The logic of online insurance
Richard Flinn explains why buying insurance online makes sense.
Sunday, July 1st 2001, 7:51PM
by P Richard Flinn
I am frequently startled at how much people spend. Very few keep a tight rein upon household costs - especially service costs (power, telephone, insurances, banking etc). Like the tide, they tend to rise incrementally.
Like any successful business, a household should review costs regularly.
I like to put major household services out "to tender" once every two years - which is to say, I like to have a competitive review to see if the same service can be purchased for less, or better services can be purchased for the same amount.
Insurance services fall into this category. As time passes, children grow and move out, my net worth rises: as a consequence, my insurance needs change.
Moreover, I find that I am more and more clear about what I want, not what insurance companies think that I need.
I have found, for example, that many insurance company’s depreciation schedules on cars are completely out of touch with market reality. Most people have insured their vehicles for far more than replacement cost - which results in unnecessarily high premiums.
Further, I have found that many house policies are assuming that house prices and building costs are still soaring as they did in times of high inflation. This can result in "mansion-like" replacement values being purchased via house insurance contracts.
Naturally, the exercise of putting basic household services up for tender carries its own costs.
That is why I like to do it in a semi-formal fashion, project style. Focus on the competitive tendering for two to three weeks, make decisions, then move on.
Increasingly I find the Internet is useful in this household tender process.
I have never been persuaded by the outlandish claims made for e-commerce.
However, there is a product/service type which seems particularly suitable for Internet commerce.
In most cases products/services with the following characteristics are appropriate:
- A well established or institutionalised product or service, usually backed by well-known brands, lends itself to Internet sales.
For example, most people who are interested already know enough about the latest Ford Falcon to be confident in making customised feature selection via the Internet. They are confident because there is no doubt about the basic integrity of the product, nor the strength of the company that will stand behind the brand.
Insurance fits into this category. Provided the contract is being offered by a well-established institutional brand, life cover is life cover is life cover—and the 'net is a perfect medium over which to make customised features selection and price comparison.
- A real, substantial added value that results from purchasing via the 'net can make good commercial sense for both product manufacturer, distributor and consumer. This value can either be in the form of higher consumer utility (for example, getting the exact colour Ford Falcon I want), or lower cost, or both.
One would expect that distribution costs of financial services via the 'net would be lower. Therefore, I would expect to pay less than buying via a full-service distribution channel, which would involve being served by trained sales staff.
Insurance services fit into the same category. Because I am making my own decisions, based upon information passively provided, and I am not dealing with a human sales agent, I expect that the costs will be less. If they are not, there is little incentive or reason to purchase insurance via the Net.
- It is best if the product or service purchased via the 'met requires relatively little after sales service. Once again, insurance services fall into this category. After the contract has been entered into and the purchase concluded, the contract itself does not need intensive service or follow-up.
Of course, if I need to make a claim, I will want very effective service - but in most cases I will use the claim systems of the company from which I purchased the insurance contract. Buying from an established company will help ensure effective service when it comes to making a claim.
In New Zealand we have not yet seen many successful examples of Internet commerce. I believe one reason is that many companies have not thought about how e-commerce should fit into their overall business strategy so that it enhances their strategy, rather than undermines it. We have seen too many instances of the latter.
If Internet commerce is to succeed, it must add a distinctive value to the customer - rather than simply be one more way of allowing a customer to access a product or service. Moreover, the products or services made available over the 'net should be susceptible to the dynamics of 'net based distribution: well-known products, with established brand names, capable of customisation, and preferably with little after sales service required.
AssureDirect has the makings of being an example of very successful Internet commerce. It has the right ingredients.
P. Richard Flinn is a Director PRF Consulting.
P. Richard Flinn is manager wholesale business markets investment services at ASB Bank. Director PRF Consulting
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