Direct insurance was set to disrupt the industry: What went wrong?

Direct insurers evolved their sales approach from purely mail- and phone-based to online purchasing in just a few decades. In Europe, direct premiums sharply increased to about €15 billion in sales by 2009. This momentum led to high expectations that direct insurers would capture a large percentage of premiums and substantially disrupt the industry.

But ten years later, the reality is different: the share of all direct premiums represents only a single-digit percentage of the market. We took a closer look to understand why the greatest expectations have not been met and how direct insurers should now position themselves to spur growth in the coming years.

Expectation #1: Direct insurance would become mainstream

Ten years ago, stakeholders across the industry predicted that direct sales would become mainstream. Looking at the insurance portfolio today, we find this is not the case. While we see that the share of direct sales in motor insurance increased from 15 percent in 2009 to 23 percent today, nearly all other products remained in the single-digit range and do not have a strong direct distribution.

When looking at profitability, our research further finds that, in most geographies, direct players have slightly higher combined ratios than the rest of the market, although the performance among individual companies is mixed. In the past decade, only 10 percent of all direct players consistently grew faster than the market. And none outperformed additionally by measure of long-term profitability.

In short, direct insurers have not become the channel of choice for customers. Physical sales remain mainstream.

Expectation #2: Direct insurers would be the innovative and disruptive industry force

Ten years ago, industry leaders expected that radical new models would disrupt the insurance market. They were partially right.

Direct insurers outperform traditional players on some key performance indicators. On average—given lower acquisition costs and fewer legacies such as in IT, which is costly to maintain—cost ratios for direct insurers are a few percentage points lower than the rest of the market. Furthermore, direct insurers provide an optimized digital customer experience, an area where many traditional players still struggle.

At the core, however, direct insurers and established players are not drastically different—and therein lies the problem. From the start, many direct insurers pursued business models similar to those of established players; as a result, their products and processes are similar, and their acquisition model often depends on web search or aggregators (online price comparison portals). Of course, there are exceptions: our research finds that advanced digital players achieve a two- to threefold improvement in administrative costs compared with traditional players. However, real disruption requires redefining how an industry operates and meeting an unfulfilled customer need.

Consider the emergence of aggregators in the past few years, which helped European markets achieve breakthroughs in direct sales across industries. Our research shows that in insurance, about 50 percent of new direct contract signings, depending on the product, now come from aggregators—ten years ago, this share was 25 percent at most. Aggregators have also invested heavily in marketing and cross-selling. The sites sell a variety of products—from insurance, to electricity, to fashion products—to the same customer groups. And in doing so, they can spend significantly more on acquisition costs per motor insurance policy than a purely direct insurer. Overall, the volume of premiums mediated by aggregators grew by 15 to 20 percent annually while the direct market (which is not mediated by comparison portals), increased annually by just 2 to 4 percent.

How should European direct insurers move forward?

Direct insurers have not performed as predicted. And now, they face tougher competition in the years to come. Aggregators, digital platforms, ecosystems, tech giants, and cross-industry players are real challengers to insurers and direct players alike. Amazon is already using its considerable financial-services experience to sell insurance in India and is looking into additional markets. According to a recent McKinsey survey of 50 CEOs of European direct insurers, a majority of viewed Amazon and aggregators as the biggest challenges in the near future.

Could this mean the end of direct insurance? Not likely—European direct insurers have reasons for optimism. Our research indicates that more and more customers are confident about entering into a contract with a direct insurer. In part, this is because people become more comfortable doing things online (conducting research or making purchases), extending this behavior to insurance. Furthermore, aggressive aggregator sites make comparing insurance easier and often encourage customers to sign up for direct insurance, which can be more affordable and attractive to digital-savvy customers.

Still, direct insurers cannot afford to stand still. To safeguard their digital competitive advantage against traditional players, they must continue to sharpen their value proposition and (digital) operating model and maintain close ties to their customer base. This approach often means further simplifying products and routes to contracting, digitalizing processes, and continuously improving the customer experience. New acquisition solutions are also crucial as more insurers make offers based on the same key words as when pursuing acquisitions through leads.

While European direct insurers have not met expectations for great disruption and innovation in the insurance industry, they continue to gain market share year after year. To accelerate this trajectory, these players should make greater use of the advantages afforded to them via their lean, targeted, and legacy-free business models.

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