16 April 2018
28 October 2018
Helps explain how providers of insurance products and services use ‘marketing’ in their activities.
Authored by Daved Sanders in 2017.
- Summary »
- The business »
- Relationships with other functions within the business
- Market and social research undertaken by the marketing function
- SWOT analysis
- Products and services »
- Pricing strategies
- Portfolio management
- The business environment »
- PESTLE analysis
- Planning »
- Developing a strategy
- Types of strategies
- Promotion »
- Key facts »
- References and further reading »
Each day we buy insurance products and services as individuals, families, businesses or organisations. How do providers of these products and services use ‘marketing’ in their activities?
The scope of marketing has been described as ‘the task of creating, promoting, and delivering goods and services to consumers and business’ (Kotler, 2003). That is to say, that marketing is more than a department; it encompasses all of the activities that providers of products and services engage in.
In insurance, some marketing departments focus on activities that help others within the business, as well as on ensuring that users are aware of the benefits the organisation provides. In smaller organisations and one-man businesses, marketing may be the responsibility of one person. Whether carried out by a department or as an individual, marketing plays an important role in helping the organisation to succeed in the marketplace.
This fact file has been divided into five sections:
- The business itself and its internal activities.
- The products and services that the business provides.
- The environment that the business operates in.
- The planning required for the business to deliver products to customers in the environment they are in.
- The promotion of products and services.
- Collateral – sales support and marketing material.
- Focus group – a group of people willing to answer survey questions.
- Marketing mix – a set of variables used in strategy. They are people, price, place, promotion, product, physical evidence and process.
- PESTLE analysis – an analysis of the external factors: political; economic; social; technology; legal; ecological, that have an effect on market participants.
- Primary data – data that is collated directly from respondents to an enquiry such as survey forms, telephone calls or cold calling for new enquiries.
- Secondary data – data that is collated from existing sources, such as a customer database, or published data sources, such as newspapers, journals or company reports.
- SWOT analysis – a tool used to review businesses internally and externally. Strengths and weaknesses represent the business’s internal attributes, while opportunities and threats are the external factors that can affect the business’s activity.
- White label – a product that is provided by a business but sold under another brand name.
Large organisations often have a marketing department that coordinates various activities. In global organisations, regional marketing departments are responsible for activities in local areas, while a central marketing team ensures that there is consistency across the regional departments. An example of a typical organisational structure is shown in Fig 1 below.
For the marketing function to be effective, it will need to work with other functions of the business.
In addition to their relationships with other marketing teams, the marketing function maintains relationships with the following:
The marketing department needs to know what financial resources are available so that it can prepare its budget.
Human resources (HR)
HR can assist the marketing department with sourcing employees who have the necessary skills and experience.
The marketing department helps underwriters to locate a suitable target audience so that they can reach their financial targets. In addition, the marketing department can design new products from its research and the feedback provided by underwriters.
The business should present a positive image of the services its claims department offers to customers when helping them to recover from losses.
When there are peak workload issues, for example following a major incident, the marketing department can communicate with the media through ‘public relationship’ communications.
The marketing department can provide the sales team with leads and support material, or ‘collateral’, to help it gain new customers and achieve its targets.
This collateral needs to be compliant and must be reviewed by the compliance department. Failing to meet such regulatory requirements can not only cause embarrassment to the business, but also lead to fines and material being withdrawn.
The marketing department can contribute to the business’s strategic function by conducting internal reviews and assisting with activities which support business objectives.
The IT department provides necessary hardware and software required by the marketing function. Specialist software used includes lead generation and graphic design.
The business needs an online presence to promote its activities; while the marketing team can provide the design, IT must ensure that the internet presence is running efficiently. In addition, e-commerce software is required to trade products online. IT can assist marketing in planning for online activity.
The high level of interaction that the marketing department has with other teams highlights its important role within the business and effect on all other business functions.
An important activity carried out by the marketing function is finding out information about customers, competitors, and other aspects of the market. There is a five-step process which marketing teams can use to help them decide which research strategy to adopt when issues arise:
- Define the issue or problem clearly – being clear about the issue that needs to be understood will increase the accuracy of the results obtained. For example, if an insurer needs to know whether customers are satisfied with its service, the marketing department should ask whether this issue relates to recent claims, the documentation provided or the way in which insurance is processed.
- Research design – important questions include how can the research be organised to obtain answers to the question originally posed? If the issue relates to claims service, does this cover all types of claims and over what period of time? Is this regionally or globally? What resources can be used?
- Gathering data – this can be done using various methods that are relevant to the research objective. For research relating to claims service, customer feedback is classified as primary data. This means that it has been collected from the original source and not interpreted by a third party. For example, a telephone call made once the claim has been finalised or an online survey form that has been sent to the customer. Potential or existing customers could be gathered together and provide comments from prepared research questions. This would be a focus group.Additional data obtained from other sources is classed as secondary data and would be gathered if it is part of the research design. For example, a business carrying out market research for the development of a new product could collect primary data from existing customers, as well as secondary data from external sources, such as published trade journal reports.
- Data analysis – this requires care to ensure that the data provides the information required to answer the research question. If the data obtained lacks clarity or is old, this may distort the results. Gaps in the data may be present if it is not all available, causing some assumptions to be made which impact the research results.
- Presenting the research – research findings need to be presented in a format that is suitable for the audience. If new information or ideas are being communicated, it is important to consider how best to help the audience make decisions. Some people prefer details to be illustrated through figures, while others will find that a simpler presentation allows them to grasp new concepts more easily. Reports may include tables, as in the Hiscox results for 2016, pictograms, or graphs to assist in explaining the results, illustrated in the Aviva Annual Report 2016.
Reviewing the business itself will help the marketing function with preparing plans for the business activities.
The SWOT analysis is a tool that insurers can use to review the business internally and the market externally. It consists of four factors, covered below, which will influence the insurer’s potential to achieve its business targets.
Strengths and weaknesses are internal factors relating to the business’s people, facilities, systems, funds and resources, while opportunities and threats are external factors which can affect the business’s plans. We will now look at these factors in more detail:
- Strengths – what are the business’s strong points in comparison to its competitors? For example, an insurer with regional offices can have close, secure relationships with its customers and brokers. Alternatively, an insurance broker who has technical staff and expertise in a particular segment of the market may attract customers who require its specialist understanding and knowledge.
- Weaknesses – in which areas do the business’s competitors have an advantage? Conducting research on competitors helps a business to identify its weaknesses. For example, an insurer may have fewer specialist skills than its competitors, limiting the number of opportunities it can exploit across the whole market.
- Opportunities – these refer to areas that a business could exploit. For example, a competitor may be withdrawing from the market, giving the insurer an opportunity to gain new customers quickly. Alternatively, the market may be providing new opportunities itself. This is demonstrated by the recent need for insurers and brokers to offer drone and cyber cover.
- Threats – these may affect business activities and require planning. For example, Brexit is likely to cause changes to international insurance transactions and result in the creation of new legislation on insurance regulation. It will affect global insurers and small brokers in different ways. Another example is new entrants in the insurance sector that make it more competitive by taking a share of the market.
Some weaknesses or threats that are identified could be opportunities for strengthening the business. It is important for businesses to carry out a SWOT analysis on a regular basis to help them achieve the desired results.
Reviewing the internal aspects of the business helps an insurer to recognise that all products have a life and that the income generated depends upon what stage they are in.
All products progress through a life cycle, which features various stages from the product’s development to its decline. A model is shown below.
The four stages are as follows:
- Launch – to begin with, the product has low sales and no profit. Funds are used to make customers aware of the product.
- Growth – at this stage, customers accept and purchase the product. As sales continue to grow, further investment is required to support the product. Profit will increase depending on the growth and investment made.
- Maturity – the product reaches maturity when the sales are no longer growing. This can be caused by a number of reasons. For example, competitors may have been attracted by the sales of the product and decide to enter the market with similar products. This competition makes it more difficult to maintain the sales revenue, necessitating a change in the pricing strategy. In addition, the market may have reached a peak, causing new customers to see if they can buy similar products for a lower price.
- Decline – eventually, the sales revenue falls as a result of new products, pricing or competition. A decision will need to be made over whether to continue with the product or drop it from the portfolio.
There is an option to extend the product’s life by introducing innovations which attract customers back. This can be illustrated by home insurance, which was originally written with limited fire cover. However, as a result of various innovations, home insurance cover has widened over the years to become the product that is available today. It originally included occupiers’ liability cover as an optional extra, but this is now included at no charge, and personal belongings cover has been added as an option.
Some home insurers now provide emergency facility cover for plumbing, drainage or the breakdown of appliances.
The price charged will affect the revenue generated in line with the business strategy.
A number of factors affect pricing. These include business objectives, market, customers, and business environment, as shown in the diagram below.
- Business objectives – When a business launches a new product, it often adopts a sales maximisation strategy in order to capture a share of the market as quickly as possible. When the product achieves the required target sales volume, the business will change its pricing strategy to profit maximisation by increasing the product’s price. This helps the business to gain the best return on its investment in the product.
- Market - In competitive markets, using a profit maximisation strategy can be a challenge as competitors look to win customers who are more price sensitive. New entrants may enter the sector and seek to capture a share of the market by adopting a sales maximisation strategy. Maintaining market share by using a profit maximisation strategy is difficult in a soft market, when there is a high level of competition, and often businesses adopt the alternative survival pricing strategy to retain customers. This strategy remains flexible allowing the business to maximise its profit without losing market share.
- Customers - In contrast, some companies adopt a prestige pricing strategy to give their products an elitist image, which can be supported by the company’s brand and position in the market. For example, an insurer may offer a wide cover and service, which satisfies customers who prioritise these features above price. High net worth customers are more likely to consider cover and service above price in their decisions.
- Business environment – In the UK, Insurance Premium Tax was introduced in 1994 and applies to UK insurance policies. The current standard rate is 12% , with a higher rate tax applying to travel insurance. This increases the price paid for the insurance and may restrict the sales of insurance products.
The resources required for market support of a product or service provided to customers depend on the product or service’s return on investment.
Businesses have a portfolio of products and services in different markets with varying growth rates. With a finite limit on resources, not all products receive the same level of support. Insurers and brokers continue to adjust their investments in different products in the market to achieve their objectives. The Boston Consulting Group (BCG) Matrix has been designed to help businesses decide how to invest in their portfolios and assist with future planning. It is demonstrated below.
The BCG Matrix shows the two variables affecting the success of products: rate of growth in a market and the market share. The circles plotted in the matrix represent different products, while the quadrants show the four types of product classifications. The market growth rate shows the sales of these products over a period of time, such as two years, while the market share compares their share in the market to that of their largest competitors.
Cash cows are products where there is little growth and the business has a significant share of the market. This requires limited investment to sustain its position. Stars are products that have a sizeable share of a growing market. Investment is required to keep a star’s position and provide a good return on investment.
Question marks are products where the market is growing but the business has not been able to take advantage of the opportunity presented by market growth. For example, it may be that the product is no longer competitive and the market remains stable with strong competitors defending their position. A decision regarding the future of the product and what strategy is to be adopted needs to be made. Products that are a drain on resources and have limited market share, such as those in the Dogs quadrant, may be dropped from a portfolio.
Products A, B and C provide an example of how the BCG Matrix can be used. An insurance broker has a restaurant scheme, which is identified as product C, and also provides personal accident insurance, shown as product A, and motor insurance, represented by product B. The different sizes of the circles demonstrate the proportions of the broker’s income that these products make up. The matrix helps the broker to see where there is a need for financial investment.
We can see from the matrix that product C (restaurant scheme) is the largest of the three circles and makes up a significant portion of the broker’s income. The broker recently purchased the business of a competitor with a similar restaurant scheme and now has a higher market share than its competitors; this is reflected by the movement of product C over the two-year period from its position between quadrants to the cash cow quadrant. The market for product C is relatively static and so it does not require a lot of investment to maintain its position.
In contrast, while product A (personal accident insurance) was gaining market share, it needs significant cash to support its position. New entrants are entering the market who are selling similar products; this is causing product A to move to the question marks quadrant. Product A’s share has fallen when compared to that of the largest competitors, prompting the broker to question whether it should continue to invest in it.
Product B (motor insurance) requires a high level of financial support and has a low share of the market compared to the largest competitor. It has remained in the same position over the two-year period and continued investment has only supported its position.
Within the portfolio will be a wide variety of customers classified as below.
Buyers of insurance can be classified as a business customer or personal customer. These customers demonstrate different buying behaviours which are discussed in the following table.
Those who are growing their business not only look for the best price but also for advice on how to manage their risks. In addition to insurance policies and risk management, other services they may require include disaster recovery or business continuity plans with the help of risk managers.
Businesses may change their activities during the year to take advantage of opportunities and need advice on how to protect themselves. For example, they could acquire another business or expand into other countries.
Small businesses, such as offices or shops, may be able to buy a package which provides the necessary covers.
These customers typically look for protection for their home, possessions and vehicles. Such products are marketed as commodities and the customer’s decision is usually based on price.
High net worth customers seek insurance that provides flexibility with a wide scope for valuable possessions, such as car collections or jewelry.
There are other types of organisations which adopt different buying behaviours. For example, agricultural businesses engage in a variety of activities and many are now expanding into other areas. Not-for-profit organisations, such as charities, clubs and sports associations, require specialist cover to be written for particular risks.
Before carrying out customer research on new customers, careful consideration is needed on the type of customer the business is looking to attract. The customer database and its profile will change over time as new customers are obtained and existing customers leave the business. The business can obtain a better understanding of its customers by using a segmentation process as part of its research.
Having categorized customers, they can then be grouped according to various criteria, allowing the business to make efficient use of its resources. The process of segmentation can help with this.
Segmentation is the process of dividing the market or customer database into portions of customers with similar identifiable characteristics; for example, age, occupation, trade classification, and buying behaviour. Segmentation helps marketing to be more targeted and resources to be used more efficiently. There is a six-step segmentation process that insurers can use to identify target customers:
- Choose the market – this could be a new market, the existing customer base or a combination of both.
- Consider the customer profile – for example, this may be young drivers with high performance vehicles and poor driving records who require motor insurance or building trade customers who purchase insurance through brokers.
- Define customer groups – research helps the insurer to identify the number and buying potential of the defined market. For the above examples, the young drivers may be refined to those who do not live in the city, have limited cover and carry out transactions directly with the insurer. Meanwhile, the building trade customers may be defined as house builders who have not made any claims in a specific period, are constructing new domestic properties only and have a turnover above a specific level.
- Select which segment to target – continuing the above examples, the insurer may have a choice regarding the order in which it will focus on the different segments. The house builders may have experienced a fall in the number of new homes being built, but expect this to change in the following year. However, if motor insurers are no longer writing motor insurance for the young drivers, a growing need and market for this risk will be arising that the insurer could capitalise on now. The insurer may decide that attention can be given to the building trade customers later.
- Decide which variables to use – these are price, place, promotion, product, people, physical evidence and process.With regards to the motor insurance product being provided to young drivers, aspects to consider when calculating the price include its underwriting factors, whether it is transacted directly, the extent of its promotion on social media and online, and whether the product has been designed to include certain terms and conditions for specific young drivers. Skilled underwriters will be required as a variety of factors affect the premium; a telematics black box may provide physical evidence. The process could be automated online as this will reduce costs and is a preferred method of communication for young people. In contrast, the prices offered to the house builders are likely to be competitive as other insurers will compete with the existing insurer. The builders transact their insurance through brokers, so it is important that the insurer maintains this relationship to win business. The product may be promoted through brokers as well, for example at seminars. The product is bespoke for the house builders, and includes various no claim benefits to refund part premiums for the builders’ loyalty and good claims records. People involvement includes site visits and health and safety inspections, in addition to underwriting employees. Physical evidence of the company can be provided through documentation, brochures and promotional items, such as umbrellas. The process is likely to be more labour intensive with surveys, underwriters and brokers involved in the relationship.
- Monitor the segments – as the customer base and markets change over time, the segmentation process should be reviewed. This will ensure that the insurer continues to focus on obtaining and retaining customers, both of which are necessary to achieving the marketing objective.
Having looked at the business and its customers, the next aspect to review is the marketplace in which the business operates.
Businesses operate in a market with a variety of other participants competing against them. The market will have various other influences as well which affect the behaviours of all who operate in it.
PESTLE, standing for Political, Economic, Social, Technological, Legal and Environmental, analysis can be used to review various external factors, outlined in the following table, that have an effect on all participants in the market.
The stability of a government and its policies can affect the supply and demand of insurance products and services. Governments may wish to influence their country’s economic growth and boost their investment in various industries. For example, increased investment in a country’s infrastructure will stimulate demand for construction material and contract labour. This provides potential for a demand in insurance for contractors and construction industry suppliers.
In a recession, people are more likely to retain their incomes rather than spend on insurance products, and usually seek lower priced products that provide essential cover. Policy wordings could change to meet this demand for restrictive cover, increasing the costs of sales and administration. This will affect the services required to process sales efficiently. Retailers may cease to trade due to a lack of sales, reducing the market size.
Increasingly people are making choices that are influenced by social media. Users may use this channel to convey opinions of their experiences or even express their complaints.
People are becoming more leisure conscious and engage in leisure and sport activities either as participants or spectators. This presents opportunities to insurers to provide club schemes, in addition to insurance for sports and leisure industry businesses.
Technology has a major influence on customers’ buying behaviours. For example, they can use aggregators to choose between a variety of products, helping them to bypass intermediaries. Products can be bought through smartphones and claims can be submitted on apps. Dashboard cameras allow motorists to record their driving and contribute to fraud prevention. Developments in technology increase the requirement for insurers to invest in IT.
In addition, customers are spending more on technology products. This increases the value of personal possessions in their homes and affects their insurance policies.
Legislation and regulation
A variety of laws and regulations is required for the sale of products and services, as well as the internal operations of businesses. In the UK, the Financial Conduct Authority (FCA) regulates insurers and brokers. Insurers are also regulated by the Prudential Regulation Authority (PRA). The Privacy and Electronic Communications Regulations (PECR) 2003 gives rules on communication with customers.
The Data Protection Act (DPA) 1998, due to be replaced by the General Data Protection Regulation from 25 May 2018, is an example of a law that affects insurers’ activities. The DPA states how data can be collected and used. The Insurance Act 2015 has recently been introduced and is having a major impact on the insurance industry. The Equality Act 2010 affects underwriting by rendering discrimination illegal.
Customers are concerned and take an active role in the environment. Both insurers and customers can send documents electronically to save time, reduce stationery costs and protect the environment.
Businesses operate in a market with other businesses that provide similar services. In addition, other businesses may enter the market as new competitors. Each business will adopt a different strategy dependent upon their objective.
Michael Porter devised the Porter’s Five Forces model on competition in order to help our understanding of forces in a market.
The Porter’s model shows the forces at work in a market:
- Competitive rivalry – centrally, there are numerous factors that can increase the size and power of rival competitors. These include growth in the industry, differentiation between products, high fixed costs, the rate of capacity, high exit barriers and diverse competitor strategies.
- Threat of new entrants – new brands may be attracted to the market and pose a threat to existing competitors. Potential barriers to their entry include economies of scale, product differentiation, capital requirements, cost advantages, access to distribution channels and government policy.
- Threat of substitution – There is a limited threat of substitution to insurance markets. Financial derivatives form an example of a potential substitute for larger insurance organisations.
- Power of audiences – customers can influence the pricing of products, particularly when they are grouped together, for example, as affinity schemes.
- Power of suppliers – the concentration of suppliers impacts competition in the market. Where there are fewer suppliers, they have more control on prices causing them to rise. Where there are more suppliers, prices are likely to fall.
Insurers can be rival competitors when they act as suppliers to brokers or customers to a reinsurance broker. The extent to which such competition affects the insurance cycle depends on the number of participants in the market.
Competitors behave differently according to whether they use an active or passive strategy. They can be classified into the following categories depending on the strategy they use:
- Prospectors – pursue growth through the development of new products, as seen in the early stages of a product life cycle. Their aim is to gain market share quickly.
- Defenders – want to maintain their share of the market by focusing on service quality or lower pricing.
- Analysers – not only want to maintain market share, but also seek to enter other markets with new products. For example, a personal lines insurer which maintains its market share, but is now entering the commercial market.
- Reactors – have no particular strategy, but instead react to market pressures and follow the market.
The supply and demand of insurance products and services influence the market by causing it to move in cycles between a soft and hard market. In a soft market, there is surplus capacity, a high number of suppliers and falling prices. The high level of competition causes losses to increase, resulting in suppliers exiting the market and it becoming hard. As the number of suppliers reduces, the power of those remaining grows because they can attract new entrants by increasing prices and profitability. These conditions attract other suppliers to the market, causing prices to fall and the market to become soft again.
Who is the competition?
Just as marketing research can be carried out on customers, insurers can use the same research processes to learn more about their competitors’ objectives and determine the strategies they are adopting. How competitors are identified depends on the market the business is entering or engaged in.
By regularly monitoring markets, insurers can see where new players are entering and others are leaving. Competitors may change their activities if they alter their strategies or business objectives throughout the year. Competitor intelligence can be gathered by reading trade journals, company websites and annuals reports, as well as by attending trade shows and talking to others who are engaged in the market.
To achieve its objective, a business must decide how it will use its resources efficiently, taking into consideration the market and competition. This will need to be planned using other business functions to support its activities.
Once the business has assessed its environment, it can determine the strategy it will use to market and deliver products to customers in the environment that it is in.
When developing a strategy, the first question a business should ask is where it wants to be in five years time. The agreed goal could be based on premium income, market share, the number of customers or any other defined target. It will be decided by the business’s senior management, with smaller goals set as targets to be achieved throughout the period. For example, the overall five-year goal may be to increase premium income by 100%, while the smaller goals define what is to be achieved in the next twelve months. Progress is monitored on a regular basis, usually monthly or quarterly.
The objectives should be SMART – short, measurable, achievable, realistic and within a timescale. A number of variables can be used to achieve the objectives, which comprise the marketing mix. The following table looks at each variable in turn.
Does the existing product meet customer needs or should a new product be developed? Could the existing product be offered to new markets? Where does the product fit within the portfolio of products? At what stage is the product in its life?
Prices set for products and services may require adjustment. For example, an insurer which achieves profitability may find that its sales revenue is not on target. It will need to consider if the pricing can be adjusted to attract more customers, even though this may affect profitability in the short term. Before an insurer decides to increase its pricing, it should analyse whether it will face more pressure from competitors as a result.
The promotion of products and services may be carried out through advertising, sponsorship or public relations. The aim of promotion is often to attract new customers or to sell additional products to existing sellers, which is known as cross-selling.
Questions to be asked include what the content and style of the message provided will be and what type of media will be used. If the insurer has finite resources, the promotion must provide a return on investment to demonstrate its effectiveness; the insurer needs to decide on the measures it will use to do this.
Place refers to the method used to provide the product or service to the customer; this process may be carried out through a variety of distribution channels. If customers visit the premises, how will employees support the brand and what image will they give to customers of the business? Recently, there has been a trend to purchase products online. This may require a reduction in offices so that the insurer can reduce costs and remain competitive.
The chain of events through which products and services are provided to customers. For example, how easy is it for a customer to renew their standard motor insurance policy? Does the process being used meet the claims of customers at the same time as preventing fraud?
People are important in providing insurance, so the business should make sure that its employees have the qualifications and experience needed to service customers. Various skills may be required to provide the right service: specialist technical knowledge is necessary for more complex or niche risks, while business operations skills are needed for IT equipment. Other specialist skills are necessary for human resources and marketing as well. Development programs should be designed to help employees advance their career and update their skills, so that they can acquire professional qualifications.
Some businesses outsource certain skills when it is not cost effective to retain them in-house. For example, IT skills, such as software maintenance, are frequently outsourced. The insurer should consider the effect that outsourcing various activities will have on customers.
Customers find it more difficult to make judgments on intangible products, such as insurance, than on tangible products. By providing some physical evidence of the product, a customer can associate this with the insurance product. Examples of physical evidence include the quality of the paper used in the document itself or promotional items, such as a key ring for motor insurance.
Now that we have seen how strategies can be developed, we will look at some of the different types of marketing strategies that may be adopted.
Designed by Igor Ansoff, the Ansoff Matrix is a strategic tool to help businesses devise strategies for future planning.
Businesses can use the Ansoff Matrix to select the growth state that will assist them in meeting their objectives. The Matrix demonstrates that the focus for current products can be placed on their penetration of existing markets or development for new markets. Meanwhile, new products can be developed for the current market or diversified for new markets. This is shown below.
We will now look at the growth states in more detail:
- Market penetration – a technique used to gain a share in an existing market. For example, an insurance broker may develop a scheme for classic motorcars to win more customers. An insurer who launches a new personal accident product will have the objective of capturing market share and so focus on sales revenue.
- Market development – this is used when an existing product is being introduced to new markets. It can be identified as an opportunity through a SWOT analysis. In a soft market, underwriters often widen their scope by insuring risks they had not previously considered. This may be because the market they were writing has reduced or they now have more capacity to write risks. For example, a professional indemnity underwriter who typically writes cover for accountants, architects and surveyors may widen its scope to provide cover for fitness professionals who have been given the wrong advice on how to perform an exercise and received an injury as a result. Alternatively, an insurer which writes personal accident insurance may expand its product by selling to new markets abroad.
- Product development – in order to remain competitive, an insurer can improve its product for the existing market. The product may not have been reviewed for some time and other insurers may be using better policy wording which is enabling them to take market share. Such improvements lead to the extension of the product life cycle. The insurer could widen its cover to include insurance which previously had to be purchased as an additional product. For example, an insurer that writes professional indemnity insurance may develop this to include other risks, such as liability insurance and damage cover for office equipment. This improvement makes the product distinct from the rest of the market. Product design can result from previous research on customers’ needs and competitors’ behaviours.
- Diversification – businesses may seek to grow by exploring new opportunities for their products and the market. They may choose to do this after conducting research into the potential opportunities of existing resources. For example, a private car insurer may decide to provide van insurance. Although its underwriters must use different statistical data, they have the skills to write motor insurance and can use the same distribution method and processes to produce documentation. An insurance broker may acquire a firm of independent financial advisors, opening up a new market and range of services. This move presents a market development opportunity as each business can cross sell to each other.
Porter’s Generic Strategies
When the business has completed its segmentation of the market or customer base, there are various strategies it can adopt to provide products and services to capture this segment.
Michael Porter’s Generic Strategies, summarised below, suggests that a company with either a broad (industry wide) or narrow (specific segment) target scope can use one of four strategies depending on whether it bases its competitive advantage on the low cost or uniqueness of its product or service.
The four strategies shown are as follows:
- Low cost undifferentiated – used for targeting a wide audience with a standard basic product when the competitive advantage is price. Larger organisations can offer low costs by using economies of scale. For example, the selection factor of a basic home insurance product may be its low price.
- Unfocussed differential – these strategies encourage the customer to consider factors that are unique to the business. When targeted at a wide audience, the attention is moved away from price. For example, a motor insurance provider could advertise that its cover is not available on an aggregator website or through an insurance broker, so that it can attract a wide audience with factors that are valued by customers.
- Low-cost focused – businesses selling to narrow or wide audiences may target specific customer segments in areas where they have expertise. Cost still influences the buying decisions of customers in these targeted segments. Farm insurance is an example of a specific segment of commercial insurance which requires insurers to have specialist knowledge. The market is clearly defined and identifiable, but price remains important as farms are commercial enterprises.
- Focus differentiated – these strategies are also used for targeted segments where expertise is required. The deciding factor for such customers is not price, but the value of the unique service provided by the business which helps them to differentiate the product from others. For example, wealthy customers prioritise service over price and therefore value the added concierge services provided with certain insurance policies.
A business’s decision over which strategy to adopt will be based on its skills and expertise. It must also assess what resources are available and the image that it projects to customers. Strategies need to be monitored and revised according to the changes in the market and the customer base.
To help with delivering the products, the customers need to be aware of the products and how they can help meet their needs. This can be done through the activity of promotion.
We previously saw that promotion is a tool in the marketing mix that businesses can use to carry out their strategies. The other six tools are price, product, place, people, process and physical evidence. Promotion refers to all the activities a business engages in to communicate with its customers, such as sales promotion offers, public relations, direct marketing, selling, advertising and online blogs.
When communicating with new customers, promotional activities focus on making them aware that the product is available. Customers need to understand what the product is and be encouraged to want it. While this process is occurring, the business must compete against the ‘noise’ or distractions which the customer will encounter from other businesses that also want to promote their products to the customer.
There are a wide variety of mediums available for communicating with customers; choosing which one to use depends on the message that is being provided and the promotion budget. TV advertising can reach a wide audience and is used by aggregators for this reason. However, audience size varies according to the time of the transmission. The costs of producing and distributing it also need to be considered.
The medium choice for reaching commercial customers could be trade conferences or personal visits to their premises. Telephone cold calling is often used as the first step for gaining the interest of business customers.
Direct mailing may be more effective for existing customers as it builds a relationship with them and can be used to promote other products. For example, customers with motor insurance could be targeted for home insurance. This helps to generate loyalty to the brand.
Public relations allow businesses to promote customers’ awareness of their services and add value to their brand. For example, a business could sponsor a local sports event so that it can promote its brand message to the local community. This is a low cost way of reaching a smaller audience. In comparison, sponsoring a major league football team reaches a bigger audience, but at a greater cost.
Public relations do not increase the business’s revenue immediately, but do create brand awareness in customers. They can support other promotional activities as customers are more likely to choose a brand they are familiar with, for example when picking a product on an aggregator website.
Public relations can also protect the business’s brand at times when the media are portraying a negative message. For example, if a large number of claims are being made for severe storm damage, the news media may argue that an insurer is not supporting their customers. This has a negative impact on the brand and some customers may then choose to place their insurance with another insurer, even though they have not suffered from the storm damage. Public relations can help the business to provide a positive message by giving information to the news media on how the insurer is supporting their customers. Communicating to customers who are experiencing delays what the insurer is doing to support them may make them more likely to accept this message.
Customers are quick to express their feelings online through company blogs or other social media messaging services such as Twitter. These need to be monitored, as customers will be looking to see how the business responds to their comments.
To promote their products to a wide audience an insurer may choose another option.
A popular retailer may recognise the value of extending its brand by selling insurance products that are underwritten by insurers through its own brand; this is known as white-labeling. Usually, the insurer has developed appropriate systems and will tailor these to the retailer’s customers. This can be advantageous for the retailer because it is not involved in the development of the insurance products and does not have to pay set-up costs. Selling white-label products provides the retailer with an opportunity to extend its brand to other products quickly and maintain brand awareness with customers. The insurer benefits from the increased sales that the retailer’s distribution provides, while the retailer is paid a commission for each sale. An example of white-labeled insurance products would be the personal lines offered by uk general.
- Marketing is more than a department; it encompasses all the activities that providers of products and services engage in.
- The SWOT analysis is a key tool that insurers can use to review the internal and external factors that will influence the business’s ability to achieve its targets.
- The business can choose from a variety of pricing strategies and portfolio management styles depending on its product’s stage in the life cycle.
- Segmentation is the process of dividing customers into portions with similar identifiable characteristics in order to make marketing more targeted.
- Businesses operate in a market with a variety of other participants competing against them; research can help them to learn more about their competitors’ objectives and determine the strategies they are adopting.
- Businesses can plan what strategy they will use to market and deliver products to customers by using, for example, the Ansoff Matrix or Porter’s Generic Strategies.
- Promotion refers to all the activities a business engages in to communicate with its customers and can be used by businesses to carry out their strategies.
- Data Protection Act 1998
- Equality Act 2010
- Insurance Act 2015
- Insurance Premium Tax: guide for insurers
- Privacy and Electronic Communications Regulations (PECR) 2003
- Ansoff, I. (1957). Strategies for diversification. Cambridge, MA: Harvard Business Review, Vol. 35.5, pp. 113-124
- Annual Report 2016 (2017). London: Aviva. Available online at https://www.aviva.com/reports/2016ar/. [Accessed 23 Aug 2017].
- Hiscox Ltd full year results (2017). London: Hiscox. Available online at http://www.hiscoxgroup.com/~/media/Files/H/Hiscox/results-centre/2017/hiscox-2016-preliminary-results-pr.pdf. [Accessed 23 Aug 2017].
- uk general. White-labelling. Leeds: uk general. Available at: https://ukgeneral.com/white-labelling [Accessed: 23 Aug 2017].
- Dibb, S., Simkin, L., Prodce, W. and Ferrell, O. (2006). Marketing concepts and strategies. Boston: Houghton Mifflin.*
- Egan, J. (2004). Relationship marketing. Harlow: Pearson Education.
- Kotler, P. (2003). Marketing Management. 11th ed. New Jersey: Pearson Education.*
- Stephenson, R. (2005). Marketing planning for financial services. Aldershot: Gower Publishing.*
- Wicks, B. (2017). Marketing insurance products and services. [945 study text] London: The Chartered Insurance Institute.*
- Ugwumadu, J. 2017. Broking success: Richard Salt, Bell & Co. Insurance Age [Online] 27 Jan 2017. Available at https://www.insuranceage.co.uk/insurance-age/opinion/2480863/broking-success-richard-salt-bell-co [Accessed: 23 August 2017].
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.