One of the major trends of the last five years has been the emergence and rapid growth of challenger banks in the retail and corporate banking space. Led by the likes of Monzo and Starling, their technology-centric approach has helped these digital-only challenger banks carve out a significant market share, especially amongst those under the age of 40.
Other markets have also begun to see transformational change, from the provision of mortgages to alternative funding arrangements for loans by companies such as Zopa. It’s interesting then that another major financial market has been slow to attract challenger companies in its space, namely the general insurance market.
My fascination with the slow emergence of challenger brands in the insurance market is the sheer breadth of the market for ideation. If we’re to look at some of the most common types of general insurance: motor, health, travel, home and (increasingly) device insurance we can see how varied and interesting the market is for innovative thinking. So why is this space stagnant in comparison to the current account market?
The first reason is (ironically) hard to quantify: the culture of the insurance industry is one of opaqueness and generally not responsive to vast amounts of change, which by its nature discourages a level of openness and innovation from new players who are looking for a low barrier to entry. As an industry whose bedrock is in analysing risk exposure, you can easily argue that by its very nature general insurance is going to be one of the sectors most averse to unstable start-ups from a cultural perspective.
The second one, I believe, is that the space is far more challenging and cost intensive to enter than that of the current account market. From writing complex AI algorithms to analyse risk exposure, to constantly updating legal documents to comply with the regulator, whilst also ensuring that customers - often stressed and upset - have their claims dealt with quickly, fairly and with compassion. It’s an expensive business to get into. Although by no means a simple space to enter, the online-only current account market certainly offers far more certainty and less risk to investors than those entering the general insurance space.
Two other things should not go unnoticed either. Firstly, I think there is a temptation to look at insurance policies as a ‘necessary’ purchase and therefore there’s less motivation in the market to upset the status quo of the current ‘way’ of business. But I think this is somewhat wide of the mark, with the other factors explained here far more likely to be impacting the relatively stagnant arrival of new players.
Secondly, the market has arguably already experienced a significant revolution in relatively recent times, with market comparison tools upending the insurance market and forcing companies to compete primarily on price but also via policy add-ons and benefits. This is an additional complexity to the CX of insurance purchases which already exists in the current account space but is far less prevalent than in the general insurance market.
If we are to look at the way in which pricing comparison sites (PCSs) have managed to upend the insurance market, we can certainly see that there are significant opportunities in this space for novel approaches to garner customer attention and build a solid challenger brand. In fact, despite there being less disruption than the current account market, there are some trends and innovations which are starting to move the needle that could predict how true challenger insurance brands could emerge in the coming years.
The gamification model is one that has become increasingly popular among many industries, from eCommerce to travel and back again. At first, gamifying your CX feels a strange fit for insurance, which often deals with stressful and tense moments in customers’ lives. However, because of the risk management nature of insurance as a business, incentivising customers to encourage positive behaviours which minimise your risk exposure as a business is a match made in heaven.
Interestingly, the mechanics of this have already been in place in certain insurance markets for a while. For example, the car insurance industry in the UK has used tracking devices to give additional ‘points’ to customers to drive down their insurance premium. This has been in place for over a decade, and it doesn’t take much imagination to see an Insurtech firm coming to market to truly gamify this experience via an accessible, modern, and fun user interface (UI) to attract a new generation of drivers.
Similarly, Vitality health insurance has ridden the wave of adoption of wearable health devices to gamify their health insurance offering. Through offering instant rewards, such as coffee vouchers, as well as lowering insurance premiums based on users reaching certain fitness milestones, Vitality has gamified an insurance model that improves users’ lives, whilst also minimising their risk exposure as a business. As these examples show, it would come as no surprise to see challenger brands enter the market in this way to help drive business whilst also offering customers a novel and fun experience.
One of the successful qualities that challengers such as Monzo and Starling have made in the current account space has been putting the users’ needs at the centre of their business. By implementing features like the categorisation of daily spending, simple overdrafts, and free card usage in foreign countries into current accounts, these challengers have helped prioritise users’ financial wellbeing in relation to their current account. In a similar way that focusing on customers’ financial wellbeing is a massive opportunity for those in the banking space, it’s similarly an opportunity for those in the wider financial services industry as well, including general insurance.
When we consider the stressful circumstances in which insurance claims are made, it’s easy to argue that the single greatest differentiator that a challenger insurance brand could implement is a fair and fast claims process that rewards customers for making genuine claims by getting money into their hands as fast as possible to reduce their distress. Lemonade, one of the few true challenger brands in the insurance market, has already identified this with its AI-driven claims decision system which pays out to claimants in as little as 3 seconds. They have understood that ‘instant everything’ is key to their capturing the attention of customers who expect their services to be near instantaneous in an industry that often operates in weeks rather than minutes. Doing this whilst also investing in social causes makes Lemonade stand out as a challenger that is rapidly encroaching on the traditional insurance providers.
Although third party tools and services such as price comparison sites and advice sites like Which? or Money Saving Expert have helped demystify many of the insurance companies’ doublespeak, many insurance providers have been resistant to simplifying their language to help improve their customer experience. This erodes trust and, coupled with lengthy sign-up processes and drawn-out claims, only exacerbates the feeling that customers are being tricked into agreements they don’t really understand. You need look no further than the PPI mis-selling scandal for evidence of this.
Product transparency and simplifying complexity has been identified by one of the Big Four accounting firms, KPMG, who see product simplification being the ‘endgame’ of improving the customer experience for insurance providers facing an uphill battle in earning the trust of their customers.
Simplification is something that the most popular of consumer challenger banks have done excellently. The steps it takes to open a Monzo account, for example, feel far less arduous than that of a major high street bank by using clean and clear UI and simple language which is easy to understand and digest. It’s arguable that this approach is even more important for a product that is often far more complex, with larger ramifications for misunderstanding at the purchase stage. A general insurance provider which takes this CX and brand approach will give themselves a significant leg up on their competition by building trust and loyalty with their customers through being open and honest with the limitations of cover.
I guess then that the question remains, is the opaqueness and risk averse nature of the insurance market really stopping new competitors from coming to market? I think the evidence suggests that this must be the case. It is one that is fraught with legal complications and risk. But, as providers like Lemonade have shown, it’s entirely possible that new entrants can come to market and offer a fresh new alternative whilst working around those barriers to entry. I do think that it’s very interesting that Lemonade has seen a far slower roll out – first state-by-state in the USA, followed by country-by-country in the EU – when compared to challenger retail banks. It may be that our general expectations on the speed of roll out from these challengers will not match up to the operational and legal realities of setting up an insurance firm across many different municipalities. But it goes without saying that those who get to market first will have a far greater competitive advantage over their rival peers.
However, despite these hurdles, the makings of an exciting challenger space are certainly present in the general insurance market. The business model is surprisingly tacit to these more novel approaches to CX in comparison to the archaic model currently present in most insurance providers.
The fact large insurers such as Vitality are looking at gamification as a solid way to drive business, whilst also benefiting their customers, gives an excellent example of where the industry could be going. But there is so much more untapped potential, as companies such as Lemonade are already demonstrating in the USA and Europe. By focusing on the wellbeing of customers and having a CX approach dedicated to prioritising their emotions and needs, there are exciting business models to be found. Capitalising on this gap in the market will only help propel a daring insurance provider ahead of their competition.
