Direct distribution of general insurance products has reached maturity in the UK after only about five years as a major force in the market.
The boom of the mid 1990s which has seen direct capture 40 per cent of the general insurance market has dissipated and a period of low margins and consolidation has quickly followed.
Players are dropping from the market in droves while consumers are suffering from what marketers call “direct marketing fatigue”.
According to Norwich Union Direct marketing manager Andrew Jackson, the market has shrunk from 25 players at its peak in 1995 to about 10. As an industry, the direct car insurance market lost close to the equivalent of $4 billion in 1997 and hasn’t bounced back quickly.
A price war is keeping margins low and customer loyalty is almost non-existent.
“In the UK, the customer has all the power. We have seen customers desert their insurer for five quid,” Admiral marketing manager Kate Armstrong told the recent Next Direct conference in Sydney.
Not only have product providers exited the market, but there has been a spate of acquisitions as margins continue to be squeezed.
Also speaking at Next Direct, Jackson said UK product providers are finding it is costing more to win over a customer as they are bombarded with direct marketing from competitors.
While response to direct marketing is waning, direct mailings are increasing. Jackson said UK consumers receive 3.2 mailings per week on average compared with two in 1995.
Product providers have spent millions of dollars acquiring databases. For example Norwich Direct has spent about $60 million a year to build up a database of about four million people within four years. However, the company is finding consumer fatigue affects the ability of the company to cross-sell to its database.
“The more you use your database, the less it will respond,” he said.
Jackson says it is imperative to market the company’s other products to customers within two years of the consumer making their first purchase.
“Start cross-selling before the honeymoon is over,” he says.
As the market continues to mature, cross-selling is becoming an increasingly important part of the business. Companies struggling to break-even in particular product lines are looking to cross-selling to keep their heads above water.
Another UK direct distributor of insurance, Admiral Insurance Services, have managed to keep profits to a reasonable level while those around have
Marketing manager Kate Armstrong describes the direct car insurance market in the UK as a “loss leader” and claims the only profits being extracted are through cross-selling.
She says Admiral has used niche marketing combined with keeping an eye on costs to survive the intense competition.
“We don’t want to be the biggest, we want to be the most profitable,” she says.
Niche marketing for Admiral means targeting the high premium-paying customers. The demograph is young, living in the inner city and driving big cars.
They are high risk but must pay high premiums for insurance.
“There is no such thing as a bad risk, there is only bad pricing,” Armstrong says.
