Brand Awareness

Affinity marketing is now well established in many forms of financial services, most notably the credit card sector where, in 2000, more than £3.3bn was spent on affinity credit cards. However, many in the insurance market have still to take advantage of the opportunities presented by it.

In this article, the implications of affinity marketing or white label offerings for brokers and insurers will be examined and a look will be taken at the structural impetus behind the growth in this market, the point at which affinity marketing makes sense, how a successful relationship should be managed, the benefits and the costs.

Broadly, affinity marketing is the leveraging of a brand relationship to sell a product or service, usually provided by a third-party supplier. Affinity relationships already exist within the insurance industry in the provision of risk management, premium credit, or even commercial brokers offering personal lines via a third-party provider, as is the case with most of the UK's top insurance brokers. However, the growth of affinity marketing has seen non-financial companies leveraging their brand value to generate additional income through affinity marketing.

Affinity marketing is probably the fastest growth area for financial services distribution. The key driver behind this is the increasing power of brand. From the consumer's perspective it offers a known and trusted set of associated values, and from the providers, the opportunity of leveraging the values associated with one product area to sell a product or service in another.

Specialist teams

One of the best examples of affinity marketing has been achieved by Tesco, which now has in excess of five million customer accounts and is, for the time being, the only supermarket to also offer mortgages. In addition, they have well over one million motor policies and 350,000 pet policies. However, what does the UK's largest retailer of baked beans know about insurance? The answer is very little. What it does understand is its customers and, using a specialist team, has been able to assemble a set of products that meet their needs in terms of cover and price.

It is not just supermarkets that are having a huge impact - everyone from sports and social clubs to electricity suppliers are offering insurance. That said, there are a range of organisations looking at affinity schemes from trade bodies to charities.

The implications of affinity marketing for the insurance industry are significant, as customer relationships with trusted brands have become a key driver of business. Competition in some instances has increased, threatening margins but, on the flip side, technological developments have reduced the cost of servicing additional customers. Brokers have responded by launching their own consumer brands and, if operational efficiency is a key strength, by providing the insurance service to the customers of the more powerful brands.

The critical question is clearly where does breakeven lie? Or, how many clients are needed to make the product worthwhile? We estimate that a target audience of at least 5000 potential customers can be profitable to both the dominant brand and the actual provider but, clearly, the more the better.

So what makes a good affinity scheme? The success of an affinity scheme is dependent upon several factors. The first of these factors is brand stretch and strength. The brand must be able to 'stretch' convincingly and be strong enough to compete with other potential affinity relationships. Most people will have conflicting affinity relationships, for example, at the highest level it may be with a supermarket, next might be an employer, however, the favoured relationship may be the favourite charity. Affinity relationships do not necessarily transverse all products and services. This can be seen by the relative successes of some of Virgin's offering, such that its brand will easily 'stretch' to some products but less well to others.

The second factor is customer experience. The customer has bought into the brand and its values. Every experience the customer has, even when dealing with the third party's call centre, must reflect these brand attributes. Treating Customers Fairly and the focus on it by the regulator is a useful guide, and all brokers should follow the best possible practices when dealing with customers. A sophisticated call centre, which enables employees to identify calls and tailor responses, is the absolute minimum required in order to ensure a quality brand experience.

Also, an ideal affinity group has features in common beyond brand loyalty or a large group of people. Indeed, a true affinity relationship targets specific groups of people with common characteristics. These can take two forms, in some instances, such as the members of an advanced motoring club, these characteristics can form the basis of the underwriting proposition and, therefore, a tailored offer. However, in others, the common interest, such as readership of Top Gear magazine, may be the only feature they have in common and it may well be an interest that does not impact on underwriting criteria. These cases will need to be serviced by a panel of brokers, as if you were dealing with any other randomly selected group of people. Brokers should ensure that they are able to cater for all within the group, for example, in a company wide affinity scheme the car insurance requirements of the managing director who may collect Porsches as a hobby, will be very different from those of the security guard.

Product design

As illustrated above, product design can work in several ways, assuming the affinity group shares the same collective interest. For example, for members of a football club where there is little homogeneity, then a standard brokerage approach is best, with the relationship secured at non-product level, such as part of the commission going to fund the youth team. If, however, the members share common characteristics then it may be possible to design a bespoke product, for example, members of a classic car club might need specialist cover under its household policy to cover memorabilia. Every affinity relationship will work differently in terms of offer but as long as the offer satisfies the collective need, then there are grounds for a good affinity relationship.

It is very important to work out with the affinity group how the scheme is to be marketed. For instance, is there a database? What level of information exists? Is it more than just names and addresses? The ability to segment the database by simple things such as age will allow better targeting of appropriate prospects, and a schedule of how often you can mail the database must be agreed up front.

Data protection issues must also be addressed and in all instances, the data must be mail preference serviced before a single mailing can take place.

To benefit truly from the relationship, it makes sense to leverage existing communication with customers. In addition to mailing prospects, check whether the affinity group uses other communication methods, such as membership mailings, customer newsletter, e-mails, regular surveys and notice boards in premises.

Producing bespoke marketing material can be expensive, so careful consideration needs to be given to how much of the affinity branding is used. Allowance must also be made for affinity branding on all administrative documentation, such as policy documents and letterheads.

That said, it need not be expensive and clever marketing can reduce costs. Normal mailings can be piggy backed, or regular communications, such as pay slips, used as a base for advertising.

Last, but by no means least, is the issue of compatibility. Like any other business relationship, if it is to last there must be a good fit between both parties and a mutual appreciation of the challenges faced, and also sensitivity to the customers' profile. There needs to be a clear understanding of how the organisations will work together, in terms of process and also in terms of style and approach.

At the outset, cross-selling opportunities should also be investigated. Most affinity groups share the same broad characteristics across the board. Therefore, if the primary offering is motor, it is likely that household, travel and many other personal lines can also be added on.

All parties should be looking for an equitable return, with any relationship being managed in such a way that there is an adequate operating margin for the affinity group and the broker and, if appropriate, any outsourcer that they are using.

Typically, revenues from an affinity arrangement are based on a share of commissions. Affinity relationships can take longer to build but, once established, are often more profitable with better retention rates, so you should look at any relationship over a reasonable time frame - typically three to five years, unless you are taking an existing book of business.

Despite these many advantages, a broker may still shy away from affinity business, somehow reluctant to take on business that it does not fully own and in which its margins are eroded. However, it can be argued that in our industry the marginal cost of servicing additional customers is much less than the additional revenue, particularly as developments in technology will require significant investment, the cost of which can only be borne by a large customer base.

Furthermore, building a brand is expensive - and how many brokers, even the large ones, can hope to compete with either the marketing spend or established customer relationships that other brands have? A customer renews their car insurance once a year but will visit its supermarket every week. In other instances, most notably in the charitable sector, the brand can tug on emotions that a commercial entity cannot reach.

New developments

As established affinity brands such as Tesco develop and mature, we are seeing a new development in the industry. Already established as a successful financial brand in one area, it is now seeking to exploit this strength in other related areas. Where it may not have the capability to service this area it is turning to third parties to provide the service. The affinity brand has outsourced a core insurance product to one party, that, when looking to move into a new and related market, turns to a second party to provide this. A good example of this is pet insurance, which is heavily outsourced to a few core providers.

In other cases, brokers may be turning away business because it is not core - here the value of the broker's brand is being thrown away. The broker may be reluctant to pass on leads or customer relationships to another broker, concerned that they will lose the client completely. However, with the right safeguards in place, brokers can offer an enhanced service to existing and potential clients. By working with a third party that is able to offer the relevant cover, they can simultaneously earn income from these leads and fulfil a customer need. It is a win/win situation.

Brokers must, therefore, embrace affinity business. They need to be looking for value wherever they can, be it in exploiting the strength of another's brand or maximising the revenue from their own.