The Evolution of Aggregators: Impacts and Future Challenges for Insurers

The Evolution of Aggregators: Impacts and Future Challenges for Insurers

Aggregators have revolutionized the distribution of insurance in the UK, posing significant challenges for insurance companies and challenging some of the assumptions that have been implicit to insurers business models for many years. Adapting to aggregator distribution and online consumer behaviours has impacted core operations and caused particular issues in areas such as pricing, branding, product design, cross-selling strategies, customer retention and systems integration. Accenture is confident that the aggregator model is here to stay, with further room for growth in the UK and strong prospects for rapid growth overseas. However, intense competition in the UK market means that successful aggregators will need to evolve to survive, and there is likely to be a profound shift in aggregator business models in the next two-to-three years. Insurers need to anticipate and respond to this second wave of aggregator evolution. It is time for insurance companies to regain the initiative rather than simply evolving as the world moves on at pace. Many of the capabilities required to thrive in the marketplace today are also those that will give providers the best chance of succeeding in uncertain times ahead. Insurers will need to determine how they can achieve step changes in these core capabilities, rather than simply adding layer upon layer of tactical changes. The Evolution of Aggregators 1

The rapid rise of the internet in UK insurance distribution The internet has displaced the phone as the key platform for the sale of personal general insurance in the UK Although it is often taken for granted, the development of the internet has been staggering, both in terms of the pace of adoption and the influence it has had on the way that we work and live. By 2009, 69% of UK homes had broadband access, with 60% of adults using the internet every day, or almost every day. In addition, at least 66% of UK consumers have bought or ordered goods or services online in the last 12 months.* Against this backdrop, the UK insurance sector has been through its own web revolution. Since around 2006 there has been a very sharp uplift in consumer uptake of the online channel to buy insurance. Despite early views from some quarters that the internet would remain a marginal distribution channel, by 2009 it had become firmly embedded in the mainstream for personal lines, having grown rapidly to account for over 50% of private motor insurance sales and 36% of home insurance sales.** As a result, the internet has now displaced the telephone as the key growth platform for personal general insurance distribution. Direct insurers, brokers, and other distributors have developed increasingly sophisticated websites for quote and purchase, either through internet only brands, or through multi-channel offerings. Accenture s recent Multi-Channel Distribution Consumer Survey not only confirms the dominance of this channel, but also illustrates that the growth in online adoption among UK insurance consumers shows no sign of abating. In addition, the survey highlights the extent to which the UK leads other countries in the level and pace of online insurance adoption. It should be noted that even these striking numbers underplay the true significance of the online channel, as the final transaction is just one part of the overall insurance buying process. Many more consumers perform online research before buying, and many transactions that originate on the web actually complete via other channels, such as call centres, either because the user has experienced difficulties, or they simply want to speak to someone before committing to the purchase. *Source: Eurostat Internet Usage in 2009 Households and Individuals. Data based on Q1 2009, European Communities **Datamonitor UK Personal Insurance Distribution 2009 2 The Evolution of Aggregators

UK consumers are advanced adopters of online insurance, and growth in this channel shows no sign of abating. Percent Share of Total UK Private Motor Sales Percent Share of Total UK Home Insurance Sales 100% 100% 80% 2% 51% 80% 60% 2% 51% 60% 40% 40% 20% 1% 1% 36% 36% 20% 0% 0% 2001 Phone 2001 2005 2008 Internet Face-to-face Post 2005 2008 2001 2005 2008 Source: Based on Datamonitor data 2001 2005 2008 Phone Internet Face-to-face Post Percent UK of consumers buying online 63% UK 45% 63% 69% 45% 58% Germany 69% 58% 26% Germany 13% 26% Italy 13% 23% Italy 15% Spain 15% 18% 23% Spain 10% France 10% 8% 18% France 5% 0% 8% 10% 5% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% Current 10% Motor 20% Next 30% 12 months* 40% Motor 50% Home Home 60% 70% 80% 90% 100% Current Motor Next 12 months* Motor Home Home *Consumers that are planning to renew or purchase a new insurance product in the next 12 months Source: Accenture s Multi-Channel Distribution Consumer Survey, released in April 2010 The Evolution of Aggregators 3

Why have UK consumers been so quick to adopt online insurance? Aside from the broader social trend of consumers embracing new technologies and becoming comfortable using them for commercial as well as recreational purposes, some of the key factors that have enabled the impressive online insurance growth in the UK include: A strong, established direct channel (>40% share of private motor market), through which consumers have become comfortable with purchasing relatively simple insurance products without advice, and with shopping around for the best deal themselves; Highly price sensitive consumers who view the internet as a low cost channel. Price is widely regarded as the single most important factor for the majority of UK consumers when choosing an insurance provider, regardless of product and channel; The openness of consumers to new insurance brands. This is a result of over 20 years of M&A activity, rebrands, new brand launches, and the emergence of new channels and entrants, from direct insurers through to corporate partners or brandassurers. An estimated 18% of private motor insurance premium is now distributed through non-financial services or intermediary brands. As a result, UK consumers are far more open to new online insurance brands and have relatively low levels of brand loyalty; Significant progress in website usability, safeguards for online security and mechanisms to collect electronic payments. 4 The Evolution of Aggregators

Aggregators have revolutionized the distribution of insurance in the UK The rise of aggregators as a distribution channel has been a key force in the evolution of online insurance. The growth of this channel since its emergence in 2003 has been phenomenal, and has caused seismic shifts in insurance distribution. Recent Datamonitor forecasts suggest aggregator-instigated sales could rise to 64% by 2011. The aggregator business model taps into many of the factors behind the success of the online channel listed above. It appeals to price sensitive consumers who are used to purchasing insurance without advice, increases the ease and transparency of shopping around, and benefits from the openness of UK insurance consumers to new brands. Additional factors behind the success of aggregators in the UK include: Heavy investment in marketing; in 2009 aggregators accounted for 3 of the 10 highest advertising spenders in the general insurance market*; Strong consumer friendly brands that have won consumer trust for example recent Datamonitor research has shown that UK consumers trust price comparison sites more than any other FS provider; Deep expertise and investment in online systems to optimise user experience, customer insight and search engine performance. For insurance companies, the dramatic rise in aggregator market share has been a challenge. Adapting to the aggregator business model and online consumer behaviours has already impacted core insurance operations and will continue to force changes. In particular, insurers have had to face up to challenges in areas such as branding, product design, priceoptimisation, cross-selling strategies and customer retention. *Based on Nielsen advertising data The Evolution of Aggregators 5

Challenges faced by insurers as a result of the aggregator channel Insurers are struggling with lower customer loyalty Customer retention plays a key role in insurer profitability, and insurers have long sought ways to improve customer loyalty. Efforts have always been hampered by the fact that, in comparison with other industry sectors, there are relatively few opportunities to develop a relationship and interact with the customer over the policy lifecycle. This is even more of an issue for intermediated business, as the insurer does not fully own the relationship with the customer, who is likely to be more loyal to the broker than the insurance provider. In today s market, increased use of the web either direct or via comparison websites is creating further difficulties for insurers, as online customers are more likely to churn. Accenture s latest research confirms this trend, and sheds further light on the extent to which the growth in online distribution has raised severe retention and pricing challenges for insurers. For example, as the graphic below illustrates, a much higher proportion of online motor insurance customers plan to shop around at renewal, compared to insurance customers as a whole. Accenture s survey found that 81% of online motor insurance customers plan to shop around at renewal, while only 17% definitely plan to renew with their current provider. This compares to 69% of all insurance customers that plan to look around at renewal, and 29% who definitely plan to renew with their current provider. There are many drivers behind the differences in loyalty between online and offline customers. The availability of comparative information and the ease of shopping around, particularly through the aggregator channel, are generally accepted to play a part. Accenture believes that a number of other dynamics contribute to this disparity in loyalty: Greater price sensitivity among online consumers; Negative consumer perceptions of value that are reinforced through the online channel; UK consumers buying their home and motor insurance online are far more likely to shop around at renewal than insurance customers as a whole Q: Do you plan to renew or purchase your insurance products with your current provider? 0% % Consumers that are planning to purchase or renew insurance products in the next 12 months 100% All insurance customers 29% 2% 69% Bancassurance customers 33% 3% 64% Online motor customers 17% 2% 81% Online home customers 18% 3% 79% Yes No I don t know yet but plan to look around Source: Accenture s Multi-Channel Distribution Consumer Survey, released in April 2010; Base: UK consumers Note: Question refers to all insurance products, including life 6 The Evolution of Aggregators

Aggregator marketing strategy and business models dependent on business churn; Insurer dual pricing; Sub-optimal customer insight and retention capabilities. Greater price sensitivity among online consumers Accenture s survey reinforces that online consumers are more price sensitive than customers buying through other channels; over 76% of online home and motor insurance customers state price to be a very important factor in their purchase decision, in comparison to 70% of UK insurance customers overall. Aggregator customers are generally thought to be even more price sensitive than any other online or offline segment, and Accenture experience suggests that the price sensitivity of aggregator business is between 2 and 3 times higher than comparable direct online books. It follows that as aggregators win a greater share of the online market, average price sensitivity and hence disloyalty is likely to increase. Negative consumer perceptions of value that are reinforced through the online channel Insurers have struggled to influence negative consumer perceptions of insurance, which for most people remains a necessary evil that can be satisfied through the purchase of a largely homogenous product. The rise of the internet and price comparison sites has further fuelled a low value commodity market, which in turn forces insurers to compete mainly on price. Although it is likely that other factors such as brand values, financial stability and comparative service reviews could grow in importance as differentiators, these have so far not been compelling enough to prevent a relatively high proportion of customers shopping around every year for a better price, and have largely failed to improve customer loyalty. Aggregator marketing strategy and business models dependent on business churn The typical aggregator business model depends on high volumes of online leads and maximising new business conversions in order to earn one off introduction fees. As aggregators do not own the customer, further revenue opportunities are limited and they are motivated to re-solicit customers directly, or generally encourage market churn to earn repeat fees. In this respect, the success of the aggregator business model is predicated on high levels of customer attrition. Insurer dual pricing As a handful of dominant aggregators increasingly control the distribution gateway for some products, insurers have had to compete hard on aggregator panels and through their online platforms to maintain market share. This has exacerbated the practice of dual pricing, where new business premiums are cross-subsidised with higher renewal rates on existing business. It is not hard to imagine that otherwise loyal customers can feel penalised and want to shop around to make sure they are getting a fair deal. Anecdotal evidence also suggests that self cannibalisation is becoming more common; customers can achieve savings by obtaining a quote from a price comparison site and switching to a new policy with their existing insurer at the new business price, rather than the intended renewal price. Sub-optimal customer insight and retention capabilities While insurers have made good progress in recent years in improving customer retention, Accenture experience suggests that there is still a very wide range of retention performance across the market, and that insurers are struggling to come to terms with retention in aggregator-led distribution. A previous Accenture study showed that on average the bottom quartile motor and home performers in customer retention terms retain a third fewer customers than the top performing quartile. In spite of some strong retention performances, many of the major brands are under-represented in the top performing quartiles, meaning there is still room for significant improvement.* Accenture experience suggests that the price sensitivity of aggregator business is between two and three times higher than comparable direct online books *Please see Accenture s White Paper: Customer Retention in UK General Insurance The Evolution of Aggregators 7

Aggregators have challenged traditional market assumptions and been a catalyst for structural change in the industry One of the most profound impacts of aggregator distribution is the way that it has challenged some of the assumptions that have been implicit to the insurer business model for many years. Aggregators have therefore been a catalyst to structural change in the industry. Traditional Assumption 1 Small price differentials are not noticed by consumers Aggregator Challenge Within aggregators top results pages, the differences in price are totally transparent. Furthermore, no matter how small the price difference is, if a quote does not reach the first display page of aggregator results it is unlikely to be considered at all. Evidence suggests that recognised brands can afford to charge a slightly higher rate. According to Moneysupermarket, while the majority of people click within the top 10 motor providers in results tables, just 50% choose the cheapest provider. However, beyond this small brand premium, consumers are unlikely to accept a higher price unless there is a compelling differentiator. Traditional Assumption 2 Acquisition costs and pricing can be recuperated through longer term customer value Aggregator Challenge The assumption that acquisition costs can be recuperated over multiple years has had to be revised as the average contract life is typically much shorter. Market data is hard to come by in this area, but Accenture estimates that only 15-30% of aggregator new business remains on insurer books into a third term. Traditional Assumption 3 Profitability is driven by underwriting and investment income on core insurance products Aggregator Challenge As investment income has declined and reserve releases are drying up, insurance companies have focused more on their underwriting results. At the same time, the dynamics of the aggregator channel have boosted the sales advantages of the lowest priced brands and loss ratios have increased. Increasingly, insurance products have been positioned at more attractive price points to secure the holy grail of a first page ranking. To achieve this, insurers have sometimes stripped back products to the bare essentials in order to win the click through. Insurance companies just like low cost airlines - have therefore had to become more successful in building incremental revenue through cross- and up-sell activities. Many companies have also looked to secure a greater share of total sales from new non-risk revenue streams such as administration fees, finance charges, or other business interests. Traditional Assumption 4 The economics of direct and online distribution are well understood and static enough to make long-term strategic plans Aggregator Challenge Aggregators have upset the status quo as far as the economics of direct distribution are concerned. Some of the big name brands have invested tens of millions over many years to gain unprompted brand awareness amongst the insurance buying public, only to find a handful of price comparison sites have rapidly built household names, diverting traffic from their direct sites and adding incremental acquisition costs (for those insurers using the aggregator channel). The most common aggregator remuneration model - the fixed introduction fee - has differing impacts on insurers, depending on the size and shape of their businesses. For example, the charge may be simpler to administer than broker commissions, but may be uneconomic for low premium business. On the other hand, in comparison to broker commissions, it can be highly efficient for business likely to be retained at renewal. Finally, the internet and digital channels are very dynamic and it is highly likely that further innovation in online commercial models will take place. As online giants such as MSN and Google become more dominant, it is not hard to envisage that the rules of the game could change very rapidly indeed, with unknown consequences for insurers. Traditional Assumption 5 Scale economies are critical and therefore present a major barrier to entry for competitors Aggregator Challenge As mentioned above, the aggregator model provides a readily available platform for new or sub-scale players to access volume markets and compete on a more level playing field. Even very small insurers can compete effectively, with no need for heavy investments in technology, advertising or agency networks. 8 The Evolution of Aggregators

Aggregators have contributed to a deconsolidation of market share, which is in turn playing a role in the return of volatility to motor insurance underwriting results Private motor underwriting result, m 400 200 0-200 -400-600 -800 2003 launch of first aggregators -1000-1200 1994 2001 2005 2009e. Private motor market share Top 10 Top 5 Others Period of market share consolidation Market share deconsolidation Source: Data and Accenture estimates based on ABI, Standard & Poor s SynThesys Non-Life Database and company annual reports e. = estimate Consolidation of the market was considered to have been one of the key factors behind the flattening private motor underwriting cycle seen between 2001 and 2005. However, as aggregators have captured an increasing share of the market, not only has price-sensitivity increased, but the more level playing field has increased the influence of smaller players and their ability to drive down market prices. This has impacted levels of competition in the sector and the premium rate rises that are achievable. Alongside a drying up of the reserve releases that have been propping up the market since 2003 and an increase in claims costs, particularly in areas such as bodily injury and credit hire, this levelling of the playing field has contributed to the return of volatility to the sector and led to a more dramatic downturn in profitability. Traditional Assumption 6 Online and offline customers have the same buyer values Aggregator Challenge Some insurers have had to stop selling legacy products that were just not suited to the aggregator distribution model. New aggregator only products have been developed and fine-tuned to meet the needs of this channel. However, the implications extend way beyond the core product, and insurers are having to get to grips with an entirely new proposition for online consumers. For example, people who buy on the web may have higher expectations for multi-channel access, self service facilities and more interactive, dynamic content. The aggregators themselves have recognised this, and have invested considerable sums in enhancing their online shop window with more user oriented services, richer experiences and compelling content designed to facilitate repeat visits and stickiness. As aggregators have captured an increasing share of the market, not only has price-sensitivity increased, but the more level playing field has increased the influence of smaller players and their ability to drive down market prices. The Evolution of Aggregators 9

Aggregators have had a mixed impact on insurance providers business Aggregators have been a mixed blessing for insurance providers, with both winners and losers. The relative impact depends on many factors including market size, positioning, the prior capabilities of insurers and their ability to respond to the challenges outlined above. Insurance companies are responding to the aggregator channel in different ways. Some market leaders have adopted different brand strategies in relation to aggregators, deciding which of their brands to preserve for direct business (and hence in which to invest heavily) and which to deploy via the aggregator channel. The insurance company winners under aggregator distribution have been those with sufficient agility to respond to these challenges as well as having distinctive capabilities in certain critical areas. For example, insurers with strong price optimisation and customer segmentation capabilities are able to benefit from aggregator growth, by acquiring their target customers while maintaining control of their loss and expense ratios. However, the rise of the aggregator channel has put particular pressure on those insurers with a focus on direct phone and/or internet channels that have found it increasingly hard to attract customers to come to them directly. Other insurers facing pressure as a result of aggregator growth include: Those coming late to the party with poor web quote and purchase ability Insurers that have embraced the aggregator model too wholeheartedly, with little regard for profitability, i.e. chasing volume over margin. 10 The Evolution of Aggregators

Insurance company winners and losers under aggregator distribution Advantages of the aggregator channel Low barriers to entry Ready access to mass market consumers Low fixed costs Acquisition costs based on actual sales volumes rather than traffic Platform to compete on equal footing Web marketing and lead generation effectively outsourced to specialists Disadvantages of the aggregator channel Low margins due to heavy price-based competition Further commoditisation of insurance offerings Difficulties in differentiating other than on price Forced quotation on lowest common denominator dataset Diluted impact of brand investment Cannibalisation of existing direct portfolios Inability to control initial customer experience Higher price sensitivity and churn than direct online Winners Losers New entrants Established brokers / intermediary only providers and direct only insurers Large scale, low cost providers Small-medium, high cost providers Providers with small, niche or highly differentiated offerings Providers with undifferentiated, standard products Strong brands (prompted or unprompted recognition) Brands with low recognition (where price is broadly similar to others); but on the plus side, aggregators can also provide opportunities for less recognized brands to compete Price leaders / optimisers Price takers / followers Writers of high average premium value and/or high persistency business Writers of low average premium value and/or low persistency business Players with strong, integrated and customer centric web propositions Players with bolt on, clunky web applications The Evolution of Aggregators 11

Where next for the aggregator model? As a result of the compelling customer proposition, Accenture is confident that the aggregator model is here to stay, with further room for expansion in the UK and strong prospects for rapid growth overseas. European consumers are embracing online insurance distribution Motor Insurance UK 63% 69% Germany 26% 45% Italy 23% 31% Spain 18% 28% France 8% 14% 0% 10% 20% 30% 40% 50% 60% 70% Home Insurance UK 45% 58% Germany 13% 33% Italy 15% 23% Spain 10% 18% France 5% 12% 0% 10% 20% 30% 40% 50% 60% 70% Current Next 12 months* Current Next 12 months* Source: Accenture s Multi-Channel Distribution Consumer Survey, released in April 2010 *Consumers that are planning to renew or purchase a new insurance product in the next 12 months. Aggregators will expand overseas Although some of the factors that have driven the pace of online and aggregator distribution in the UK may be specific to the local market, there is a growing appeal for this channel in other geographies. Accenture has observed an apparent acceleration of several early trends, such as a growing propensity to use the internet for financial services transactions, in a number of other more traditional European and emerging insurance markets. Accenture s survey has shown that outside the UK there is a clear trend across all lines of business of consumers changing their purchasing patterns. Despite the dominance of traditional insurance sales channels in the other markets covered by the survey, in the last 2 years in particular, more of them have started to buy insurance products and services online. Across the continental European countries covered by the survey, 28% of consumers now expect to purchase or renew motor insurance through the online channel in the next 12 months, and 18% expect to do so for home insurance. Accenture s survey indicates there is potential for the aggregator channel in Italy, Germany Spain and France, where the proportion of consumers buying online will increase substantially over the next 12 months. It is interesting to note that the highly successful UK insurer Admiral a pioneer in embracing the online distribution model and owner of one of the leading aggregators in the UK has established fledgling businesses in these markets and appears confident that internet and price comparison site distribution will continue to gain market share. Insurance companies in these geographies should therefore look closely at the lessons learnt from the early stages of aggregator evolution in the UK and adapt their business models accordingly. Intense competition in the UK market means that successful aggregators will need to evolve to survive In the UK, the online aggregation model has created rapidly growing, highly profitable businesses, but current players now have new challenges to contend with. Peak business performance for companies such as Confused and Moneysupermarket was achieved in 2007-8, since when profits and margins have been static or declining. Although this channel still has a growing market share, intense competition among the major aggregators means their underlying profitability is being squeezed. This is a result of extraordinary levels of advertising spend, as the major price comparison sites go head to head on TV screens in a constant battle for market share. This is partly driven by the aggregators lack of ownership over the customer 12 The Evolution of Aggregators

Strategic positioning for aggregators Consumers still find financial products complex and confusing, and welcome tools to help make better purchase decisions Consumers are rapidly embracing new technologies and are willing to trust secure online services A few major brands dominate the comparison market and have large customer bases The market is saturated, and likely to consolidate around a small number of dominant brands, challenged by niche players and new start ups The current business model is approaching its natural limits, and will need change to support further growth aspirations Strengths Attractive value proposition for consumers Excellent brand awareness Established relationship and infrastructure with key players in personal lines insurance Low variable operating costs Weaknesses Do not own customer relationship or experience beyond the quote phase Revenue dependent on single conversion event only Emphasis on simple comparison of price / basic features only High fixed costs, notably advertising, just to keep market share Opportunities Respond to demand for more engaging, collaborative, and dynamic content (web 2.0) and multi-channel availability Exploit strong trusted brands compared to financial institutions Improve terms of trade due to control of key distribution gateway Keep ownership of customer to gain greater share of customer lifetime value Develop remuneration models to reflect business value and move further up value chain Threats Market saturation with similar propositions Low barriers to entry for me too competitors Competition from other brands offering web search/content portal/social networks (e.g. google, msn) Direct players undermining position with negative campaigns and/or alternative offerings (e.g. price check) Refusal of insurers to cede more power to aggregators or accept business model changes relationship, meaning that they effectively have to win their entire customer base afresh each year. Not only is this a crowded market, but aggregators also face strong competition from other directions. The large direct insurers have the highest vested interests in derailing the price comparison sites, and they are already responding in equal measure with advertising campaigns and aggressive pricing. At the same time, there is huge potential synergy between insurance comparison and the provision of other social networking, content search and online consumer analytics services. We have already seen a global search engine challenge aggregators on a number of occasions (e.g. credit card comparisons) and we expect these kinds of initiatives will continue. Accenture does not think that present market conditions are sustainable, and believes that there will be further consolidation in the aggregator market, with players that are unwilling or unable to make the investment required to gain or keep a strong foothold in the market dropping out. This not only presents an opportunity for existing leaders to drive the next wave of change, but also means the time is right for niche players to innovate and compete on the basis of new propositions, rather than get caught up in a brand spending war. The next wave of aggregator evolution Quite simply, the market is now at the stage where aggregators need to evolve and think through their strategic options if they are to maintain their growth ambitions. Accenture thinks that there will be a profound shift in business models in the next 2-3 years, as aggregators develop new strategies that will build on their strengths and opportunities and simultaneously mitigate their main weaknesses and threats. Insurers will need to be mindful of these future developments and formulate their own strategies accordingly. Accenture s strategic analysis of the aggregator market suggests that there is plenty of scope for one or more companies to make some bold moves. The illustration above gives a flavour of some of the main considerations that we believe to be top of mind for the aggregators. Based on this analysis, we think that there is a high probability that aggregators will be giving particular consideration to the following dimensions: How they can optimise performance of their existing infrastructure How they can take a larger share of the value chain How they can derive greater value from their customer franchise The Evolution of Aggregators 13

In the medium term Accenture thinks that aggregators will wish to expand their franchise, exploring options to grow their share of the insurance value chain and retain more control over the customer relationship Short-term focus for aggregators: optimising existing business In the near term, until the economic environment stabilises, Accenture believes that aggregators will focus efforts on optimising their existing businesses. In the next 12-18 months we would expect changes in the following areas: Improvements in user experience, for example through the further use of website optimisation tools as well as re-engineering websites using the next wave of collaborative, interactive and rich user experiences enabled by web 2.0 technologies Expansion of existing services in new geographies and expansion of new and related products and services (e.g. micro commercial insurance, wealth management, related non-insurance products) Reductions in cost base by enhancing IT effectiveness (e.g. service architecture, infrastructure outsource) and maximising their marketing return on investment (e.g. marketing analytics) Mid-term focus for aggregators: growing share of insurance value chain In the medium term Accenture thinks that aggregators will wish to expand their franchise, exploring options to grow their share of the insurance value chain and retain more control over the customer relationship. Examples could include: Providing additional customer-centric services designed to improve conversion rates and build customer relationships from which they can earn repeat fees (e.g. setting up of customer accounts, renegotiating terms of trade to own the customer and provide annual renewal statements, using customer data to identify other non-insurance products) Moving further up the insurance value chain to provide services such as policy / document fulfilment, premium collection, claims services Exploiting their brand capital and customer loyalty (e.g. with an own brand insurance product placed with a panel or single-tied partner) Longer-term focus for aggregators: developing entirely new business models A third strategic option for aggregators may be to reinvent themselves to create a changed playing field, with entirely new business models, partnerships and alliances. Some illustrative examples of this may include: Providing a market aggregation utility for direct players to run their own comparison and price check services, or offering a white label aggregator platform for new entrants or brandassurers. Linking up with other service providers (e.g. financial management software, business rules engines to create bundles of integrated services to their customers) Changing the dynamics of buying insurance (e.g. with e-auctions, competitive online bidding) 14 The Evolution of Aggregators

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Insurer responses to the aggregator channel Insurance companies have had to make significant operational changes to be successful on aggregators Insurers that are currently successfully employing the aggregator channel have already had to make significant operational changes, especially in systems integration, pricing agility and product innovation. However, Accenture believes that aggregators are investing now to evolve and refine their business models, and insurers should be doing the same to stay ahead of the game. Insurers need to anticipate and respond to this second wave of aggregator development. In particular, they must determine their strategic response to aggregators taking more control of the customer relationship, and combat the impacts on their own retention and cross-selling strategies. For insurers to be successful through the current and future evolutions of the aggregator channel, they need to develop strong capabilities in the areas outlined below. Insight driven customer segmentation for acquisition, cross-selling and retention Insurers need to implement insight driven customer segmentation based on customer value, using customer analytics to develop churn prediction and propensity models. Successful insurers will require a single customer view across products and channels, as customers increasingly diversify their use of channels at different points in the product lifecycle. Leading practices in these areas include the use of customer relationship management solutions, loyalty schemes, transaction monitoring tools, customer insight analytics, price elasticity models / dynamic rating algorithms and proactive / reactive save initiatives. Tailored sales and service blueprints are required for different customer segments, with predictive profiling aiding targeted pricing, sales and service interventions. Cross-selling efforts should target the right product to the right customer at the right time and through the right channel. However, insurers should be mindful of the need to design customer experiences and propositions across channels and not just focus on siloed product- or channel-centric propositions. Management and operating models should instead be designed around the customer. Flexible systems and further development of online capabilities Most of the leading players have developed operations and systems to serve their combination of channels organically over time, amending and extending legacy systems to meet new requirements as they are driven by the market. A minority have implemented new platforms designed to address specific aspects of the online market. However, to be successful through the aggregator channel: Systems must have the capacity to accept in-bound quotation messages and respond within a strict time limit in order to appear on aggregator lists They also need the flexibility to adapt to changes in aggregator functionality (e.g. new questions, option wizards) to avoid being uncompetitive or selected against Back end policy administration systems will require upgrading to enable seamless integration with richer web front end functionality Infrastructure, architecture and back-office capabilities should be flexible to cope with rapidly changing distribution and market dynamics. Insurance companies will also need to further develop their online capabilities to tackle changing consumer behaviour and harness technology advancements. Accenture has found that the insurance industry in general is poorly equipped to capture prospective clients in the digital world. Insurers websites should employ all of the latest web marketing methods e.g. multi-variate testing and propensity modelling. In particular, as they develop their online capabilities insurers should focus on: Richer two way dialogues based on user preferences, profile data and personalized experiences Reconfiguring online sales activities to maximise return on investment using proven marketing analytics and mix optimisation techniques Web tools and techniques to enable real-time optimisation and capability benchmarking Pricing agility Under current market conditions, insurers must protect their loss ratios with strong underwriting performance, and drive profitability by minimising costs and selling higher margin add-ons. Core pricing must therefore be capable of rapid change to adapt to market dynamics, and insurers need to be able to quickly respond to new aggregator data. 16 The Evolution of Aggregators

Insurance companies are generally yet to demonstrate leading online capabilities Most insurance companies are here Basic Basic online buying Keyword search Limited product range A standalone channel User experience same for all visitors Lack of real-time integration Cross-channel effectiveness Advanced Real-time integration w/ back-end systems Content management tools Advanced search and optimization Cross-sell, up-sell, product comparison, wish lists, etc. Products, pricing and promotions are managed across all channels Customer Centricity Leading Social networking, mobility, search and Web 2.0 / 3.0 technologies drive traffic and revenues Loyalty programs and user experience are customized by shopper Web moves from push to two-way dialogue with more non-browser access Data driven programs: predictive analytics and behavioral modeling Price optimisation is also key to maximising retention and profitability, enabling differential pricing according to customer price sensitivity and customer lifetime value. Higher levels of customer attrition mean that insurers need to consider each year of exposure on its own merits for some customer segments, identifying customer segments prone to churn, and seeking to achieve year 1 profitability for those customers if they are part of the insurer s target customer base. Product innovation and proposition management In order to present competitive prices on aggregator sites, offerings must often be pared down to the lowest common denominator, with add-ons sold later rather than included in the base price. However, as product comparison features become more common on aggregator sites, insurers should ensure that they are not stripping too far, and that they have in-depth customer insight into the preferences of their target customers in terms of product features and benefits. To attract people away from pure commoditisation and retain compelling direct offerings, providers should also consider offering products and services that are not available on aggregator sites (e.g. family fleet, telematics based products, innovative product packaging / bundling) In order to meet these differing product demands, successful insurers will require industrialisation of insurance product configuration and maintenance of agile product component / rules catalogues. Investing in mobile capabilities and digital marketing are also high on insurance company agendas to make multi-channel distribution a success. High performance insurance companies will therefore seek to successfully integrate insurance products with new multi-channel propositions such as mobile applications, mash-ups, visualisation tools and social network / peer to peer offerings. They will also look to harness cross channel campaign management and social CRM. The Evolution of Aggregators 17

Looking into the future The challenges posed by the aggregator channel have been painful for many insurers, and will continue to exert pressure into the future. However, Accenture believes that in addition to facing up to current challenges, insurers also need to be mindful of the future development of the aggregator model and should start to proactively anticipate likely changes in the market in order to remain competitive and relevant. It is neither possible to predict which organisations will win or lose the battle for online sales and customer ownership in the coming years, nor to specify what the most effective strategies will be. The only thing that is certain is that the pace and degree of change is unlikely to reduce. Accenture s view is that the current market is unsustainable, and there will be another wave of structural change n the not too distant future. Other industries appear to have made more headway in adapting to change, focusing their businesses and operating models around a holistic view of customer needs and preferences, and thinking through the dynamics of an increasingly e-centric marketplace. It is time for insurance companies to regain the initiative rather than simply evolving as the world moves on at pace. Many of the capabilities required to thrive in the marketplace today are also those that will give providers the best chance of succeeding in uncertain times ahead. Insurers will need to determine how they can achieve step changes in these core capabilities rather than simply adding layer upon layer of tactical changes. Note: Accenture s Multi-Channel Distribution Consumer Survey. Between December 2009 and January 2010 Accenture conducted a survey of over 3,500 consumers, representative of the general population from six countries: UK, France, Germany, Spain, Italy, and Brazil. More than 1,000 consumers were interviewed in the UK. The aim of the research was to understand consumers insurance purchasing habits and preferences. 18 The Evolution of Aggregators

How Accenture can help Accenture is well positioned to help insurers respond to the opportunities and challenges likely to arise in general insurance distribution, drawing on its experience of working with leading insurers in the UK and globally, and of helping clients across industry sectors to create and execute winning online business strategies. Specifically, Accenture can assist with: Online market entry / growth strategy Product / Underwriting / Pricing effectiveness Mobile/e-commerce capability design, implementation and operation Customer segmentation and insight Business analytics Operational and IT strategy. Contacts If you would like to hear more about Accenture's views on this topic or would like to discuss how you may address the strategic and operational questions highlighted in this paper, please contact: Steve Lathrope Accenture 1 Plantation Place 30 Fenchurch Street London EC3M 3BD T: +44 (0)207 844 2891 F: +44 (0)207 844 9599 Email: Stephen.lathrope@accenture.com Jeremy Lefebure Accenture 1 Plantation Place 30 Fenchurch Street London EC3M 3BD T: +44 (0)207 844 8291 F: +44 (0)207 844 9599 Email: Jeremy.lefebure@accenture.com Vicki Summerhayes Accenture Research 1 Plantation Place 30 Fenchurch Street London EC3M 3BD T: +44 (0)207 844 6373 F: +44 (0)207 844 9599 Email: Vicki.summerhayes@accenture.com The Evolution of Aggregators 19

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