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Page 1: Australian Car Insurance Market - ANALYSIS

AN ANALYSIS OF A

USTRALIAN MOTO

R

INSURANCE MARKET IN TE

RMS OF ITS

ECONOMICS, D

RIVERS, TRENDS AND

COMPETITIVE STR

UCTURE

& L E S S O N S F R O M O V E R S E A S G E N E R A L I NS U R A N C E

M A R K E T S

U L L A S H TI W

A R I

S L I DE S H A R E . C

O M / U L LY U L LY

U L L A S H . T I WA R I @

G M A I L. C O M

Page 2: Australian Car Insurance Market - ANALYSIS

2004 2005 2006 2007 2008 20090

1,000

2,000

3,000

4,000

5,000

6,000

7,000

4,720 4,776 4,944 5,2095,646

6,018

SIZE, GROWTH & PROFITABILITY

► Domestic motor insurance is worth $6bn in premiums per annum, and is the largest segment of the Australian general insurance market

► Given that a number of players sell both domestic motor and CTP, these two market segments can be considered together

2

The $6bn domestic motor insurance market is the largest component of the general insurance market, has grown ~5% p.a. for 5 years, and has a ~9% to ~15% profit margin

Total GI Market: $26,352m in Gross Premium Revenue

CAGR = 4.98%

21.2% 21.1% 21.7% 21.8% 22.8% 22.8%Share of GI Market:

(1): Based on 2009 industry actuals, excludes investment incomeSource: APRA June 2009, JP Morgan General Insurance Survey 2009

Growth of the Domestic Motor Insurance Market ($m)

Australian General Insurance Market

by class of business ($m)House-

holders; 4338; 16%

Commer-cial mo-

tor; 1602; 6%

Domestic motor; 6018; 23%

CTP motor; 2286; 9%

Fire & ISR;

3151; 12%

Public & product liability; 2145; 8%

Profes-sional indem-

nity; 1496; 6%

Employ-ers liabil-ity; 1191;

5%

Other; 4125; 16%

Full service underwriters

Brokers / Distributors

Loss(71%)

Expense

(20%)

Profit (9%)

Sacrificed to

Underwriter

(85% - 92.5%)

ProfitAcquisition Cost

Commission paid to distributor (7.5% - 15%)

Motor insurance industry

profitability(1)

► System growth has averaged 5% p.a. over the last 5 years

► In this time the motor insurance share of the overall GI market has grown slightly from 21% to 23%

► Underwriters earned an average margin of 9% in 2009, while distributors earned 7.5% – 15% before acquisition costs

The profitability and strategic implications of business models are discussed further in this report

Page 3: Australian Car Insurance Market - ANALYSIS

UNDERLYING DRIVERS OF MARKET GROWTH

► Much of the demand for motor vehicles is met through new vehicle sales

► Sales fell dramatically in 2008 and 2009, but have since shown an upward trend though it is unknown whether this will herald a return to historic levels

3

The underlying growth of Australia’s population and the increase in car ownership all result in additional vehicles and drive demand for comprehensive domestic motor insurance

Australian Population Growth

(millions)

Australian New Passenger Vehicle Sales (thousands)

Total Passenger Vehicles (millions, LHS) and Passenger Vehicles per 1000

People (RHS)

2001 2002 2003 2004 2005 2006 2007 2008 20090

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

500520540560580600620640660680700

Total Vehicles Vehicles per 1000

2001 2002 2003 2004 2005 2006 2007 2008 200940,00042,00044,00046,00048,00050,00052,00054,00056,000

Passenger Vehicles

18,000.018,500.019,000.019,500.020,000.020,500.021,000.021,500.022,000.022,500.0

Resident Population

► Australia’s ongoing population growth and wealth continues to drive demand for passenger vehicles

► Total registered passenger vehicles have risen from 9.8m in 2001 to just over 12m in 2009

► Vehicle ownership rates (penetration) are also increasing, with cars per person rising 1.02% per annum over the last decade

► The increase in ownership rates levelled off in 2008/2009 as a poor economic environment slowed vehicle purchasing

1.54% annual growth

1.02% annual growth

Source: ABS

0.55 cars per

person

2.54% annual growth

12.0m cars

Page 4: Australian Car Insurance Market - ANALYSIS

INDUSTRY TRENDS

4

The hangover from the GFC, technological innovations, and new competitive pressures are expected to shape the market over the next several years

• Market hardening with premium increases of 5% in 2009, and premium growth of 5% and 4% predicted by industry participants for 2010 and 2011 (1)

• Decreasing sum insured due to lagging impact of economic slowdown (fewer new cars and shift to smaller cars) though this is now offset by increasing new vehicle sales

• Improved investment returns as equity markets recover• Claims costs lower due to strong AUD reducing cost of parts, however

upwards pressure also present due to a shortage of repairers and consequently higher labour costs

• Internet distribution models have lowered the barriers to entry

• If widely adopted, internet aggregators / price comparison websites have the potential to increase shopping around and price-based decision making, however their success is yet to be determined

• Web-bots are making it simpler for insurers to benchmark pricing against one another

• The Henry Tax Review may alter the economics of vehicle ownership and operation, impacting demand

• Regulatory changes to capital standards are expected in 2010 which may impact funding mix and ROE

• Regulatory tightening as a hangover from the GFC may also have unexpected impacts going forward

• Entry of new players potentially eroding market share of leaders and mid-tier players

• New products and business models (e.g. Pay-as-you-drive and online aggregators) may impact profitability

• Well known retailers leveraging their brands (e.g. Australia Post, Coles)

• High fuel costs vs. historical averages are contributing to declining car use (likely to reduce claims frequency)

• Increasing familiarity with online purchasing driving demand for 24-hour quotations and sales

• The focus on climate change and the contribution of car usage may lead to an increase in ‘car share clubs’ (e.g. Go Get) driving down car usage and ownership

Economic

Political Technological

Social

Competitive

(1): Some analysts are sceptical of this, and expect more modest premium growth as a result of competitive pressuresSource: Media articles, JP Morgan General Insurance Survey 2009

Page 5: Australian Car Insurance Market - ANALYSIS

CUSTOMER BUYING BEHAVIOURS

5

Customers consider a number of factors in selecting motor insurance, suggesting a number of areas in which players can differentiate

Top factors in selecting a motor insurance provider

High

er P

rices

More Features

Strategic Differentiators

Other

Overall Quality of Website

Recommendation of Friend

Simple Product Solutions

Professional Advice

Loyalty Rewards / Incentives

Speed of Quotation

Ease of Understanding Policy

Range of Benefits / Features

Flexible Payment Options

Overall Reputation

Level of Cover

Customer Service

Trustworthiness

Value for Money

0% 10% 20% 30% 40% 50% 60% 70%

3%

1%

2%

5%

6%

9%

9%

13%

15%

22%

23%

33%

35%

36%

54% While some customers are entirely

driven by one factor (e.g. Price), most purchasing choices involve a trade-off between multiple factors to select the best overall offer

Players will typically aim to compete with the market in most areas and differentiate or dominate in one or two

For example, Choice.com.au analysis (1) based on premium prices and policy features shows a breakdown of the market into two groups:

(1): See appendix for further detailSource: AC Neilsen

Players have an opportunity to appeal to customers

behaviours and differentiate on any of these top factors:

Opportunities to Differentiate

Value for Money: Price, Product & Service

Trustworthiness: Brand & Customer

Experience

Customer Service: Service

Level of Cover: Product Features

~75% of brands

Highly competitive on

product features ~25% of brands

High price competition

Page 6: Australian Car Insurance Market - ANALYSIS

COMPETITORS IN THE MARKET

6

Consolidation has not reduced customer choice, there are more targeted brands and business models in the Australian Motor Insurance market than ever before

Incumbents Mid-Tier Players

Aggressors Experimenters

► Mid-Tier players have a reputable brand for motor insurance and small to moderate market share

► Aim to gradually build market share through quality offerings and minor differentiation from the Incumbents

► Mixture of insurers and bancassurers► Split into two business models:

► Offshoots of the Incumbent and Mid-tier brands using low-cost internet models to defend against the Aggressors

► New players looking to leverage ‘aggregator’ model and aiming for a market paradigm shift

► Aggressors are new entrants making aggressive and mostly price-based plays to gain market share

► Many of their business models leverage the internet for distribution and a low cost offering

► Incumbents have been in the market over a long period of time and built up sizable market share

► Full value chain insurers

Suncorp Group IAG

Incumbent Offshoots

Aggregators

Aim to gain share on like-for-like offer

Aim to gain share

by undercutti

ng on price Aim to defend

Incumbent share by matching Aggressor

model

Aim for paradigm

shift based on new model

Page 7: Australian Car Insurance Market - ANALYSIS

MARKET SHARES OF KEY PLAYERS

7

IAG and Suncorp represent the “cosy duopoly” of the domestic motor market in Australia, holding ~70% of the overall market on a GWP basis

Market Share of Motor by Insurer

IAG33%

Suncorp37%

Allianz8%

Wesfarmers6%

QBE4%

Zurich3%

RACQ3%

CommInsure2%

Westpac0.5% Other

4%

IAG Group brands include:• NRMA (NSW, ACT, TAS,

QLD)• RACV (VIC, via a joint

venture)• SGIC (SA)• SGIO (WA)• CGU (VIC/NSW and national

intermediated distribution)• The Buzz (Internet-only)

Suncorp Group brands include:• AAMI (National)• Suncorp (QLD)• GIO (NSW)• RACQ (QLD, via a joint

venture)• RAA (SA, via a joint venture)• APIA – Australian Pensioners

Insurance Agency (National)• Just Car (national niche

player)• Shannons (national niche

player)• Bingle (Internet-only)

IAG and Suncorp have successfully maintained their ~70% market share through consistently low lapse rates (e.g. 47% of NRMA customers have been with them for 10+ years) This has been achieved by:• Building and maintaining high levels of

trust in their brands• Effective loyalty programs (NCBs, multi

policy discounts)

The majority of larger market players offer both CTP and comprehensive motor insurance, with CTP often acting as a loss leader to attract new comprehensive customers

Page 8: Australian Car Insurance Market - ANALYSIS

COMPETITOR POSITIONING

8

The market is dominated by the large national and state players who target the mass market on value through competitive prices and service. Smaller players lead on price and/or target niches

Price

Product / Service

Niche Mass

Bubble size = approximate market share

Note: bubble

size and positionin

g is illustrative

AAMI

APIA

NRMA/RACV

Budget Direct

Shannons

PAYDReal

Comminsure CGU

Key Observations

The larger brands (e.g. AAMI, NRMA) focus on a mass market offering and primarily seek to balance product features and service quality with price

Some of the larger and more established intermediated insurers (e.g. Vero, CGU) have adopted service-driven mass market offerings that tend to be more expensive than competitors

Some niche players such as Shannons and APIA target demographic or needs-based customer segments who will pay a premium for highly differentiated service experiences

Aggressors such as A&G Group (via Budget Direct), Real and YouI aim to undercut the large incumbents on price, and focus on a mass market play through a single channel (internet) or through distribution agreements with existing mass market brands

Many players have also launched brands to target market niches (e.g. PAYD and Just Car target low car-users and young drivers respectively) with price-based offers

Bingle

IAG Group Suncorp Group

Other

Just Car

GIO

Allianz

QBE

Lumley

Suncorp

Vero

iSelect

VirginYouI

Aust. Post

Coles

ibuyeco

A&G Group

Page 9: Australian Car Insurance Market - ANALYSIS

COMPETITOR CUSTOMER VALUE PROPOSITIONS (1/4)

9

The Incumbent brands offer a range of GI products with a strong focus on cross sales, and tend to differentiate using service-based offerings and competitive pricing

Incumbents

– Australia’s largest insurance brand with a national focus on motor then cross-sell to H&C

– Positioned as the insurer that offers “better” service, claims and pricing, AAMI primarily sells through call centres then internet

– Distinct sub-brands aim to retain market share of vehicles (or customer segments) outside of underwriting guidelines: (e.g. Insure My Ride for motor cyclists, Just Car for grey imports, Bingle for online bargain hunters, APIA for over 50s and Shannons for motoring enthusiasts)

– GIO is a significant brand in NSW with plans to expand presence in VIC with a focus is on growing H&C then cross-sell to Motor

– Positioned towards a large segment called “planners” who understand risk and take pride in their belongings who primarily purchase over the phone then internet

– Suncorp is a significant bancassurance brand in QLD

– Focus is state-based rather than product (i.e. the emphasis is selling to the parochial Queensland home base)

– Largest insurance brand in NSW with a focus on attacking AAMI by promoting ease of switching

– Positioned as the insurer that is easy to do business with and gives “greater” choice

– Product is largely undifferentiated with the highest no claim bonus but lowest new car replacement (1 year) and personal effects ($200)

– Size of the motor book allows for medium level of pricing sophistication (i.e. good use of relativities and interactions but not very granular)

– Strong inbound and outbound capability (e.g. concierge service on inbound and refined outbound sales capability)

– Discounts offered if taken together with home and contents insurance

– There was a significant investment in pricing capability in 2007 to make it highly granular, active demand pricing and responsive to competitors

– Product is largely undifferentiated– Good inbound call capability which are now brand

focused (i.e. historically the Suncorp and GIO call centres were combined resulting in poor service levels during the storm season)

– Has ~$100 million intermediated motor through AMP and Honda, however this is unprofitable and Honda has a very low first year retention

– The primary channels is sales through call centres then internet

– Pricing, Product and Claims are the same as GIO

– Has a <$75 million motor dealer channel

– Discounts offered if taken together with home and contents insurance

– Product is largely undifferentiated but more modular than competitors (e.g. select options such as car after an accident) with a focus on multi-policy discounts, which is a defensive tactic used by market leaders

– Discounts offered if taken together with home and contents insurance

– Best practise claims model for customers and suppliers (i.e. branded assessment centres that promote sustainably competitive/quality repairs)

– Claims model was implemented in 2006 based on the AAMI model. This is used nationally by all Suncorp brands

– Claims model based on AAMI model

– Less efficient claims model with limited cross-channel capabilities, but in the process of being rejuvenated

Bran

d Po

siti

onPr

oduc

t / P

rice

/ D

istr

ibut

ion

Clai

ms

Note: Only selected competitors are shown

Page 10: Australian Car Insurance Market - ANALYSIS

COMPETITOR CUSTOMER VALUE PROPOSITIONS (2/4)

10

The mid-tier players use a mixture of direct and indirect distribution, but have struggled to achieve significant brand differentiation in the market

Mid-Tier Players

– Despite having a strong reputation as a commercial insurer, QBE’s overall capability in personal lines is patchy

– It has little to no brand presence in car insurance since most of its distribution is through third parties

– QBE considered investing in building a direct brand, WesternQBE but decided the investment would not deliver target returns

– The brand leverages the equity built around the Bank and makes the link to insurance, and is largely known for Life Insurance

– The market entry strategy into underwriting motor was to quickly and aggressively undercut on price to acquire market share

– Allianz’s direct brand focuses on low cost and reliability

– Although the low brand profile vs the incumbents means that it tends to underperform on trustworthiness measures, the brand is perceived in customer surveys as offering good levels of cover and value for money

– Zurich is primarily focused on commercial lines and has little brand presence outside this market

– Low brand recognition in the mass market for motor or other personal lines

– QBE offers three levels of car insurance, including specialised products for younger car owners

– Primarily an intermediated player with distribution through brokers and agents, and a JV with ING which provides white labelled products to ANZ bank

– Some direct distribution via an online quotation engine on their website

– Three levels of car insurance. High no claim bonus (70%) that is comparable to AAMI

– Allianz has a white label agreement to distribute motor insurance through NAB

– Has distribution agreements with a number of European car manufacturers to provide bundled insurance at time of purchase

– Some direct distribution via the online channel, which they promote as part of broader promotion of the retail brand

– Allianz have also launched 1Cover, a low cost direct internet player aiming to differentiate on price

– Primarily intermediated distribution (either broker-based or through affinity plays)

– Motor insurance presence is primarily through fleet sales and CTP insurance, with smaller domestic comprehensive book cross-sold off these two

– QBE has internal claims capabilities, but is stronger in claims handling from its core commercial business than from personal lines

– Claims are handled by Lumley who have a core focus on Fleet Insurance. This resulted in poor claims experience in 2008 and 2009 during the period of rapid growth

– Has solid claims capabilities and a reputation as the strongest provider for claims outsourcing and affinity models

– Internal claims capability but primary focus is not on comprehensive motor capabilities

Bran

d Po

siti

onPr

oduc

t / P

rice

/ D

istr

ibut

ion

Clai

ms

Note: Only selected competitors are shown

Page 11: Australian Car Insurance Market - ANALYSIS

COMPETITOR CUSTOMER VALUE PROPOSITIONS (3/4)

11

The Aggressors are new market entrants who are primarily adopting price driven challenges to the Incumbent brands, generally using direct or white label distribution

AggressorsBudget Direct ibuyeco Virgin Australia Post

– Owned by Auto & General, a subsidiary of privately-held Telesure, a direct player in South Africa

– A&G primarily run a direct multi-brand strategy with capability to offer products through intermediaries, of which Budget Direct is the headline brand

– Aggressive focus on challenging the major brands on price

– Distribution brand / channel for Auto & General, with brand positioning aimed at the niche market of environmentally conscious drivers

– Insurance premiums are at the lower cost /lower featured end of the spectrum, however cover is bundled with the calculated cost of offsetting the vehicle’s carbon emissions for the year of cover

– White label agreement between Auto & General and Virgin Money, which aims to leverage the Virgin brand’s association with value for money in Australia

– Value proposition is strongly price based, with an emphasis on low premiums (“up to 30% cheaper than the big guys”), plus additional offers of 13 months cover for the price of 12

– Also offer a 2 year premium level guarantee

– White label agreement between Auto & General and Australia Post, which aims to leverage the strong brand, customer base and distribution footprint of the national post provider

– Value proposition is based around a ‘value for money’ price-based offer, married to a trusted brand

Real YouI Progressive– Owned by Hollard who are a privately owned company

that offers a diverse range of General and Life Insurance products.

– The only Motor Insurer to promote 10% cash back if you do not claim in 3 years and Pay As You Drive insurance

– Owned by Outsurance, a direct distribution player in South Africa

– Offers comprehensive motor but does not provide CTP– Brand name and marketing material are highly

customer-centric (You.Insured)– Uses a direct distribution model with an emphasis on

price savings through more accurate risk pricing

– Entered the Australian market in January 2010 with a sole focus on motor insurance

– Progressive’s value proposition is based on convenience, with 100% online purchasing and claims management designed to target individuals who prefer to only transact via the internet

Bran

d / P

rodu

ctBr

and

/ Pro

duct

Note: Only selected competitors are shown

Page 12: Australian Car Insurance Market - ANALYSIS

ExperimentersBingle iSelect Coles

– Developed by AAMI in response to the entry of aggressive online competitors with approximate startup costs of $10m - $15m

– Target customers are customers seeking the cheapest premium

– Lowest cost strategy with no sales, service or claims call centre (i.e. all online) and basic product:– No claims bonus has been

replaced by “best price on the day”

– No windscreen excess– No new car replacement– No choice of repairer

– Aggregator website providing quotations and feature comparisons across a panel of motor insurance providers

– Initial market entry was in health insurance, with a recent expansion into motor insurance

– The technology platform is via Auto & General

– Panel includes a range of the Aggressor brands: Ozicare, Cashback, Budget Direct, 1st For Women, Heels n Wheels, Kudos, ibuyeco, Retirease Insurance, Dawes and Silver Fox – these are all Auto and General brands

– The Incumbent and Mid-tier players are yet to engage as a supplier to any of the aggregator sites

– Coles Insurance is a white-label arrangement between two Wesfarmers subsidiaries, Coles and Lumley, launched as an attempt to extract synergies from its insurance and retail subsidiaries

– Aims to leverage the Coles brand and distribution footprint to provide a mass market insurance offering

– Launched in mid-2009 in Tasmania and due for national launch in early 2010

– Focus on providing value for money cover as well as minor product innovations that reinforce the brand link (i.e. comprehensive cover for stolen or damaged groceries)

COMPETITOR CUSTOMER VALUE PROPOSITIONS (4/4)

12

The Experimenters are a mixture of existing players adopting new business models and new market entrants who are aiming to grow the online aggregator distribution model

Bran

d / P

rodu

ct

Note: Only selected competitors are shown

Page 13: Australian Car Insurance Market - ANALYSIS

DISTRIBUTION CHANNEL BREAKDOWN

13

Branch networks including bank branches and branches of full service underwriters such as NRMA represent 29% of direct distribution and 21% of all personal lines

Distribution Channel Breakdown

Source: JP Morgan General Insurance Survey 2009

All Personal Lines0%

10%20%30%40%50%60%70%80%90%

100%

Direct DistributionBroker, 7%

Other Intermediated

20%

Direct73%

Call Centre56%

Branch Network

29%

Internet11%

Direct Mail, 3%

Key Observations

► Direct channels account for the vast majority of personal lines distribution in Australia, with the remainder distributed via brokers or a range of other intermediated channels (including agencies, strategic alliance partners and affinity groups)

► Online discounting, a common practice in the UK, is gaining momentum in Australia as insurers seek to drive customers to lower cost acquisition channels:– Allianz offer 10% discounts for online

policies in motor and H&C– GIO offers 15% online discounts for motor

and H&C► New distribution channels are emerging,

particularly white label arrangements with retailers:– Australia Post has launched a white labelled

motor product underwritten by Auto & General

– Coles are piloting H&C and motor offerings in Tasmania, underwritten by Lumleys (owned by Coles parent Wesfarmers)

There does not seem to be an overall industry figure for customers using the internet and whilst we are using the JP Morgan figures we have our doubts as to whether internet usage is really as high as 11%

Page 14: Australian Car Insurance Market - ANALYSIS

ROLE OF BANCASSURANCE

14

Research conducted by Datamonitor suggests that bancassurance accounts for at least ~9% of motor insurance distribution in Australia

Source: Datamonitor – Cross Selling Financial Services, 2009

Transaction account

Savings account

Mortgage Credit card Personal loan

Debit card Other insur-ance

Life in-surance

Car in-surance

Pension / super

0%

10%

20%

30%

40%

50%

60%

70%61% 61%

53% 52%

41%

26%

13% 11% 9% 6%

► Research conducted by Datamonitor suggests that bancassurance accounts for at least ~9% of motor insurance distribution in Australia

► Similar penetration rates for non-motor GI and for life insurance suggest that bank-based distribution in general is yet to have a substantial impact in this market

Percentage of products held with primary bank

Page 15: Australian Car Insurance Market - ANALYSIS

AUSTRALIAN BANCASSURANCE

15

Despite the significant potential of their branch networks Australian banks have had limited success in selling general insurance with home and contents providing the greater revenue

Key Observations

► With the exception of Suncorp, the success of banks in GI has been limited with only CBA achieving any minor market share with around 3% market share in each state

► Home insurance has been the major focus with the banks focusing on sales at the point of mortgage origination with a similar strategy being used with motor finance

► CommInsure have had the greatest success in motor because:– Distribution channels are aligned to sales objectives

(i.e. high levels of staff awareness, training to identify sales triggers such as bank cheques for purchasing a car, KPIs, NPS, MI and BDM support)

– The “CommInsure” brand leverages the parent brand equity and raises customer awareness of the insurance offering

– Aggressive pricing and broad underwriting (pricing is more rational after two years of +35% growth)

– Products are good quality, competitive with other offers, and provide limited differentiation from the majors on NCB

► By contrast, the white label models of WBC, ANZ and NAB have seen limited differentiation or sales focus, and have had little impact

► All of the banks have product bundles on offer, primarily structured as add-ons to home loan customers. Only CBA and ANZ offer discounts on motor insurance as part of packages (1)

• 1264 branches combined• Westpac white labels its

motor insurance through Vero and underwrites H&C

• Westpac’s St.George and Bank SA brands white label motor insurance from CGU

• No product bundles including motor insurance (WBC Premier Advantage offers discounts on H&C and life insurance)

• 1094 branches• CBA underwrites H&C and

motor insurance with claims outsourced to Lumley, a subsidiary of Wesfarmers

• Has the most effective bancassurance offering with significant national market share

• ‘Wealth Package’ includes 10% discount on base premium for motor insurance

• 1049 branches• NAB white labels its

insurance through Allianz• Motor insurance discounts

not included in any product bundles (‘Choice Package’ does include discounts on H&C and life insurance products)

• 216 branches• Suncorp underwrites H&C and motor insurance• Although they have the smallest branch network, Suncorp is the

largest of the bancassurance players, having multiple insurance subsidiaries

• Does not offer explicit discounts for bundling insurance with bank products

• 826 branches• ANZ white labels both home

and motor insurance through QBE & ING

• ‘ANZ Breakfree’ product bundle includes 5% discount on first year of motor insurance premium

(1): See appendix for further detail of bundles on offerSource: APRA, Bank websites

Page 16: Australian Car Insurance Market - ANALYSIS

THE VALUE CHAIN & BUSINESS MODELS

16

Business models follow the value chain with the major players adopting a multi-brand distribution strategy which stretches all the way across the value chain in order to maximise margin

Value Chain

The activities undertaken

will define the business

model and capabilities

Brand & Marketing

Claims Management

Product & Pricing

Post Sales Service

Sales & Distribution

Intermediated underwriter

Distributor

Full Service Provider1

Business Model

There are 3 broad

categories of business

models and these define

the core capabilities of

the organisation

3 2Underwriters

may move up the value chain in an

attempt to capture

distribution margin

Distributors may move down the value chain to capture more

margin

Business Model Variant Description Examples

Full Service Provider

Normal reinsurance Takes the distribution and product margin with all the risks and requires capabilities across the value chain

IAG, Suncorp

Heavy reinsurance support

Takes the distribution and product margin and mitigates some risk with reinsurance arrangements and requires capabilities across the value chain

Lumley

Intermediated underwriter

Coinsurance/Reinsurance

Reduces underwriter risk through sharing across partners Admiral

Joint venture Profit and equity risk share arrangement IAG / RACV

Profit Commission Profits based on business volume QBE / ING

Distributor White labelling Leverages brand and protects the customer experience and takes distribution margin. Capabilities concentrated on customer, sales and marketing.

Westpac

Single Insurer alliance Joint branding between insurer and distributor RBS / Norwich Union

Multiple Insurer alliance

Leverage bank brand and provide multiple product solutions HSBC

Aggregator Almost becomes an ‘advisor’ to the customer to select most suitable product from the market and leverages internet technology

iSelect

Option to outsource

claims in order to concentrate

on product and/or

distribution for Full Service

Providers and Intermediated Underwriters

1

2

3

The majority of

bancassurer business

models are either Full

Service Providers or Distributors.

The Intermediate

d Underwriter

model is only used when insurance forms a strong

strategic component

of the overall bank holding

company

Page 17: Australian Car Insurance Market - ANALYSIS

BANCASSURER BUSINESS MODEL IMPLICATIONS

17

The choice of business model has some fundamental implications in terms of potential profitability, operational and reputational risk, and strategic differentiation in the market

Full Service Underwriter Intermediated Underwriter Distributor

– Potential to maximise profitability through controlling margins and cost throughout the end to end value chain (i.e. Setting premium levels, risk appetite, operational costs etc) though this can be cyclical and volatile

– Control the strategic positioning of brands in the market according to customer segmentation and buying behaviours

– Complete control over the customer base

– Control of service standards and quality tailored to your customers needs

– The end to end value chain become your core competencies and the organisation’s resources do not have to compete against other products/services in a portfolio

– Opportunity for multi-brand distribution without significant brand and marketing investment and ability to add revenues through targeting new areas of the market through alternative distribution channels

– Distribution costs can be lower than direct distribution since sales networks are already in place (particularly for bancassurance or retail partnerships where insurance is not the core product)

– Retain control of service standards and quality tailored to customers needs

– Potentially lower operational and reputational risk

– Opportunity to leverage distributors brand, customer base and customer insights

– Marginal distribution costs since existing sales force and infrastructure can be leveraged

– No capital is required to be held

– Additional levels of capital required for book – can be an advantage if capital can be secured at a cheaper rate than your competitors

– Significant and ongoing brand investment needed

– High potential for operational and reputational risk

– Expertise required across the capabilities in the value chain (e.g. distribution, marketing, pricing, claims management, systems)

– Reliant on partner for sales and marketing to generate business volumes

– Partner may prioritise other product lines if insurance is not a core product

– High potential for operational and reputational risk

– Control over the customer base is deferred

– Levels of capital still required for the book - can be an advantage if capital can be secured at a cheaper rate than your competitors

– Expertise required across the capabilities in the value chain (e.g. pricing, claims management, systems)

– May be perceived as a low-volume channel by underwriter and hence de-prioritised

– Limited pricing control and high risk that underwriter may price uncompetitively to ensure margins are preserved vs. direct business

– No control over claims process risks poor customer experience and brand damage as underwriter prioritises risk recovery over customer experience

1 2 3

Stre

ngth

sW

eakn

esse

s / R

isks

Bancassurers can combine elements of these business models to have a “hybrid” model e.g. both

underwriter and distributor depending on

brand/product/customer segment

Today COMPANY A

is a Distributor based on a

white labelling

approach

Page 18: Australian Car Insurance Market - ANALYSIS

RECENT COMPETITOR ACTIVITY

18

The internet continues to be the primary source of competitive activity, and although industry impacts remain weak so far IAG and Suncorp are struggling to respond

Source: Media articles

Experimenter Brands Struggling

► As part of its mid-year results, IAG announced in February 2010 that ‘The Buzz’ had lost money in the first half of the financial year

► Despite this, the Experimenter brands are proving to have broader appeal outside of younger and more web-savvy customers. IAG revealed that the average customer of The Buzz’s is 35 years old and tends to live in wealthier suburbs

Entry of Progressive

► US-based Progressive entered the Australian market at the start of 2010 with the launch of Progressive Direct, a direct online distribution model which aims to gain some of the alternative online market occupied by lower cost internet players

► Progressive hopes to leverage its expertise in online business models and segmentation, and aims to rollout online claims management which it believes will help differentiate it within the Australian market

Increased Aggregator Activity

► Additional players have entered the aggregator space in recent months, with health insurance aggregator iSelect entering the motor insurance market

► The aggregators continue to struggle with low participation from the incumbent brands, which limits the credibility and trustworthiness of their offerings

Competitor Premium Increases

► Suncorp and IAG have announced increases to motor premiums in the first two months of 2010, indicating a hardening of the market and moves from the major players to recover margins

► As yet this has not been met by fierce undercutting from competitor brands (beyond their existing discounting strategies)

► Recent fierce weather events in Victoria have generated extremely large claim volumes and will likely result in further premium increases

Recent Activity

Growing Focus on Marketing

► The entry of new players has resulted in the launch of a number of aggressive market campaigns, both from the Aggressors seeking to gain market share and the Incumbents seeking the defend it

► As a result, marketing spend as a percentage of GWP has increased for most players, and the industry may see a corresponding uptick in switching activity

Page 19: Australian Car Insurance Market - ANALYSIS

Bank Model Brands% of

Group Profits*

Operating Model Strategy

Underwriter/Joint

VentureMultiple 16.9%

Biggest personal lines insurer in the UK with direct and partnership brands as well as commercial presence

Having built up leadership in direct and partnership business, are currently developing commercial offerings and consolidating different brand infrastructure

Multiple Partner

DistributorSingle 6.8%

Mainly distribution model but with some underwriting of own PPI products

Embarked upon a significant growth ambition for general insurance though has found it difficult to make an impact

Single Partner

DistributorSingle 4.9%

Underwrite own PPI but partner with Aviva (formerly Norwich Union) for all other products under a distribution model

Formed a distribution partnership joint venture with NU in 2005 announcing significant growth plans & price focused proposition. Have enjoyed a moderate degree of success through leverage of bank’s customers

Hybrid Single 5.5%Hybrid model, partnering for motor & SME, underwriting own creditor and underwriting some home, passing rest to a panel

Have a growing GI presence, looking to selectively develop underwriting expertise and “cherry pick” risks to underwrite

Underwriter Multiple 5.3%

Hybrid Model underwriting own home & PPI, partnering for commercial. Own E-sure Direct Motor Brand

Growing home insurance offering under the Halifax brand and growing motor direct under the E-sure brand

BANCASSURANCE IN THE UK

19

The banks are split between the underwriting and distributor business models and this has implications for brand positioning in the UK general insurance market

* % of Group Profit attributable to Home & Motor insurance 2005

Now form Lloyds

Banking Group

Page 20: Australian Car Insurance Market - ANALYSIS

EUROPEAN BANCASSURANCE

20

Europe has the highest bancassurance penetration in the world, with a share of distribution channels accounting for more than half of premium income in many markets

Key Observations

► Traditionally the focus is on life insurance rather than non-life products

► Share of non-life insurance for new business in 2006:

– UK10%

– Germany 12%– Italy

2%– France 9%– Spain 10%(Source: “Bancassurance“ Oliver Wyman Study

2008)

► Excluding the UK, agents and brokers play a major role in all European markets

► However, bancassurance has steadily gained market share in motor insurance since 2000 in France, UK Belgium and Spain

► In most countries bankers are targeting motor insurance where they see some potential for cross selling and profits

► In France, Spain and Italy, banks benefit from having a special relationship of trust with their customer and are perceived to be better than insurance companies at handling financial issues and they value the face to face relationship

Northern Europe – Non-integrated Model

• Usually involves distribution rather than product manufacturing

• Distribution agreements are often on an exclusive basis in Germany though UK is multi partnered

• Use of multiple brands for particular segments

• Focus on use of direct channels

Southern Europe – Integrated Model

• Joint ventures or full integration more likely

• Success based on integration of insurance and banking business models

• Appeal to existing bank relationships through active targeting

• Distribution of products by bank staff (i.e. Non direct channels)

Page 21: Australian Car Insurance Market - ANALYSIS

LEARNINGS FROM OVERSEAS OPERATING MODELS

21

While no definitive model for successful bancassurance exists, there are a number of lessons that can be learnt from the models which have succeeded overseas

► There is no “right model” (distributor vs. underwriter) for bancassurance, it is circumstantial to the overall corporate strategy, market and internal business capabilities

► Though there are a number of “get rights”:

– High level of direct distribution

– Relative profitability through maintaining margin

– Relative lack of brand proliferation

– Relative size of market

► Traditional bancassurance models have typically struggled due to tension between underwriter profitability and distributor margin versus ultimate price to customer

► There are a number of successful bank-owned models:

– TD – Meloche-Monnex (Canada) – stand alone direct insurer

– Royal Bank of Canada – RBC Insurance (Canada) – stand alone insurer with proximity to the bank, clear customer proposition and leveraging brand name

– HSBC – HSBC Insurance (worldwide) – leverage brand name and customer capture

Page 22: Australian Car Insurance Market - ANALYSIS

LEVERAGING THE BANK’S BRAND STRENGTH

22

HSBC, WorldwideLeverage the powerful bank brand with

different business models appropriate to the market

Bank of America, USGave their customers the perception of

value to help them save money

A small team of Bank of America employees in conjunction with a research team observed the banking and buying habits of their various customer segments. They discovered:► Certain savings tricks by customers who would round up the

amount of anything they bought to the nearest dollar to provide a small cushion in their transaction account

► Taking this idea, the BoA team 18 months later rolled out a programme entitled “Keep the Change”

► The product works by rounding up the amount of any purchase to the nearest whole dollar when they use their Visa Debit Card and stores the excess balance in an electronic savings jar, in effect a savings account, which is linked to their transactions account

► As an incentive the bank matched 100% of the transactions for the first 3 months and after that they will contribute between 5% up to a total of $250 annually

► Both the 100% and 5% contributions are paid annually on the anniversary of opening the account

► 12 months after the inception of the programme, over 3 million customers had signed up for the programme – including 1.3 million new customers – and had cumulatively saved up $200m

► The use of debit card transactions had increased as a result of the programme which in itself generated extra fee income

► Dependencies for the success of the programme were in the main effective marketing and the back end systems to record the amount which went to the merchant and the amount that is transferred to the electronic savings jar

► As for the customers, it seemed to strike a chord with people emotionally and the inherent desire to save

HSBC have a hybrid model across the world and act as either aggregator, distributor or full service underwriter depending on the market and the opportunities therein. Central to all markets and models though is the use of the single and worldwide HSBC brand.

► In the UK they have partnered with BISIL, who act as an aggregator, to arrange their customer’s motor insurance

► They also offer Premier Car Insurance for their Premier customers through a single distributor model (Equity Red Star)

► In Australia they have a white label approach to leverage the HSBC brand with Allianz

► In Singapore and Hong Kong they act as the underwriters and distributor

► In Asian markets they also act as the underwriter and partner with others for the distribution aspect of the value chain (e.g. Auto Insurance)

► Common to all these models is that the HSBC brand is at the front and central to the proposition

► Employees across all branches and countries are aware of the product and able to sell it regardless of channel – this sales effectiveness is key to penetrating their customer book

► A lot of effort is also invested in understanding their customer book in terms of segments and propensity modelling allowing HSBC to accurately target the product at customers that will offer them the most value and long term revenues

► Investment has been made in the internet capability to ensure that the brand is strongly represented online and that the customer experience is strong

Page 23: Australian Car Insurance Market - ANALYSIS

BROAD & NARROW MARKET POSITIONING

23

RBS, UKMade General Insurance a strategic

priority with a multi brand presence and full business modelRBS in the UK has positioned general insurance as a key income

provider to the overall bank based on:

► Creating a separate business division within the bank - RBSI► A multi channel and multi brand approach matched to key

customer segments in the UK Motor Insurance market ► The portfolio of brands was created through start ups, joint

ventures, and acquisitions ► The distribution of motor insurance through the bank’s

distribution channels (Nat West and RBS branches) was an optional benefit rather than the primary focus

► Strong ‘direct’ offering through call centres and internet channels

► Income from General Insurance is a strong contributor to overall bank incomes at circa 20%

► Joint ventures with other leading retail brands e.g. Breakdown providers (Green Flag), supermarkets (Tesco) enabled diversification for the distribution approach and leverage through well known retail and motoring associated brands

► In short, the components of the business were:– Churchill Insurance provided scale and appealed to a

particular geography of the UK and mass affluent customer segment

– Direct Line run as a separate business for mass market

– Green Flag Breakdown Services allowed for an affinity play

– Tesco joint venture allowed a new distribution approach

► Overall the RBSI model was a combination of Full Service Underwriter and Intermediated Underwriter

► Andy Cornish was the former Managing Director of RBSI for over 9 years and is now IAG’s Direct Insurance Chief Executive

Bingle, e car, Progressive, AustraliaInternet only propositions look to take

market share based on low cost modelBingle (underwritten by AAMI) and e car (underwritten by Southern Rock Insurance co) were launched in 2007 with a value proposition based on low premium prices accessed using only the internet as a channel thus achieving a low cost model. Progressive (US) have a similar model and entered the Australian market in January 2010. Features of this business model are:

► Leverages the models common in the UK where ‘direct’ is popular due to broadband take up and use

► Quote, purchase, renewal and claims are all completed online

► There is no provision of phone numbers for contact – only email and internet contacts

► There is no choice of repairer ► The target market for these types of propositions is a

younger market (Gen X and Y) ► Focused advertising to raise initial awareness► Early positioning to take advantage if internet usage for car

insurance in Australia surges ► Strong positioning for “cheap car insurance” and heavy

above the line advertising spend matched with strong online capabilities

► Strategic proposition is based on industry data that Australians maybe overpaying by $3.4bn for car insurance

► Aiming to sideswipe customers from the market incumbents through price reductions

► The incumbents have set up their platforms to check this aggressive market play (e.g. IAG own The Buzz )

► The success of this market challenge is predicated on greater internet use by customers and that they are more price sensitive than brand loyal

Page 24: Australian Car Insurance Market - ANALYSIS

PRODUCT BUNDLING & INNOVATION

24

Telstra, AustraliaHave successfully used product

“bundling” to prevent churn of their customer book

The key strategic driver for Telstra was to reduce churn of their customer book.

► Defensive strategic move as had 70-80% of the market► Achieved through a strong capability and understanding of

the customer book through segmentation and propensity modelling focused on those customers that were most likely to switch

► Propensity modelling showed that customers with 4 products were very unlikely to switch and hence became the aim

► Some customers were not offered the choice of bundling because of reduced margins

► The added extras were at a low marginal rate to Telstra but perceived by customers as high value

► Success was based on an ‘anchor’ product of fixed line telephones and cross sell from there

► The success came from Big Pond (broadband), and Foxtel, customers saw mobiles as a separate purchase

► Achieved 450,000 customers with 4 products with very high retention rates

► Main issue of churn was driven primarily by price (64% of customers mentioned this as primary reason) and then service

► Started through a trial of asking all fixed line customers about broadband services, it then was about scale

► Product Bundling has been a success for Telstra in meeting its strategic objective of reducing churn and protecting its customer base

► Furthermore, it has become a key approach to marketing its products and services that conveys value and convenience to the customer

Norwich Union, UKEmbracing new technologies for

innovation only works if you can convince customers to take it upPay as you drive (PAYD) is a metric based “user pays: insurance

product.

► PAYD is a product development that bases insurance costs on how much the customer drives, when and where to

► The proposition is that customers are bale to reduce their risk through accurate vehicle usage measurement and only paying for when the vehicle is in use whilst insurers are able to price more accurately for the risks actually undertaken

► Other insurers using this technology are Hollard Insurance in South Africa, AIOI Insurance in Japan and Progressive (TripSense) and GMAC in the US whilst AAMI have begun to actively investigate adoption in the Australian market

► This may cause the size of the traditional motor vehicle to reduce if an insurer introduces PAYD into a geographical area and customers take up the product in numbers – therefore suited to a non-incumbent to launch this strategy to take market share

► Greater accuracy to price risk and segment customers an d more positive underwriting results

► There is obviously a technology dependence on this innovation

► Norwich Union suspended the scheme 2 years after launching as take up from the market was too low to overcome the costs of administration and fitting vehicles with the GPS receivers

► This is despite customers being involved in the pilot saving up to 30% which was particularly suited to low car usage and young car drivers

► It seemed customers were not keen on having a “big brother” device in their cars

► Patrick Snowball was the Chief Executive of NU at this time, he is now with Suncorp

Page 25: Australian Car Insurance Market - ANALYSIS

MOTOR INSURANCE INDUSTRY ECONOMICS (1/2)

► Claims frequency shows some volatility (linked to weather events) but reflects a general increase as additional customers enter the market

► Average claim sizes have been in decline since the start of 2008

25

Premium growth has tended to lag behind inflation over the long term, reflecting increasing competition and declining margins

Motor Insurance Premium Growth

Claims Frequency & Average Claim Size

Average Vehicle Kilometres per Year

(thousands)

2000 2001 2002 2003 2004 2005 2006 200712.5

13.0

13.5

14.0

14.5

15.0

15.5

Passenger VehiclesAll Vehicles

0

20

40

60

80

100

120

140

Claim Frequency (index)Average Claim Size (index)

5060708090

100110120130140

Average Motor Insurance Premium (index)CPI

► Motor insurance premiums have tended to increase more slowly than CPI over the past 10 years, although the gap has narrowed in the last 2 years

► Kilometres travelled per vehicle declined over the last decade, indicating a reduction in car use or trip length

► Over time this trend is likely to limit the frequency of claims resulting from driving incidents

Page 26: Australian Car Insurance Market - ANALYSIS

MOTOR INSURANCE INDUSTRY ECONOMICS (2/2)

► Combined ratios in domestic motor insurance have hovered around 90, the result of high loss ratios driven primarily by weather events

► Loss ratios in 2009 declined from the peak in 2008 but remained high by historical standards

► Industry participants expect loss ratios to improve over the coming two years, however the driver of this move is unclear

► The industry’s weighted average expense ratio increased to 20%, however this may have been skewed by the inclusion in 2009 by a number of new entrants who do not benefit from scale

► If industry forecasts hold, combined ratios should improve to 85 in 2010 and 2011, driving margin improvements and higher profitability in the sector

26

Industry participants forecast falling loss ratios resulting in improved profitability in 2010 and 2011

8993 91

85 85

Motor Insurance Combined Ratios

Forecasts

2007A 2008A 2009A 2010F 2011F0

102030405060708090

100

73 77 71 68 68

16 16 20 17 17

Expense Ratio Loss Ratio

Source: JP Morgan General Insurance Survey 2009

Page 27: Australian Car Insurance Market - ANALYSIS

AUSTRALIAN GI OPERATING MODELS

27

Business models are focused around either full service (direct) or intermediated distribution, with the major players adopting a multi-brand strategy which straddles both models

Full service providers

Incumbents Mid-tier Players• IAG: NRMA, RACV, SGIC, SGIO,

The Buzz• Suncorp: Suncorp, GIO, AAMI,

APIA, Just Car, Shannons, RACQ, Bingle

• CommInsure• Allianz: Allianz, 1Cover (1)

• Zurich

Aggressors Challengers• Auto & General: Budget

Direct, ibuyeco (1)

• Hollard: Real, PAYD• Youi• Progressive

• Bingle (Suncorp, via AAMI)

Intermediated underwriters

• Vero (Suncorp)• CGU (IAG) (2)

• QBE

• Lumley (subsidiary of Wesfarmers)

Distributors(partnered with)

• Westpac (Vero)• St.George / BSA (CGU)• NAB (Allianz)• ANZ (ING & QBE)

• Virgin (Auto & General)• Australia Post (Auto &

General)• Coles (Lumley)

Players who underwrite and directly distribute their own products.

Split roughly into 4 sub-groups:• The two incumbents who operate

through a range of brands• The mid-tier players who are

established but hold single-digit market shares

• The aggressors, who have all launched in the last 5 years and favour low-cost distribution

• The Challengers, which are start-up brands launched by the incumbents to attempt to compete with the low-cost Aggressors

Players who underwrite business which is distributed through brokers or third parties (including banks). Some of these players also have some direct distribution.

(1): Primarily direct distribution but also involved in some intermediated distribution

(2): Primarily intermediated business but also involved in some direct distribution

Distribute products underwritten by intermediated underwriters, occasionally on a white label basis

Page 28: Australian Car Insurance Market - ANALYSIS

MOTOR INSURANCE POLICY FEATURES

28

The majority of players in the market are ranked similarly on policy features, indicating a competitive environment where policy innovations are swiftly replicated by competitors

InsurerPolicy Features

Choice.com.au Policy RatingValuation Option

No Claims Bonus

Choice of Repairer

24-hour Helpline

GIO Agreed Value Yes Yes YesSuncorp Either Yes Yes YesRACT Agreed Value Yes Yes YesRAA Higher of both Yes Yes YesHBA Either Yes Yes YesMutual Community Either Yes Yes YesCGU Either Yes Yes YesCommInsure Either Yes Yes YesING Either Yes Yes YesAAMI Agreed Value Yes YesQBE Either Yes Yes YesHBF Agreed Value Yes Yes YesNRMA Either Yes Yes YesSGIC Either Yes Yes YesRACV Either Yes Yes YesSGIO Either Yes Yes YesTIO Market Value Yes Yes YesAllianz (Gold) Either Yes Yes YesAllianz (Plus) Either Yes Yes YesReal Insurance Either Yes YesAnsvar Insurance Market Value Yes Yes YesPay As You Drive Agreed Value Yes YesApia Either Yes YesThe Buzz Agreed Value YesYoui Either Yes YesBudget Direct (Gold) Either Yes YesAustralia Post Either Yes YesBudget Direct (Std) Either Yes YesJust Car Insurance Agreed Value Yes YesBingle Agreed Value 30

345353

606363

69707071717273757575757777777878808181

87888889

► Mass market brands offering extensive policies with similar levels of features

► Competitive pressures are strong, meaning that most feature innovations are matched by competitors

► It should be noted that certain new market entrants (e.g. Real Insurance) offer policy features which are broadly competitive with the fully-featured incumbents

► The lower end of the features range is unsurprisingly dominated by players whose business models are based on highly competitive pricing

Source: Choice.com.au

Page 29: Australian Car Insurance Market - ANALYSIS

AUSTRALIAN BANK PRODUCT BUNDLES

29

While all of the major banks offer product packages these almost all require a mortgage as their base, and only two (CBA and ANZ) include discounts on motor insurance

Premier Advantage Package► Primarily offered to home loan

customers (but available to other lending customers)

► Provides discounts on lending rates, transaction account and credit card fees, insurance products (H&C, landlord’s, mortgage, and life) and wealth and super products

► $395 annual feeWestpac Choice Student Package► Available to full time students► Fee free transaction account, lending

rate discount for personal lending, interest bonus on savings account

Advantage Package► Home loan based package► Offers discounts on home lending rates

and fees, transaction account fees and credit card fees

► $395 annual fee

Wealth Package► Requires $150k total home lending

with CBA► Lending rate discounts for home and

personal loans, fee free transaction account and credit cards, bonus interest on TDs, financial planning discounts, and life insurance discounts and GI discounts as follows:– 10% off residential H&C base

premium– 5% off investment H&C base

premium– 10% off motor base premium– 5% off loan protection premiums

► $350 annual fee

ANZ Breakfree► Home loan package, plus a broad

range of package options, but no life insurance

► Offers lending rate discounts and fee waivers on home and personal lending, fee free transaction and credit cards, discounts on margin lending and online trading, financial planning discounts, 1 free month of H&C cover in first year, 5% off motor premium in first year

► $375 annual fee

NAB Choice Package► Requires $150k or more of mortgage

lending► Offers lending rate discounts, lending

fee discounts, no transaction account and credit card fees, bonus interest on TDs, premium and discounts on life and H&C insurance

► $395 annual feeNAB Shareholders Package► Available to NAB shareholders► Bonus TD interest, no credit card or

lending application fees, life insurance discount

NAB Graduate Package► Credit card and low interest loans for

recent graduatesMoney Manager – My Home Package► Home loan based product► Provides rate discounts on lending

greater than $150k► Also offers fee discounts on home and

personal lending, transaction accounts, and credit cards

► Discounts on “a range of other banking and insurance products” (however similar discounts available outside the package)

► $300 annual fee

Page 30: Australian Car Insurance Market - ANALYSIS

CUSTOMER DEMAND DRIVERS

30

Value for money and trustworthiness are ranked as the top two factors in selecting a provider, with customers who switched placing a greater emphasis on price

All Customers Customers who switched in the last 6 months

Top factors in selecting a motor insurance provider

OtherOverall Quality of Website

Recommendation of FriendSimple Product Solutions

Professional AdviceLoyalty Rewards / Incentives

Speed of QuotationEase of Understanding PolicyRange of Benefits / Features

Flexible Payment OptionsOverall Reputation

Level of CoverCustomer Service

TrustworthinessValue for Money

0% 10% 20% 30% 40% 50% 60% 70%

3%1%2%

5%6%

9%9%

13%15%

22%23%

33%35%36%

54%

OtherOverall Quality of Website

Recommendation of FriendSimple Product Solutions

Professional AdviceLoyalty Rewards / Incentives

Speed of QuotationEase of Understanding PolicyRange of Benefits / Features

Flexible Payment OptionsOverall Reputation

Level of CoverCustomer Service

TrustworthinessValue for Money

0% 10% 20% 30% 40% 50% 60% 70%

3%2%3%

6%6%

9%8%9%

18%22%21%

32%34%

28%66%

Source: AC Neilsen

Page 31: Australian Car Insurance Market - ANALYSIS

Value for Money

TOP CUSTOMER DEMAND DRIVERS BY PLAYER

31

Deviations in customer responses from the market average show how the differing value propositions of the players is reflected in the priorities of their customers

54%

Market Average

70%

Budg

et Dire

ct59

%

AAMI57

%

Allian

z56

%

GIO52

%

CGU, S

uncor

p51

%

RACQ

46%

APIA

47%

NRMA, RAC

V

Trustworthiness

36%33%

CGU

30%

Budg

et Dire

ct32

%

Allian

z39

%

GIO42

%

Sunco

rp35

%

RACQ

, AAMI

40%

APIA, R

ACV

38%

NRMA

Good Customer Service

35% 38%

AAMI

APIA

RACQ

31%

Sunco

rp33

%

Allian

z30

%

GIO

CGU

27%

Budg

et Dire

ct32

%

NRMA36

%

RACV

Level of Cover

33% 38%

Allian

z, CGU

27%

APIA

37%

Sunco

rp31

%

RACV

AAMI

30%

NRMA

Market Average

Market Average

Market AverageRA

CQGIO

Budg

et Dire

ct

• Price is a significant differentiator, and is clearly valued more highly by budget brand customers than those that have stayed with the traditional players

• Trustworthiness is more of a hygiene factor with less of a spread in customer responses

• Brands with strong state-based roots (e.g. Suncorp show high trust levels)

• Customer service is a hygiene factor for the incumbent brands, but less critical to price-sensitive customers

• There is a low spread in responses on level of cover, suggesting that most brands are competitive on this factor

Source: AC Neilsen

Page 32: Australian Car Insurance Market - ANALYSIS

ROLE OF TRUST IN FINANCIAL SERVICES PURCHASES

32

There is a strong bias towards trustworthiness when it comes to the purchase of financial products, with 68% of the market only willing to buy from established brands

“I would only buy financial products from an established provider”

Breakdown of Responses

Strongly agree; 24%

Agree; 46%

Neither agree nor disagree;

23%

Disagree; 4%Strongly disagree; 3%

Source: Datamonitor Australian Financial Services Consumer Trends Survey, 2007

Page 33: Australian Car Insurance Market - ANALYSIS

LIKELIHOOD TO SWITCH BY PROVIDER

33

Brands with high trust levels and/or strong regional footprints (APIA, RACQ, NRMA, RACV) have the highest incidence of customer stickiness

Source: AC Neilsen

Market Average 5% 7% 22% 26% 41%

Highly Likely Likely Unsure Unlikely Highly Unlikely

Likelihood to switch providers at next renewal (by provider)

APIA

RACQ

NRMA

RACV

GIO

AAMI

Suncorp

CGU

Allianz

Budget Direct

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

5%

4%

3%

4%

4%

5%

6%

5%

6%

5%

4%

4%

6%

6%

9%

8%

9%

8%

9%

11%

12%

19%

19%

21%

24%

25%

23%

27%

29%

30%

22%

28%

28%

25%

25%

25%

26%

25%

23%

25%

57%

45%

44%

44%

38%

37%

36%

35%

33%

29%

Page 34: Australian Car Insurance Market - ANALYSIS

LIKELIHOOD TO SWITCH BY CHANNEL

34

Customers who have used the internet as a purchase channel are a higher risk of switching, while customers using face to face channels are the lowest

Source: AC Neilsen

Market Average 5% 7% 22% 26% 41%

Highly Likely Likely Unsure Unlikely Highly Unlikely

Likelihood to switch providers at next renewal (by original purchase channel)

Internet

Telephone

Other

Post

Face-to-Face

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

7%

5%

5%

4%

3%

9%

7%

7%

9%

5%

28%

22%

21%

19%

18%

26%

26%

24%

20%

26%

30%

40%

43%

48%

48%

Page 35: Australian Car Insurance Market - ANALYSIS

BUNDLING OF BANK PRODUCTS (1/3)

0%

10%

20%

30%

40%

50%

60%

70%

In taking out a newproduct I wouldreview as many

providers aspossible

In taking out a newproduct I would first

go to my bank

I am more inclinedto get several

products from mybank to make iteasier for me

I am more inclinedto get several

products from mybank because I

know and trust them

I am more inclinedto go to separate

providers to get thebest rates

Strongly agree Agree

35

There is a strong bias from customers towards accessing product bundles from their bank to satisfy emerging product needs

What approach would you take to purchasing a new financial product?

Source: Datamonitor Australian Financial Services Consumer Trends Survey, 2007

Page 36: Australian Car Insurance Market - ANALYSIS

BUNDLING OF BANK PRODUCTS (2/3)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Help with lifeevents

Single websiteto manage all

financialservices

Single point ofcontact

Lower rates formortgage / loan

/ credit card

Better rate forhigh-interest

saving account

Reduced fees(banking, cards

etc)

Very important Quite important

36

Drivers for customers to want to bundle financial services products are primarily driven by price (reduced fees or lower interest rates), with convenience a secondary factor

What reasons would you have for bundling products with the same bank?

Source: Datamonitor Australian Financial Services Consumer Trends Survey, 2007

Page 37: Australian Car Insurance Market - ANALYSIS

BUNDLING OF BANK PRODUCTS (3/3)

0%

2%

4%

6%

8%

10%

12%

14%

Switched transaction account dueto getting bundle with different

provider

Didn't change transaction accountprovider due to holding bundle

Didn't change high interest savingsaccount provider due to holding

bundle

37

Bundled products have been shown to provide a reason to switch to and a disincentive to switch away from the bundle provider, however this was only a factor for some customers

How has product bundling influenced your choice of bank?

Source: Datamonitor Australian Financial Services Consumer Trends Survey, 2007


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