurance. I see that you have inquired about an insurance quote.”
I loved it. For 20 hours a week, mostly on evenings and weekends, I would call up leads or cold call households to sell P&C insurance.
Working for Fair Insurance was exciting because they were quite revolutionary at the time. Their concept was simple:
- Sell insurance by phone only
- Increasing the number of meetings a salesperson can perform, per day
- Which reduces the cost per sale
- Which allows the company to offer more affordable insurance
- Giving customers an incentive to change insurance providers
Many people were incredulous at the idea of selling such a complex product over the phone. They predicted that Fair Insurance would never become a household name, let alone a profitable company. Consumers, we were told, were just not ready to purchase insurance over the phone.
Sounds familiar, doesn’t it?
Well, four years after I made that first call, Fair Insurance had reached a portfolio of 300million DKK (a market share of just under 1%) with a combined ratio of just under 100. The company was then sold to Gjensidige who used it at their launchpad into the Danish market.
Why am I telling you this story? Well, in the early 2000s, call centre sales made up a very small percentage of the insurance distribution in Denmark and very few of the large insurance companies even bothered to set up call centres. By 2010, they all had one. And in 2020, the leading insurers in the Nordic countries sell close to as many insurances through call centres as they do through a traditional agent and broker sales.
Why shouldn’t we expect digital sales to follow the same trajectory?
Let me tell you another story. In 2011, Penni.io’s Head of Design & Customer Insights, Simon Bentholm, walked into Alka (at the time, Denmark’s 9th largest insurance company) to have a look at their online sales flow. The people he met at the company were sceptical. They told him insurance is a product that the consumer will never buy — it must be sold.
Simon wasn’t swayed. He began examining the barriers to online sales that insurers believed were standing in their way. He took each assumption, one by one, and incorporated them into his design process. He was committed to changing the customer journey and spent seven years working closely with Alka to develop their online sales processes.
In 2018, Alka was sold to Tryg, Scandinavia’s second-largest insurer, for 8.2B DKK. Alka was now selling more than 30% of its insurance policies online and the sale was precisely due to this undeniable success with digital sales.
Why Online Sales Have Not Yet Boomed: The assumptions holding back evolution
The DK and UK chamber of commerce compiles data on the relationship between online and offline sales across a number of industries. Consumers are, unsurprisingly, purchasing more goods and services online, accounting for 13% of sales in Denmark in 2018 (2019 not published as yet) compared to 21% in the UK).
So, customers are comfortable with online purchases, even for things like banking and travel, in amounts that exceed the average premium on a home insurance policy. Why, then, are Danish insurance companies not following this trend?
To explain, let’s start by looking at insurance sales in Denmark. They began largely as face-to-face sales meetings and are now largely done through call centres and distribution partners. Since 2001, the call centres have been delivering a percentage of sales, almost equal to those secured by agents.
Below are two graphics showing how the sales are distributed for two of the largest insurers in Denmark Tryg and Topdanmark. They are also the only ones to disclose this data why they act as sources in this paper.
As you can see, online sales are still a very small percentage of total sales. In Tryg’s case, it is primarily from its acquisition of Alka and for Topdanmark the COOP case is expected to contribute highly.
Online sales should be higher, but there appear to be two factors that limit online conversions:
- The complexity of the IT infrastructure required to sell insurance products digitally
- Unproven assumptions based on most insurers’ existing business models
I won’t focus on the complexity of the technology involved. Solving that problem is the reason behind Penni and our Penni Connect platform. Instead, I will explain how the unproven assumptions that hold insurers back are fueled not by fear of new technology but by internal incentives.
How can insurers digitalise their offer in 2020?
3 Unproven Assumptions Holding Insurers Back
Online sales remain a very small percentage of both Tryg’s and Topdanmark’s total sales, with 97% of their distribution still generated through offline channels.
Correspondingly, 97% of their workforce involved in sales are dedicated to supporting agents and call centre operators by generating leads, running marketing campaigns, pricing products, and so on.
This means a lot of their resources are dedicated to a process that supports an existing (successful) business model and less supportive of the evolvement in consumer behaviour. Here are the three assumptions we keep coming across for why few insurers are making a strong leap to digital sales.
1. “You can win a lead online, but you will lose it offline.”
Well, this is simply wrong.
The demand for insurance is not a zero-sum game. The number of customers interested in insurance is only limited by the insurance company’s CRM configurations deciding how frequently customers should be contacted.
With digital touchpoints, customer interaction moves from “one-off/yearly” to “always on.” This exposure doesn’t replace existing demand — it opens up new demand.
As online distribution makes insurance more relevant and easier to interact with, the number of leads will rise. This will result in both an increase in online sales and an increase in digitally acquired leads converting offline (since not all customers are ready to buy online and may want to consult a field agent or a call centre representative).
Simply put, an “always-on” presence will increase consumer demand.
2. “Online sales only appeal to Millennials. If we use an aggressive digital strategy, we will lose older consumers.”
This is another false assumption. Recent studies have shown that online sales are rising across all ages. The internet is not a youth phenomenon — 66% of the population in the EU, across all income classes, are now online.
Meanwhile, insurers are now able to price risk correctly thanks to access to better and more fine-grained data. They can precisely tailor pricing for each customer, which increases the probability that the consumer is offered the right price, no matter the distribution channel.
Online customers are offered a targeted price (which is also the correct price) and a potential discount rate offered will be aligned with the company’s overall risk profile. This better pricing method will appeal to all generations, not just the young.
3. “Premiums for insurance products sold online are costly because the marketing costs are higher and the profits are lower.”
This is partly true. The cost of generating leads online is high and it is more difficult to achieve a good ROI on an insurance product. However, this is mainly due to the cost of driving traffic to the insurance homepage. And this is precisely the problem that can be overcome by selling online through distribution partners.
Insurance has never been all that interesting and a lot will have to change before the general public shows a lot of interest in it. No one wakes up in the morning and starts the day thinking about insurance. Because of that, it takes a significant marketing effort to get customers to consider your product. First, you have to pique their interest and lead them to the homepage. Then, once they’re on that page, you must keep them interested despite demanding a lot of their time and effort to fill out data so you can offer them a tailored quote.
This intense marketing, along with low conversion rates, raises the cost per sale and is not a great incentive to digitizing sales processes. However, the same process can be made drastically more affordable. If the majority of costs are spent driving the customer to your homepage, you could save considerably by being in the digital environments the customers are already in.
That’s where distribution partnerships come in.
Reducing Cost Per Sale Using Partnerships
I’ve worked with insurance distribution partners for more than a decade, developing, implementing, and driving business models in a customer-friendly framework. The focus has always been on achieving a profitable outcome for all parties: the customer, the partner, and the insurer.
The distribution partner’s main focus is selling a product or service other than insurance. Insurance, for them, is a way to earn extra revenue while increasing customer loyalty.
Typical distribution partners include banks, car dealerships and manufacturers, unions, real estate companies, and travel agencies. Insurance is offered and sold to the customer either as part of the onboarding process or through a transaction.
For the insurer, the benefit is gaining access to the customer. The customer is a lot more interested in the core product than the insurance. But by coupling the product with the insurance, the customer is exposed to the insurance product right at the moment when their desire or need for it is most salient.
Besides the customer who is in transactions (for instance, while purchasing a car or setting up an account), the partnership offers the insurer a kind of sleeping portfolio (as one of our clients called it), which is a large customer base that is not offered insurance products during a phase of the transaction.
This sleeping portfolio is essentially a large number of leads that have not actively requested a quote. Typically, these customers are not offered the coverage more than once a year due to insurers internal marketing rules limiting how often customers can be contacted. To incentivize them to make the purchase, the insurer will usually offer a discount. And to incentivize the partner to promote the insurance offer to this portfolio, the insurer will often pay a marketing fee. In an ideal partnership, that marketing fee is lower than the insurer’s direct marketing costs.
Because of this marketing cost and the heavy discount offered to the customer, a high conversion rate is required to make this worthwhile for the insurer.
By instead using the partner’s existing digital touchpoints, customers are given easy access to an insurance price calculator which motivates them to start the quoting and purchasing process online — see below an example in Denmark of an embedded Penni widget in an online article on distributions partners website.
The customer experiences an easier onboarding process and a quicker purchase flow than with other insurance suppliers, since the customer can (with their consent) reuse information stored by the partner to calculate prices, instead of having to enter the information again.
And that is how you achieve an increase in customer convenience and a reduction in cost per sale: (1) higher exposure and (2) quicker time to offer (3) raising the number of quotes per Partnership per year (4) for a lower marketing cost and (5) increasing your conversion through ongoing optimization with up to factor 3.
Digital distribution channels present the insurance offer to the customer precisely when the customer finds it most relevant. And it does so with no additional marketing cost than what is invested in an existing partnership. Increasing customer convenience and sales at a lower cost. What more could an insurance distribution partnership want?
It’s Time to Go Digital
The number of online sales across all markets is rising. Therefore, the number of customers who are buying products and services online, where insurance is relevant, is also rising.
Hence, if you would like to work with partners, you must be online like your partners.