Introduction: Positioning or Segmentation
Capturing market share is a perennial topic in most markets, not least in the Middle Eastern insurance markets. Notwithstanding the crisis one still sees companies competing for top-line. I was talking to the Head of Motor Operations (a very hot seat) of one of the A rated insurers within the region recently. We discussed how the rate of growth (in premium terms) has been decimated when not too close a look at policy production / renewals reveals that the number of active policies / insured vehicles actually continued to increase. In short, several companies are still writing more for less with an obvious adverse impact on their technical results.
How does one stay ahead of the game with these market dynamics? In theory, insurance is a relatively homogenous product (we are basically all in business to pay claims) and therefore many harbour the arguably misguided notion that the industry does not lend itself too much to competition on non-price variables. This is also supported by the assertion that few insurance products other than in personal lines can be commoditised. This is another misconception.
In reality if one thinks of a product in terms of its four ‘P’s constituents (or five Ps in respect of a service), insurance is not that homogenous a product. Although the core product remains broadly similar, i.e. the settlement of a claim, other variables relating to its packaging, place (delivery), the quality of the people providing the service and the medium through which the product is promoted can significantly differentiate the product that is delivered to the consumer. From a price perspective, the cost of an insurance product is determined by three main factors, i.e. burning cost (claims), supply cost (reinsurance) and acquisition cost (commissions/brokerage). So, it follows, that product differentiation can also be achieved through an alternative design or structuring of either one’s reinsurance programmes, or a policy’s excess levels or, to a lesser extent, a change in distribution strategy.
In marketing terms the above relates more to positioning than it does to segmentation. In reality, the two go hand in hand. The objective is for a company, although very much active in the market, to position itself outside the ‘blood bath’ where the price wars happen to achieve a competitive advantage in at least some sectors of the business. This diversification can take various forms; the most prevalent perhaps being geographic, differing distribution channels and product-wise.
The illustration that follows provides an example from the region on how some of the companies have achieved or are seeking to achieve this.
Blood-bath to Blue Ocean
The phrase ‘Blue Ocean Strategy’ was coined by W. Chan Kim and Renee Mauborgne in their international best-seller bearing the same name. It is a ‘must read’ book for any senior executive involved in strategic development. The Blood-bath vs. blue ocean scenario is very much evident even in the UAE market as illustrated below:
I have specifically chosen 2008 since this was the turning point prior to the international crisis significantly impacting the UAE insurance market.
Within 2 years of this, the UAE insurance market grew only marginally, i.e. yielding a total premium of less than AED 20 billion by the end of 2009 and registering a lower growth rate in 2010. In the meantime market followers started catching up on, for example, trying to establish broker relationship management units, writing energy and/or aviation business, accepting reciprocal regional reinsurance business and/or exploring regional growth opportunities. Therefore, by 2010 the proverbial ‘blood bath’ grew and companies could only stay ahead of the game if they identified new opportunities for diversification. It has to be said, though, that timing, geo-politics, economics etc. all played a role against pursuing top line growth strategies. In fact the technical results of companies that continued to concentrate on top line growth suffered significantly by the end of 2010. In fact the leading 4 insurance companies in the UAE, i.e. Oman Insurance Co, Salama, ADNIC and Orient Insurance Company (accounting for over 40% of all UAE insurance premium) experienced drops in technical return of 30%, 8%, 17% and 1% respectively to collectively achieve a 13% growth in gross written premiums.
This is not to say however that positioning or diversification has no role to play under the current challenging environment. RSA and Zurich, for example, achieved this not through organic growth and diversification but through acquisition. M&A activity has, until now (barring a few exceptions such as BNI in Bahrain) been largely avoided by the regional insurance fraternity. However, if greater profitability can be achieved through cost rationalization and the achievement of economies of scale (as these companies grow in new markets) then there is certainly a case for others in the market to consider them as an alternative to continued aggressive engagement in the blood bath. Sometimes we have to question the logic of popular stances or belief. It is said, for example, to fight fire with fire. Surely wouldn’t that merely create a greater conflagration? One should fight fire with water. Similarly, insurance companies in the region can only add value to their customers and stakeholders if they endeavour to differentiate beyond the blood-bath. Perhaps an apt conclusion would be an Albert Einstein dictum, “We cannot solve problems by using the same kind of thinking we used when we created them!”