The following is a guest post authored by Kyle Nakatsuji (@kylenakatsuji), principal at American Family Ventures (@amfamventures).
Earlier this year, I wrote about the transformation of insurance distribution as part of a broader movement towards “Insurance 2.0.” In that post, I highlighted the growth of incidental channels. In this post, I’ll dig deeper into the concept of incidental channels, exploring their appeal from both structural and behavioral perspectives.
First, as a quick refresher, let’s cover the basic concepts. The incidental channel is a customer acquisition engine (often a brokerage or agency) that provides a product or service that delivers value outside of insurance/risk management, but uses the resulting relationship with the customer and data about the customer’s needs to make a valuable offer of insurance. In this framework, “opportunity-driven customers” consider purchasing insurance because, in the course of other activities, they have completed some action or provided some information that allows an offer of insurance to be presented to them.
To be clear, this isn’t a new idea. In insurance, incidental channels currently exist in a variety of forms. Credit unions and car dealerships partner with insurance carriers and agents to offer insurance based on perceived or observed needs.
In fact, the incidental concept goes back further in other industries. In Designing for Behavior Change, Stephen Wendel shares a fascinating example of incidental distribution – iodized salt. In 1924, the Morton Salt Company, at the request of the U.S. government, started adding iodine to salt as a way to battle iodine deficiency, a leading cause of thyroid issues. Morton’s primary product (salt) delivered independent value but used that relationship to make an important, relevant secondary offer – keeping your thyroid healthy.
In the Morton example, it’s important to note the incidental product wasn’t really a secondary sale since it was largely inseparable from the primary product. However, as incidental insurance channels evolve, we may see the lines between primary and incidental products blurred in this same way. In other words, insurance could become an embedded feature of the primary product.
Whether embedded or cross-sold, I believe incidental channels in insurance are just beginning to reach their potential. In part, this potential will be unlocked by the power of these opportunistic channels to influence buyer behavior.
Why buy insurance, or anything at all?
Before we can start to understand why incidental channels work, we first need to make some assumptions about why people buy insurance. And, in order to do that, we should try to understand why people do anything at all. Pretty deep stuff, I know. Fortunately, there’s great research we can borrow from.
BJ Fogg’s Behavior Model (FBM) is one of my favorite tools for understanding behavior, and will help us address the “why” questions above. The FBM shows that three things must be simultaneously present for a behavior to occur: motivation, ability, and triggers. Motivation refers to the core human emotions that drive decisions (seek pleasure, avoid pain, etc.). Ability refers to if the user can take the action (time, money, simplicity, etc.). Triggers spark or signal the user to take the action.
This framework is presented visually, below. According to the FBM, if a user is triggered when their intersection of motivation and ability place them to the right of “Action Line” the desired behavior should occur. Without getting into too much detail, what’s important to note about the model is that the slope of the “Action Line” implies you can trade off motivation and ability to ensure the potential user/buyers are in a state where behavioral triggers succeed. In other words, although occasionally a user/buyer’s motivation can be so high that even an action that’s very difficult is still successfully triggered and completed (and vice versa) most of the time these factors must be balanced.
I believe the same model applies to insurance purchasing, and incidental channels present new opportunities to move products across the “Action Line” by affecting motivation, ability, and triggers. Let’s explore how.
How can incidental channels work?
Not every incidental opportunity is a good one. An offer to buy pet insurance when you buy a new bicycle isn’t that helpful. But would you buy renters insurance when you sign a lease on a new apartment? If so, would you consider buying that insurance when you started looking for a new place, but before you actually moved? Who would you buy it from?
To make any insurance sale work, the producer can increase the probability of purchase by harnessing motivation, ability, and triggers. To this end, three attributes of incidental channels make them powerful tools for creating insurance purchasing behavior: relevance, lower friction, and timing.
Relevance
Most people are not intrinsically motivated to buy insurance. This makes sense, since many insurance products are compulsory. And for a compulsory product, intrinsic motivation typically isn’t required. For example, if you want to drive a car, you must buy liability insurance, but the insurance-related motivation really stems from a desire to drive.
However, incidental channels are often logically adjacent to an insurance need. As a result, the channel can offer highly relevant insurance products. A relevant product anticipates the buyer’s needs and presents them with optimized, curated solutions. In addition, relevant products can highlight previously unidentified, beneficial opportunities for customers. Both of these attributes can increase intrinsic motivation to purchase (moving people up on the FBM y-axis).
For example, if you use a third party service to purchase a new car, you typically need to provide proof that your current insurance coverage has an appropriate grace period – it will cover the new vehicle for some period of time, then you need to report the new car and update your coverage. If you have this grace period, you may not be highly motivated to update your insurance coverage right away. That said, your motivation to purchase new/adjusted auto coverage might increase if you were made aware, at the point of sale, that your coverage may not be adequate (particularly if you’re “trading up” significantly) or that switching coverage now offered single or multi-vehicle savings.
In this example, a relevant offer based on the primary product/service (and often associated data, which we’ll discuss later) can create or uncover new motivations to purchase, like avoiding pain by having adequate coverage or seeking pleasure by saving money, and increasing the probability that any purchase experience ends in a sale.
Lower Friction
Incidental channels can also remove friction from the purchase process, leading to increased buyer ability, and resulting in higher likelihoods of successfully completing a sale.
An incidental sale is generally the result of a preexisting relationship generated by the non-insurance product or service. This preexisting relationship offers two important benefits – access to data and trust.
Access to data allows the seller to make the buyer’s life easier. It means the seller can pre-fill application information, curate menus/options, avoid painful questions or tests, simplify the underwriting process, or facilitate payment through existing financial relationships. Leveraging important information in these ways allows the seller to increase buyer ability by making the purchase process simpler, faster, and more seamless (moving them right on the FBM x-axis).
A preexisting relationship also creates trust. One of the big issues facing startups selling insurance is convincing buyers that they are a trustworthy producer. Because they are new to the industry, and digital incidental purchasing is (currently) atypical, buyers may need convincing that the seller is reputable. However, if the incidental seller of insurance has already established a trusted relationship with the buyer, it may inherently alleviate some of these concerns. The buyer may attribute their trust in the non-insurance product to the insurance product, or have a history of relying on suggestions of the seller, making a new transaction feel routine.
In some cases, the brand benefits that accrue from having a better experience may also increase the buyer’s motivation – in a sense, the purchase process becomes a source of pleasure (relative to other options).
Timing
Incidental channels can also increase the likelihood of a successful sale by using timing to their advantage to “skip in line.”
Today, lots of insurance is sold as a result of search. Insurance keywords are among the top keywords by paid search ad spend, often priced between $30-50 per click. As a result, insurers spend billions of dollars on advertising to capture potential customers. However, new incidental channels have the opportunity to “skip in line” – in other words, reach the customer before the search engine does. For example, if they can bundle the sale of insurance with the sale of another product, a producer can make and close the insurance sale before the customer needs to search. This creates opportunistic customers, whom we’ve discussed before.
“Skipping in line” offers important benefits. One, sellers can improve the probability of the desired behavior occurring (buying insurance) by offering a better-timed trigger. In other words, if the insurance product becomes a feature of some other product or sale, it can capitalize on moments when the potential buyers intrinsic motivation is at its peak (highest point on the FBM y-axis).
In addition, getting out in front of the search engine allows new, innovative companies to avoid heavy paid search expenses and compete for attention based on attributes like product and service quality. Avoiding the keyword fray can facilitate investment in new products and reduce friction, which generate better experiences for customers and results for the seller.
Conclusions
Let’s take a quick look at how each of the three incidental channel attributes we’ve discussed can impact insurance purchasing behavior (thanks again to BJ).
A relevant offer increases motivation by making the customer aware of beneficial purchasing opportunities. Lower friction offers improve ability to purchase or even increase motivation. Timing is used to trigger offers at their motivational local maximum.
However, these are just a few examples of the potential of incidental channels. Relevant, low friction, timely offers of insurance may have a variety of positive effects not discussed here, particularly when used in combination. In addition, a variety of models could be applied to understand this important purchasing behavior. Finally, trends like the rise in direct distribution systems, availability of new behavioral context, and growth in online/mobile shopping (for everything, not just insurance) are force multipliers.
At American Family Ventures, we believe that incidental channels are an emerging, important opportunity for insurance sellers to create a win-win – better and more useful purchasing experiences for buyers, and increased sales volumes and profits for producers. As always, please let us know if you are working in this area or would like to discuss these ideas further.
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Kyle is a principal at American Family Ventures, the venture capital arm of American Family Insurance, where he is focused on identifying and supporting early-stage companies impacting the future of the insurance industry. Prior to working at American Family, Kyle was a corporate attorney focused on emerging company business matters, including financing transactions and M&A. Kyle has also worked in strategy, finance, and legal roles with a number of startup companies. Kyle holds a J.D. and M.B.A. from the University of Wisconsin Madison.