‘Social Distribution’ could save the UK Insurance industry
Written By William Corke, 573 days ago
Social Distribution: customers passing on product recommendations to their family and friends when making a direct purchase from (for example) an insurance company or broker.
It doesn’t sound like a revolution. Haven’t people always done this?
For the past month we have been working on a brand project in Insurance. The product is an add-on policy that has real (money-saving) value for many consumers, but most don’t know that this kind of product exists and so are not searching for it. As a result, conventional direct response channels for customer acquisition don’t work.
Our answer has been to create a product offer that rewards customers for recommendation. Given a little-known product with clear benefits this seems like an obvious business model. But the ramifications of this product/marketing offer are profound: at heart it is a re-engineering of distribution.
Let’s look at the UK market for motor insurance and its current distribution, based on 2011 figures.
For each £100 paid in premium, £79 goes to pay claims and £27 goes on expenses.
The alert will notice that this adds up to £106. So at a basic level, the UK insurance industry makes a loss of £6 on each £100 of premium (GWP – gross written premium). Some of that is clawed back via investments, and cross/up sell, as well as ancillary income (referral fees etc.).
Breaking down the Expenses into Operational and Acquisition (distribution) costs is a little tricky, but as insurers are allowed to defer the costs of acquiring the business over the lifetime of the policy it is derivable from statutory returns. Acquisition costs have been rising, but industry sources suggest a figure of £12 (per £100 of GWP) seems fair.
If we take a figure of £500 to represent an average premium (currently £488) we arrive at an indicative figure of £60 to acquire a customer (CPA).
Many insurers on aggregator websites do no other advertising. So here’s the kicker… if we can halve the CPA by giving back £30 to the customer acquired through social distribution - rather than paying intermediaries £60 on an average sale, this would return the UK insurance market to profit.
The savings inherent (advertising cost, broker / affiliate commissions etc.) in the social distribution model must offer real opportunity to product providers who can construct credible brand and product offerings in this space. We’re working with some providers to try and make this happen.
And what about ‘Social Distribution’ as a term? When I mentioned the term in conversation with Alan Mitchell of Ctrl-Shift he assumed that Social Distribution was a descriptor in regular use. Follow-up on-line research produced the somewhat surprising insight that no-one seems to be writing about social distribution as a business model in financial services (or any other industry for that matter).
This will surely change.
Links and credits:
Mintel: Motor Insurance – UK – March 2012 – headings only for non-subscribers, but helpful resource