Company Interpretations

The results from the game model and their meaning provides insights on how a company could conduct their business and form their product portfolio to maximise their market potential in the large term. This section will discuss the analysis conclusions as they pertain to the company operations and strategy.

As a side, the consumer utility function contained specific to price sensitivity and behaviour that was not intuitively obvious and was a very interesting finding. Further research on the logic behind this behaviour would be intriguing or an expanded survey study may prove beneficial.

5.3.1. Innovation

With the insurance add-on market valued at £1bn a year (FCA, 2014), and telematics slowly picking up pace in interest (Jones, 2015) it is clear that innovation in necessary in the UK Motor Insurance industry.

Although add-on insurance products are defined by their insurance coverage offering, this and other less tangible aspects in a service based industry, like insurance, are not protected from quick adoption by competitors by patents. Copyright law may cover some aspects of the product, but has limited coverage. This leaves a short lead time for a company to profit from their product portfolio advances, and

emphasises the need for constant innovation in the product portfolio.

In the game model addressed here, the product portfolio was defined as the available product offerings of bundled insurance with various add-on coverage. In this section, first, the value of innovation in the add-on product offerings is discussed. Then, other aspects of the insurance ‘product’ that were either indirectly or not addressed in the game model, are reviewed, namely: consumer services and physical technology.

5.3.1.1.

Diversification of Add-ons

An insurance add-on is defined as an additional insurance coverage item that may be added to the customers base insurance product. For example, when purchasing comprehensive auto insurance, the consumer also bundles three add-ons: legal cover, breakdown cover and protected no-claims bonus cover.

The results from the Nash Equilibrium calculated in this research show that all brand types should have a full product portfolio to maximise profits at the market equilibrium; however, the current market does not display market equilibrium characteristics as discussed in the previous section.

Although it is obvious that the market is not currently at equilibrium based on the common usage of targeted products by niche players, but it is clear that innovation in products will help a company to maintain ahead of the curve in profits and marketshare.

As mentioned previously, the Nash Equilibrium results of the model shows that a full portfolio for all players will be the market equilibrium. It could be implied from this result that greater portfolio options would extend the boundaries of the game, and the market Nash Equilibrium would extend as well. This would mean that continued innovation towards a more extensive product portfolio would further maximise the companies position in the market.

5.3.1.2.

Consumer Services

As discussed in the previous section, customer services increase the consumer value of the services; however, they also have added value to the companies and should be considered as part of the company’s strategy. Although not represented in the game theory model here, these products or attributes are related to the findings.

This section will address recommendations on company action regarding consumer services, as they relate to the research findings. These consumer services include: Reputation/Brand ID, Process Management (consumer and back-office), Consumer Management (relationships, relationship building etc).

Research from Insurance Times shows a stronger bias to brands with good customer service reputations than that shown in our survey (Insurance Times, 2011). One reason is our survey placed brand in context with the product attributes and price, where the IT survey asked using direct questioning about customer service preferences. It has been discussed that choice-based conjoint analysis gathers a more truthful insight into the attribute values over direct questioning outside of context (Train, 2009).

Although not addressed in the game model, it is apparent through the case research that unique products and consumer services that maintain a relationship beyond claims, would increase customer retention which is low and problematic in the industry (Newsdesk, 2011). Differentiation is, also, highly beneficial in a highly competitive commodity services market like the UK Motor Insurance industry (Eakin & Faruqui, 2000; Porter, 2008), and some insurers and brokers have been using consumer services to add value to their core product. Innovations in the form of easy to use websites and apps for mobile devices.

Currently only telematics is in play, but advances in any other physical technology that can benefit from the patent protection would allow for a greater advantage to the insurer.

Telematics is a recent innovation that places companies outside of the traditional comparison website market. Telematics technology was not taken into account in this game theory model, but could be viewed as an extension of the portfolio options.

Adding telematics to the game model would enquire further consumer research in the form of conjoint analysis, surveys and/or focus groups. Telematics is a relatively new technology and the sales data may not provide the detail necessary. The sales data may also contain a strong bias. Telematics has only been adopted by 3% of motor insurance consumers and the technology is unknown to 25% of motor insurance consumers (Insurance Times, 2015). This would suggest that the product has only been adopted by "early adopters" and this niche consumer population would have different purchase behaviours that the rest of the motor insurance consumers. For this reason, the sales data could not be relied upon to create a reliable consumer utility function. The discrete-choice conjoint analysis survey would be a good viable option, although direct questioning conjoint analysis could provide greater insight. The direct questioning can be more valuable when asking consumers about products that they are not familiar with, therefore the survey can directly addresses the value of the attributes and not the under experienced consumer decisions.

With the use of the survey data the consumer utility of telematics can be included as a product in the product portfolio strategies played by the player in the game model. When including the telematics in the player utility, ensure all additional costs to the player are included (overhead, physical product cost, development etc).

The results of the game model with the inclusion of telematics could be very enlightening. According to research from USwitch, 45% of motor insurance consumers would consider installing telematics (Insurance Times, 2015). If the game model shows that the market will benefit from the addition of telematics, a more confident decision can be made regarding the development of this new technology and related products.

5.3.2. Risk

In developing the game model the importance of risk costs for a target market segments was highlighted. This factor was included in the player utility function and discussed in the case study research. The use, calculation and interpretation of the risk factors can be found in section IV below, Company Usage.

Diversification of Risk across market segments is not a new concept, and is discussed in the Literature Review. That section includes details regarding Insurance portfolio optimisation and risk management.

5.3.3. Comparison Site Use and Recommendations

The use of comparison websites has become common place for consumers (Insurance Times, 2011). While there are companies that do not participate in this market place, most companies choose to provide products through these markets. The market is specially beneficial to new entrants that may have highly competitive pricing for targeted niche customers.

Large insurance companies can easily take advantage of the marketplace to gain large portions of the marketshare with competitive pricing and innovative products, especially if they have a positive brand reputation. This was demonstrated in the consumer behaviour research with brands having a positive impact on the perceived value of a product, along with price and add-on products.

The game model demonstrates that a highly varied product portfolio will dominate at the market equilibrium. It is also a beneficial strategy on the comparison sites. If priced competitively, a number of product offerings could be included in the first page of results for a customer’s insurance product search. The first page of results are generally the only ones reviewed by the customer and covering more real estate on that first page will push competitors past this important threshold (McDonald & Wren, 2012; Blackwell, 2011).

The impact on profits and marketshare from page rankings and “Priority listings” on comparison sites needs more research, and preferably data from comparison sites to understand the impact of these methods on consumer purchase behaviour.

5.3.4. Regulation Changes and Litigation

Although innovation and expanding the add-on insurance product promised further profits and competitiveness in the market, increased government regulation means control of portfolio offerings to ensure good practice. The regulation increases the risk factor of the product due to the possibility of fines and decreased reputation from mis-selling or misrepresentation.

The risk of litigation from mis-selling or mis-representing a product was not included in the game model but should be considered as this risk becomes more prominent.

The research clearly shows that a diverse product portfolio is the market equilibrium and the strongest strategic decision in the long run. More research is needed to clarify this position, and it is recommended that a company undertake their own research and model creation to take into consideration any specific strategic goals, market targets and risk analysis data.

For a game model that answers specific questions regarding market or company positions, read next section to create a model better suited to specifications.