Lowering the cost of sales in the insurance industry

EasySend Blog - Lowering the cost of sales in the insurance industry

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

The Cost of Sales (COS) is an important 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 important 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, which, in addition to selling policies, are delivering experiences rather than material and tangible products. So for service-oriented organizations such as insurers, the cost of sales will include mostly operational and administrative expenses, including wages and salaries, as well as 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 have a big impact on a company’s COS, for example, the cost of the 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 profitability of the insurance company. Let’s dive into its main components.

 

Customer acquisition costs

While customer retention also strongly affects insurers’ bottom lines, acquisition remains to be 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 on average 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 by far the most time-consuming activity as well: about 44% of the time is dedicated to the acquisition, while only 18% focus on retention.

No matter the channel, insurers are striving 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 major culprit of skyrocketing cost of sales 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
  • When independent agents are. added to the mix, the average cost of customer acquisition rose to $900 per customer.

Why does it cost so much to acquire new customers?

One reason customer acquisition costs are so high in insurance, is the fact that the industry as a whole 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 PDFs and email attachments. 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 major 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

To remain profitable while facing a new form of competition with digital-first insurance providers, insurers must step up their digital game.

Digital channels hold great potential for reducing skyrocketing COS in insurance. Digital journeys can become a major contributor to reducing costs of customer acquisition, as well as slushing 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, continuous experience that is channel-agnostic. By offering a unified journey instead of a disconnected string of interactions, your customer acquisition rates drop 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 to customers who have questions or require some assistance
  • Personalize experiences: Personalization is by far the strongest 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.

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