Setbacks.

I have to admit to being somewhat disappointed and a little puzzled when I read that Norwich Union was suspending their experiment in ‘pay-per-mile’ car insurance in the UK (via BBC):

Britain’s biggest insurer has suspended a flagship car insurance scheme less than two years after its roll out. Norwich Union’s “pay as you drive” policy used satellite technology to track every journey via a black box installed in customers’ cars. It resulted in cheaper premiums for people who avoided driving at high risk times like rush hour and late at night.

The company said too few customers had joined, and blamed a slow take-up rate of the technology amongst car makers.

It seems only around 10,000 people had taken up this product. I have to admit that our family hasn’t, although I’m convinced it is an excellent product and the ‘right’ way to buy car insurance for many (most?) people. So why didn’t it succeed? I thought about this a bit and boiled it down to two (inter-related) factors:

1. Inertia. Like many services, especially financial services, most people (myself included) have tremendous inertia. That said with the rise of comparison shopping sites like moneysupermarket.com, confused.com, etc. this is changing. I wonder also if the current economic climate will accelerate this trend as family budgets feel the squeeze of higher inflation and weak balance sheets.
2. Ignorance. Not stupidity but the proper definition of ignorance: prospective customers either don’t know about the availabilty of this novel product or if they do are put off by a ‘learning curve’ to understand how it would relate to their driving experience.

I wonder (I don’t have time to research this) how Norwich Union marketed this product: ie how helpful / transparent were they in terms of making it easy for their customers to compare the ‘pay-per-mile’ product with their ‘fixed-rate’ offering. Was this an example of the corporate antibodies winning? What did the middle/senior managers responsible for ‘traditional’ insurance think of this innovation? Fear? How would it affect their margins? (Their power?) Short term? Long term? I have no insight into the particular dynamics of Norwich Union, but I suspect this might be an excellent example of how disruptive innovation cannot survive the caustic environment of large organizations. If I were in charge at Norwich Union, I would have set up a new independent company to offer this product, taken a minority stake – bringing in an entrepreneurial management team and a handful of outside investors (like us) – to build this product. If/when it worked, then I might buy the company in a few years time. (Of course I would say this – its at the heart of our business proposition – but equally obviously we believe passionately in the validity of this model; what kind of entrepreneurs would we be if we didn’t? )

Perceptive readers may have spotted an apparent incongruency in my enthusiasm for the ‘pay-as-you-go’ model in car insurance. After all usually I am seen on these pages touting an ‘all-you-can-eat/flat rate’ business model for many companies who’s stock in trade is ‘pay-per-transaction’. So am I just being a contrarian just for the sake of being provocative? Well, no. The thing is, it (the correct business model) depends on the context and the ‘linearity’ of the underlying service to the cost of providing it. And just to be clear, in many many businesses the best model is to offer both pricing paradigms and let the customer decide what is more appropriate to their circumstances. So what do I mean by linearity? (perhaps not a good description) I mean that the cost of providing the service is highly proportional to the amount it is used. Car insurance fits this – the more you drive (and the more you drive in congested cities or at certain times of day), the more statistically likely it is you will have an insurable loss and so it ‘costs more’ to provide this insurance. If you are running a communications network for example (or a health club, or a stock exchange…) your costs are largely fixed and so one more call, or customer, or trade is essentially free. (Up to the capacity of the existing infrastructure of course.) And so ‘broadband’ / fixed rate plans are usually the best way to go in the long term.

I’d be happy to bet on this space going forward. Norwich Union’s experience is clearly interesting, but I believe their lack of success was due to timing and (probably) execution. A setback. An opportunity?

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