Aggregators and cashback websites have become major forces in the distribution of a wide variety of insurance products in the UK in recent years, but new research from Finaccord, a market research consultancy specialising in financial services, reveals that they suffer from an in-built weakness. Because the main attraction of these websites for their customers is to get a lower price, they encourage people to switch their policy provider regularly and thus have very poor retention rates from one year to the next.
Finaccord's survey of 1,000 consumers in the UK looked at a basket of eight insurance products that are commonly sold by aggregators and cashback websites, namely annual travel, breakdown recovery, home emergency, household, life, motor, pet and single-trip travel insurance. It split respondents between a) those switching provider or taking out a policy for the first time and (b) those continuing with their existing provider. The survey found that aggregators were the single most important distribution channel among switchers and new buyers in 2013, as they handled 27.5% of these customers, while cashback websites were responsible for another 8.8%; as a comparison, direct sales accounted for 19.6% of switchers and new buyers. However, their average share of customers renewing a policy was far lower, as just 10.0% of renewals went to aggregators and 2.8% to cashback websites. Among these customers, direct sales by insurers held the largest share, with 32.3% of renewals.
“Aggregators and, to a lesser extent, cashback websites have transformed the way that people buy insurance in the UK in the last decade, taking full advantage of the internet revolution – and this now applies to many products, not just motor and household insurance", comments David Parry, Managing Consultant at Finaccord. "But they have attracted the most volatile customers, partly because their main appeal is that you can save money with them and partly because their online operations make it easy to keep switching provider year after year. This means that insurers might not want to spend a lot on acquiring customers through them if they can't retain these customers for long. Conversely, other channels with higher acquisition costs become more valuable to insurers if they have better retention rates."
One of the clearest ways to judge the relative performance of different distribution channels on this key measure is to see what proportion of customers holding a policy through each channel in 2013 were switchers and new buyers, and what proportion were renewals. Grouping all types of distribution channel into eight major categories and as a weighted average of these eight insurance products, financial partners such as banks and building societies had the highest share of renewals at 78.4% of their customers, followed by the worksite (76.8%) and direct sales (76.2%). Financial partners had a high level of retention for products that they package with premium bank accounts or credit cards, such as annual travel or breakdown recovery insurance, but they also performed well for most other products.
These three channels were followed by insurance brokers and financial advisers, not-for-profit affinity groups (e.g. charities and trade unions) and non-financial commercial partners (e.g. automotive associations and supermarkets), which had 70.3%, 68.4% and 67.8% of their customers as renewals, respectively. In contrast, only 41.1% of customers holding a policy in 2013 that was originally bought through an aggregator were renewals, with the equivalent figure being 39.0% for cashback websites. Put another way, and as just one example, the annual retention rates for policies sold directly by insurers are almost twice as high on average as those for aggregators and cashback websites.
"The value of a customer depends on numerous factors, most obviously claims, but also the cost of acquisition, price sensitivity and the ability to cross-sell other policies (such as legal expenses cover with motor and household insurance). Retention rates are an important factor in themselves because a low retention rate pushes up acquisition costs but they can also work as indicators of whether consumers are highly price-sensitive and whether they are likely to buy additional cover. By their nature, aggregator and cashback customers risk reducing profitability for insurers because of these factors – and will certainly be unprofitable if insurers win their business one year then hike up prices the next, sending them back to the internet for a better deal" concludes David Parry.
For more information please visit: http://www.finaccord.com | @Finaccord
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