$12 for a jar of honey?
I recently visited a farmers’ market close to where I live. I walked by a stand that was selling small containers of honey, and I was shocked to see a price tag of $12. Shocked to the point that I stopped to see if I was understanding properly, because how could honey possibly cost so much? I could buy that same quantity of honey in the grocery store for a fraction of the price!
As any good salesperson would, the vendor quickly explained to me the many virtues of his honey. It was hand-crafted, gourmet honey that was grown on a small farm in a very specific microclimate. There were specific flavor nuances to different jars based on reasons I didn’t fully understand. And finally, the honey was locally produced, which he promised me would help with any seasonal allergies that I might face. In other words, this wasn’t the same honey that I could buy at the grocery store. Although I didn’t buy any honey, a lot of people did that day.
At this point, you might be wondering what this could possibly have to do with insurance. The common link is differentiation. In a market where the consumer might be inclined to think of the product as a commodity, this vendor has found a way to differentiate his offering. This is how he was able to justify a price premium on the honey. The Property/Casualty insurance industry is facing a similar challenge, especially in personal lines. The rise of insurance aggregators in different parts of the world show that some consumers are already starting to think of insurance with a “commodity” mindset.
Consider the implications of this scenario. If consumers believe insurance to be a commodity, it is logical to assume that they will shop on price, and price alone. There is no reason to be loyal to one insurer over another, because they’re all offering the exact same thing. From the insurer’s perspective, the only way to increase your market share is to offer the lowest price. However, your competitors are also seeking to do the same. Prices will inevitably fall. This is bad for insurers, but on the surface, good for consumers. However, this will ultimately lead to insurers competing to cut the most costs while providing the minimum acceptable customer service and barebones coverage. No one wins in this situation.
There’s one question that I haven’t addressed yet: is personal lines insurance actually a commodity? I don’t think it’s controversial to say that all insurance companies are not created equal. You won’t necessarily get the same products or the same customer experience from one insurer to another, so by definition, insurance shouldn’t be considered a commodity. However, how insurance should be classified doesn’t matter! This is truly a case where perception is reality. If consumers shop based on price alone, it doesn’t matter if they’re buying the same thing or not. In fact, in a (perceived) commodity market, offering more than the minimum coverage limits or good customer service could be considered a competitive disadvantage, as they increase costs and risk while bringing no benefits in the mind of the consumer.
Admittedly, the above paints a bleak picture for the future of the insurance industry. So, how can insurers avoid this fate? That is where differentiation comes in. Insurers need to help consumers to understand what makes their products different. From a claims perspective, the easiest way to do this is to differentiate your customer service. Do something unique, something that can be associated with your brand. Each company will have a different business strategy, but technology is one of the best ways to enable such differentiation. With modern core systems, insurers have the flexibility and agility to offer things that will set them apart in the market. This gives customers a reason to stick around, even if they could save some money elsewhere.