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Lowering the cost of sales in the insurance industry

7 minutes

How much does it cost your organization to sell insurance policies?


The Cost of Sales (COS) is an essential budgeting metric for insurance providers that can make or break profitability. It can eat up a significant percentage of the premium, directly impacting how much risk you can take on. Understanding how this metric works can help you make better decisions when setting your premiums or negotiating contract renewals for existing customers.

What is the Cost of Sales metric, and why is it important?

The cost of sales is an essential factor in determining an insurance company’s profitability. After all, a company’s COS determines how much profit its insurance business contributes to its overall bottom line.


Insurance companies are service-focused organizations that deliver experiences rather than material and tangible products in addition to selling policies. So for service-oriented organizations such as insurers, the cost of sales will include mostly operational and administrative expenses, including wages and salaries, customer acquisition costs, and distribution costs, including commissions paid to the insurance brokers.


In addition to customer acquisition costs and distribution costs, there are other factors that can significantly impact a company’s COS, for example, the cost of claims processing. 


What factors influence the cost of sales in insurance?

The cost of sales is a fundamental business management metric that can make or break the insurance company’s profitability. Let’s dive into its main components.


Customer acquisition costs

While customer retention also strongly affects insurers’ bottom lines, acquisition remains the primary driver of growth. But controlling customer acquisition costs while still attracting new customers presents a significant challenge for insurance companies.


Across industries, it costs businesses five times more to acquire a new customer than to keep an existing customer. But for insurers, customer acquisition is even pricier than average. In fact, the insurance industry boasts the highest customer acquisition costs compared to virtually any other sector -  industry benchmarks show that insurers pay seven to nine times more to attract a new customer than to retain one.


Moreover, acquiring new customers is the most time-consuming activity: about 44% of the time is dedicated to the acquisition, while only 18% focus on retention.


No matter the channel, insurers strive to provide the best possible customer experience, which means ongoing investments in improving the quality of service. So the cost of acquiring new customers is the primary culprit of skyrocketing sales costs in the insurance industry. 


When you take into account the already low net margin of property and casualty insurance — which hovers between 3% and 8%— It’s easy to see why lowering acquisition costs must be made a priority. 

 

How much does it cost to acquire a customer?

A recent analyst report demonstrated that direct insurers have a significant competitive advantage due to lower cost of sales:


  • Direct insurers, such as Progressive and Geico paid an average of $487 to acquire a customer in 2014
  • Captive insurers like State Farm and Allstate paid $792 on average
  • The average customer acquisition cost rose to $900 per customer when independent agents are added to the mix.

 

Why does it cost so much to acquire new customers?

One reason customer acquisition costs are so high in insurance is that the industry is lagging in adopting digital technologies that meet the expectations of today’s insurance shoppers. 

 

Customers demand simplicity, around-the-clock availability, and quick delivery. But what they get instead are clunky PDF forms and email attachments, which simply do not go hand in hand with a good customer experience. The bottom line: modern consumers have the same expectations whatever the service provider, insurers included.

 

Adapting digital technologies to improve customer experience improves profitability. When insurance is easier to access, the cost of sales for insurance policies drops dramatically.


Distribution costs

Insurance agents who are selling insurance on behalf of their clients are a significant component of insurance distribution models. Agents and brokers earn commissions based on the amount of commissionable business they sell. 


But the communication workflows between insurers, brokers, and customers often involve manual processes and clunky paperwork. Improving broker/agent workflows with digital tools streamlines the process and lower the distribution costs significantly.


How EasySend improves the cost of sales in insurance

Insurers must step up their digital game to remain profitable while facing a new form of competition with digital-first insurance companies.


Digital channels hold great potential for reducing skyrocketing COS in insurance. Digital journeys can significantly reduce customer acquisition costs and slush distribution costs by replacing manual workflows with best-in-breed digital experiences.


  • Offer a multi-channel, continuous experience - One of the major factors in boosting conversion rates is the ability to offer a streamlined, ongoing, channel-agnostic experience. By providing a unified journey instead of a disconnected string of interactions, your customer acquisition rates rise significantly.
  • A fast and seamless application process is a must - Make it easy for prospects to become customers. Eliminate extra steps, and ensure that the entire application process can be completed through a digital journey, from policy selection to uploading supplemental documentation and legally binding eSignature.
  • Assist your customers - Ensure that help is always only a click away from customers who have questions or require some assistance.
  • Personalize experiences - Personalization is by far the most vital differentiator of best-of-breed customer experiences today. Customers expect that their insurers will use the information they already collected to improve their experiences.


EasySend is a no-code platform that empowers financial institutions to craft and launch digital journeys quickly and efficiently at every stage of the journey. From a frictionless application process that enables customers to complete the application without leaving the app to instant welcomes for new customers and members to frictionless adoption of account-related services and consistent, personalized communication, EasySend ensures that your cost of sales on digital channels are as optimized as they possibly can be.

Vera Smirnoff

Vera Smirnoff is the demand generation manager at EasySend. She covers digital transformation in insurance and banking and the latest trends in InsurTech and digital customer experience.