Traditional European auto insurers tend to rely on standard risk criteria such as age and accident rates to target customers and set prices. But that dependence leaves companies vulnerable to new, low-cost competitors. A survey of 2,200 auto insurance customers in Germany, Italy, and the United Kingdom¹ suggests that if insurers supplemented their conventional customer segmentation approaches with one based on an enhanced understanding of consumer behavior, they could retain and serve their current customers better and target new prospects more effectively.

In recent years, understanding the motives of customers has become particularly important because of the proliferation of low-cost insurers that sell policies through the Internet and call centers. These competitors, unburdened by the costs that traditional insurers must bear, make it easier for customers to compare prices and switch carriers. Indeed, we found that from 2000 to 2004, the number of policies purchased through remote channels doubled in Italy, to 8 percent, and more than doubled in Germany, to 16 percent. This trend is striking, given the affinity for face-to-face selling in Italy—the top reason Italians gave for not switching insurers was that they like their agent—and regulations in both Italy and Germany that restrict the ability of consumers to switch. Judging from the United Kingdom's experience in 2005, when customers bought more than 70 percent of all car insurance through remote channels, the shift will likely continue (Exhibit 1). These trends present serious challenges for incumbents, many of which have underdeveloped direct-sales units or none at all.²

In such a climate, traditional insurers might conclude that low prices are essential. Although price is the overwhelming reason customers start shopping—33 percent of Germans, almost half of Italians, and 69 percent of Britons said so—our survey found that when policies were up for renewal most recently, only 21 percent of customers in Germany, 8 percent in Italy, and 35 percent in the United Kingdom actually changed insurers.

An examination of customer motivations and behavior can help traditional insurers spot opportunities they might otherwise miss. When we analyzed the shopping behavior and price sensitivity of the respondents, four distinct groups emerged (Exhibit 2). The largest segment, "reluctant loyals," accounted for 36 percent of the respondents. The customers in this group value price over personal service and hold no particular allegiance to their provider, but they don't actively comparison shop. These consumers are receptive to competitors such as banks, which offer one-stop shopping and can use the customer's existing credit information to speed applications. Traditional insurers should strive to retain their reluctant loyals and can start by streamlining their renewal processes.

The next-largest group, which we dubbed "stables," is particularly attractive to traditional insurers because these customers place more value on the relationship with their insurer than on a less expensive policy: fully 99 percent of them said they would be willing to pay more for a better offering. In the United Kingdom, such customers remain with their insurer up to three times longer, on average, than do those in other groups, while in Germany and Italy they remain up to twice as long. These German and UK customers are also twice as likely to buy additional insurance products, and Italians are up to three times as likely.

This group is shrinking, however, as competitors elbow into the market: it now represents just one-quarter of all respondents. In Germany, for instance, only 22 percent of those surveyed in 2004 fit into the stables group, down from 41 percent in 2000. People in this segment will continue to be important because many an insurer still has large numbers of them on its books. Traditional insurers should capitalize on this group's loyalty by offering higher-priced bundles of products that include homeowners and travel insurance policies, for example.

The third segment, "switchers," consists of active discount seekers who are comfortable with remote channels. This characteristic makes switchers the least profitable segment for traditional insurers and the most difficult to retain—particularly for incumbents with nascent direct-sales capabilities. Such insurers should target other segments or, if possible, adopt lean strategies in the knowledge that the customer's total lifetime value must be realized quickly.

In Germany and Italy, where well-established networks of insurance agents still play a major role, we identified a segment that frequently shops around but rarely switches insurers. These "advice seekers"—16 percent of the respondents—value personal service: 61 percent of them said they would be willing to pay more for better accident coverage, including options such as courtesy cars and reimbursement for legal expenses. Traditional insurers should focus on staying in contact with these customers and using opportunities to cross-sell additional products.

Although the size of these consumer segments varies from country to country, we found that the behavior underpinning them was similar across Europe. Further, some major insurers that use traditional risk criteria end up with very different customer profiles. A comparison of six German insurers, for instance, shows that reluctant loyals constitute anywhere from one-fifth to one-half of an insurer's customer base (Exhibit 3). By understanding the appeal of different products and services to different consumers, insurers can more precisely target those they wish to serve.