By Dr. Anu Karna
We all know Superman: the Man of Steel, able to leap tall buildings in a single bound. Then there’s his alter ego, Clark Kent: mild-mannered, unassuming, nondescript — except of course for that 6'3" frame and those horn-rimmed glasses. The two personas could not be more divergent. Yet the paradox between the average man and the super man, the ordinary and the extraordinary, exists.
In a narrow sense, this paradox manifests itself today in the property/casualty insurance industry. Insurers can try to maintain the status quo by conducting business as usual — at the risk of losing out to the competition. Or they can seek to transform themselves through innovation. To excel and succeed, insurance companies must strive to be extraordinary, like Superman.
Let’s look more closely at the overall trend specifically in the personal auto market. As noted in Figure 1 below, over the past 30 years (roughly the career span of an insurance executive), the market has gone from stable companies with 7 percent annual growth in direct written premium (DWP) to flat DWP growth. And only two-thirds of the companies remain.
In the context of the industry landscape highlighted in Figure 1, the pressing question becomes, How does the insurance industry sustain longer-term growth? Or, when new forms of differentiation are not identified, is the trend likely to continue — with further consolidation followed by imminent price erosion?
Let’s take a look at the key questions insurance executives are asking today. (See Figure 2 below.)
The questions are insightful in that they highlight the differences between the staid Clark Kent and the dynamic Superman, between the average and the exceptional, between incrementalism and transformative growth. In essence, the questions in Figure 2 help address the tactical problems of today, but they will not expand the insurance industry or identify new areas for development. This is of particular concern given the consolidation trend highlighted in Figure 1.
The trend is not unprecedented, nor is it unique to the insurance industry. Since the mid-2000s, the telecom industry has undergone significant consolidation — from a plethora of telecom operators to what is now a concentrated set of players. This industry has experienced severe price competition with all-you-can-eat plans (the result of years of providing commodity services) and is now looking for different ways to drive growth and shed the tag of simply providing a “dumb-access pipe.” Many a corporation has benefited from the phenomenon. Google, Apple, Amazon, and the like are shining examples of disruptors who have captured much of the value that telecom operators should have secured for themselves.
Fighting back is hard of course, but telecom operators are now investing in new services such as mobile payments, telematics, and other machine-to-machine services to make sure they’re not left behind again. The intrinsic lesson: Telecom operators have realized that building a better, faster, cheaper network access service simply satisfies the basic or, at best, the performance requirements of customers — and keeps organizations situated firmly in the Clark Kent camp. Now, wiser from experience, operators are looking for ways to delight and drive excitement among their customers — the Superman approach.
The distinction between basic, performance, and excitement is well illustrated in the Kano model, a framework for product development and customer satisfaction developed in 1984 by Professor Noriaki Kano at the Tokyo Rika University. Figure 3 below highlights the Kano model framework.
According to the Kano model, there really are three distinct types of customer needs: basic, performance, and excitement. Basic refers to needs that, when fulfilled, do not drive incremental customer satisfaction; in other words, customers expect it. However, basic needs when not fulfilled are a huge driver of customer dissatisfaction.
Using the telecom industry parallel, a basic need might be the ability to dial an area code and phone number and hear the sound of a phone ringing on the other end. When a caller is unable to make a call (for example, poor signal), it usually becomes a source of frustration. In the insurance industry, a basic need might be the ability to contact an insurance carrier and obtain a quote for a new vehicle.
Performance needs in the Kano model refer to needs that customers consciously like to have. In the insurance industry, an example of a performance need might be the ability to receive prompt service and claims processing for an auto accident. Good and prompt service makes customers happy, and in combination with basic needs, is the world where Clark Kent resides.
The ultimate level in the Kano model focuses on customer delight — exploiting the subconscious wants of the customer to drive value. This is the domain of the best innovators, the would-be superheroes, where horn-rimmed glasses are swapped for x-ray vision. Innovation that drives customer delight is typically transformative and creates a step-function of value, a foundation for innovation that serves as the foundation for more innovation. Apple Inc. is a good example. When Apple released its first-generation iPhone, it drove significant customer delight; consumers were surprised by the thoughtful and intuitive user interface of the iPhone. As a result, a new genre of premium devices (value creation) came to exist in the market, replacing conventional personal data assistants (PDAs).
Transformative innovation may be the catalyst that the insurance industry needs to stem the consolidation and pricing trends highlighted in Figure 1. But to do so, insurance firms must approach innovation in new ways — drawing on lessons from industries other than insurance and leveraging technology as a source of differentiation. Technology-based innovation is critical, especially in light of today’s digital concepts such as Big Data and cloud-based delivery, which provide new insights into customer preference.
The secret in all of this is time. With time, needs that at one point drove excitement become performance needs, and performance needs become basic needs. Hence, the window for differentiation is limited and constantly changing. For insurance carriers today, it’s time to call on Superman — because the race is certainly on.
Anu Karna is vice president of Customer Strategy at Verisk Insurance Solutions – Underwriting, where she leads the development and execution of customer-centric go-to-market strategy. Dr. Karna has degrees in mathematics with a focus on cryptology.