The UK retail protection market is characterised by relatively low customer engagement, with most purchases driven by life-stage triggers such as marriage, property or childbirth, rather than concern about the risk of personal illness or death.
With consumer perception of a strong social safety net in place in the form of the NHS and other state welfare, insurance is not a top of mind concern for most consumers, and perceived affordability or consumer’s willingness to pay is therefore a key factor driving consumer attitudes to protection insurance purchase.
When it comes to purchase, given the absence of a default group channel which dominates markets like Australia (via pensions), consumer demand for insurance is mostly channelled via retail advisers.
Like end customers, retail advisers also see price as the dominant driver in protection, particularly for products such as term life. NMG’s UK Retail Protection Study for 2017-2018 indicated that advisers place ~85% of term life policies with the cheapest quote, and as shown in today’s chart, price is cited by advisors as the most important factor driving provider selection for new business, ranked before product features, technology and operational aspects.
Scores out of 10
Source: NMG UK Retail Protection Study 2017-18
The demand for low pricing has shaped supply dynamics, with increasing numbers of participants competing on price. Top-tier providers including L&G, Aviva, and Royal London all use price as a primary lever to gain share-of-wallet from advisors.
While price strategies have become more common, they can be a risky strategy if price is the only real plank in positioning. There may be nothing to fall back on if price differentials are eroded by rising costs, competitor action, increasing return on capital requirement etc.
As a result, price strategies are only reliable for providers with significant scale benefits and maximised cost efficiencies which can do all of:
• Maintain pricing in the bottom quartile amongst competitors
• Keep unit costs low while offering decent commission terms to advisers
• Derive decent profit margins
For niche players which do not enjoy scale, a price strategy can only be justified via an unrelenting journey of cost-cutting and accepting lower returns. The outcome would still be highly uncertain given that the dominant insurers in the market lead on price and would be likely to respond to any niche challenger making progress.
So is there scope left for providers to differentiate on non-price factors rather than price and build a profitable business of some size?
We believe the answer is yes. A few second-tier providers with differentiated non-price propositions have already seen significant market share increases over the last three years, including Vitality as a value player with its wellness focus and AIG’s streamlined approach in operational service.
As shown in the chart, while price remains the top success factor, attractiveness of product features and speed/quality of underwriting are also important, as is digital functionality and operational service supporting adviser efficiency. These non-price factors provide scope for second-tier and niche providers to identify profitable growth opportunities.
However in a highly competitive market such as the UK, non-price differentiation can only translate to scale if supported by a highly targeted distribution approach. For example, remote online or phone-based intermediaries are better supported by a streamlined underwriting process and slick digital journey to keep transaction costs low, providing a justification for a higher premium quoted to end customers.
Most significant protection competitors are also part of large diversified financial service providers aiming to win and retain customers throughout their lifecycle, from workplace pension to retirement income.
For these providers, there is potential to think broadly about protection and wealth rather than positioning category by category in a largely unconnected (and sometime conflicting) manner, which is the most common current model. An alternative may be to take a more holistic approach, leveraging and migrating aspects of a value-based differentiation in wealth to create broader or more premium brand perception in protection with the goal of driving further growth and / or improve retention at an overall customer view.
For more information, contact:
Andrew Baker, Partner (London; email@example.com)