“If you don’t know what business you are really in you will find it hard to compete.”
I came across the incredible fact the other day that British motor insurers haven’t made an underwriting profit since 1994. They have paid out more money on claims than they have taken in premiums every year since then. Apparently, the combined ratio of claims to premiums fell from 122% to 106% last year, which I guess is a step in the right direction, but it is still a loss.
Here we have a classic example of a sector competing almost exclusively on price and inevitably this makes it impossible to generate a superior return, or any return at all it seems, from the core business. As generating a superior return is what distinguishes a great, or even good business, you’d have to say that motor insurance, per see, was pretty commoditised and perhaps not the best place to invest your money.
It’s a funny business, as so much is spent competing for market share that it can’t afford to invest enough in claims management so ends up paying-out too much, too often, sometimes even for bogus or inflated claims: they are just doing all the wrong things. They should be competing on stuff other than price alone; they should charge more for it; they should invest much more in controlling claims, both numbers and average claim costs. They seem to me to be running to stand still.
Motor insurers do though generate profits, although the insurance bit itself has become something of a loss-leader. Once these profits came from investing the cash passing through the books but rates are low and so this is not quite as lucrative right now. Controversially, they have pushed the referral fees, from personal injury lawyers, so far that they are getting bad press from it and there are fees to be earned from car-hire companies and garages too. At Admiral, who just do motor-insurance, something like 58% of profits come from ancillary sources like this.
The motor insurance industry needs a big kick up the backside. It has allowed what was once its primary business to become secondary and arguably it is no longer in the car insurance business. “Insurers” have become ambulance chasers of sorts, cashing in when things go wrong, rather than offering distinctly differentiated and valued products and services that we’d all be happy to pay for. Bizarrely, they are incentivised for things to go wrong and that makes no sense at all. The price comparison sites have a lot to answer for here and have arguably transferred much of the motor-insurers’ margins to themselves. The comparators have been smart in recognising a market weakness: motor-insurers are to blaim though for allowing it to happen at all.
Anyway, my main point being that it can be very helpful to understand your business in terms of where the profit comes from. If most of your profit comes from legal referrals you are, to my mind, primarily in the legal referral business and it can help to think in those terms. Do you really want your car insured by a company who only earns money from introducing you to a lawyer? It always helps to have a better understanding of exactly what business you are in. Many businesses are actually in quite a different business to what they and their customers think and that means that management do a pretty crappy job and customers are just confused.
Be clear about what business you are in and get everything, both internally and externally, not least of which your marketing, aligned behind it.