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MP65138

MAPS TELEFINANCIAL SERVICES 1998

Overview

Table of Contents

Executive Summary

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EXECUTIVE SUMMARY

Although the telephone has been an integral part of the selling process for a long time, it was the arrival of the direct writers in the insurance industry some ten years ago, which really changed the market place. They have capitalised on the concerns of customers about the amount of money, which goes on commission. By ‘cutting out the middle man’, they are able to offer a lower cost service. There has also been streamlining of the sales process; meaning a speedier, more efficient service, with faster underwriting. All these features have made traditional insurers take notice and now many offer competing services.

The general insurance market follows a cycle of competition-reduced premiums and low profitability, followed by rises in premium rates; improved profitability and a more stable market. Most of the general and commercial markets have suffered an extended period in the soft part of the cycle and this has been exacerbated by the increased competition, caused by the new entrants into the market. It is unlikely to improve unless there is some catalyst, which produces a firming up of rates. Rationalisation within the market is therefore inevitable.

The direct writers have had the greatest impact on the motor insurance market, with 28 percent of insurers operating a direct arm. Of household insurers, 13 percent use telephone sales. Life and Pensions are offered by only between 1 percent and 5 percent of insurers, but that is a relatively new departure and may well become more popular with time.

There are three main ways in which the call centres work:

· Quote Providers - provide the cheapest quote, but do not sell the products.

· Intermediaries - selling the products of one or more product providers.

· Direct Writers - sell and underwrite their own products using the phone for sales.

Motor insurance was the first product to be sold by the direct writers and is probably the easiest product to sell; being a relatively simple cost sensitive product. There is also a large potential market. House and contents insurance and most types of general insurance, including travel, commercial and pet insurance, are all available over the phone.

Mortgages are sold using the telephone, but this method only accounts for about 1 percent of the total mortgage market. Life insurance and pensions are also sold by phone, but again, this is only a tiny fraction of the total market. Product complexity and regulation make it unlikely that these sectors will ever be as successful for telephone operators as, for example: motor insurance.

One of the main arguments for the selling of financial services by telephone is that it is cheaper. In the case of direct writers, there is no commission payable. However the procurement costs are high and involve various other outgoings.

· Advertising is very important - telefinancial services providers are often reliant, on customers choosing them from the large number of operators in the yellow pages. Advertising may also take the form of TV and radio advertising, billboards, buses, and even take-away carton lids.

· Technology expenses are high; the specialist equipment for a Greenfield provider is especially costly.

Due to these costs, direct writers must continually sell more products to their existing customer base, as the highest costs have already been met and such rollover business will be more profitable. This results in the expansion of the product range, to meet the requirements of the client base.

Suitable products for sale using this channel, tend to be those which are simple, straightforward and easy to underwrite, using a streamlined computer system. The advantage of simple products is that they open up markets for other complex and expensive ones, which are and have previously been suited to a limited market only. The new low cost products, whilst not necessarily being suited to all needs, may result in people purchasing, for example, health insurance, who would previously been financially excluded from this market.

Market Assessment commissioned original research to look at what customers, who are buying financial services over the telephone, think about the sales channel.

Most surprisingly, 90 percent of people had not purchased financial services over the telephone. Of those who had used the telephone, their responses are summarised.

This reveals that those who do use the telephone for financial services are happy with the service and advice that they receive using this distribution channel. They also find it a convenient way to transact business. What is surprising, is the fact that only 21 percent feel that the products are cheaper. This is one of the main advantages of the channel and features in much of the advertising.

Motor insurance over the telephone, looks set to account for 50 percent of the market by early in the new millennium, with household insurance over the phone also becoming more popular, reaching, perhaps 25 percent of the total market by value.

Life insurance, pensions and mortgage products are unlikely to reach these heights, being later starting and having more complexities, making selling more difficult. However, a market share of between 5-10 percent seems likely.

Market Assessment predicts that there will be a steady increase in product ranges, with pet, travel and medical insurance increasing rapidly, both in product numbers and premium income.

There will be an increase in the number of providers, but the rate at which new entrants join the market will reduce, as entry becomes more difficult with increased competition. The early entrants always stand to make the largest gains and these were made some 5-10 years ago. There may well be some rationalisation, with some companies withdrawing from the market, or being swallowed up by larger competitors.

Text © 1998 MAPS

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