(To get access to the detailed analysis this post summarises, feel free to reach out to philip@codepole.com or marek@codepole.com)
The Swedish market for consumer loans has grown substantially over the last decade. As the market has been generating substantial profits for some companies, more players have entered the market and competition has increased. As a result, lenders and brokers have looked for new growth opportunities. Many have added Payment Protection Insurances (called insurance moving forward) to their product offerings and for some players this has been a highly profitable move - contributing to up to 83% of the EBITDA.
Looking at the consumer loan market, the outstanding loan volumes have increased from 150 bn SEK in 2010 to 274 bn SEK by the end of 2022, a growth of 83% according to official statistics from SCB(1) & FI(2). Whilst there is no official statistics on how many of the borrowers have signed up for an insurance, our analysis shows that the majority of the payers are offering insurances and conversations with some key players in the industry reveal that it is their main profit driver - by increasing the lifetime value of users (both lenders & brokers) and covering part of the potential losses from defaults (lenders).
However, we can also see that there are many aspects to keep in mind having insurance in the product portfolio (insurance terms, pricing & commission, technical and operational aspects) and that some players are very successful whilst others are not.
Insurance offering - terms, pricing, and commission levels.
To tie or not to tie - an impact on customer life time & risk
Looking at these types of insurances there are two main categories that are being used; either a “loan protection insurance” or an “expense insurance”. The first category is tied to the loan, i.e. if the loan is fully repaid, the insurance is cancelled. Another aspect is that in case of, say, an accident, the indemnity payment goes directly to the lender who has issued the loan. Further, the indemnity payments tend to match the monthly amount that a borrower pays the lender each month.
In the case of an expense insurance, there is no contractual tie to the loan. In other words, it is optional for the borrower to continue having the insurance even if a loan is fully repaid. The amount of the indemnity payments can be both higher or lower than the monthly payments for the loan, and in case of an accident, the payments go directly to the insuree (in the vast majority of the cases a borrower) who is free to use the cash in any way that it wants.
Clearly, the choice of the two types can have profound impacts on both the customer lifetime value (being capped at the actual loan duration for loan protection insurances) and the downside risks for lenders, as payments going directly to an insuree allow for other uses than repaying the loan.
Terms - some possibility of differentiation
Looking on the term side of things, we can see that there is some manoeuvre for differentiation on the offering, more specifically in terms of the coverage and exclusion periods.
The majority of the offerings on the market cover involuntary unemployment and incapacity to work due to an accident or illness. But there are differences in terms of what level of unemployment or incapacity of work is required to be indemnified. In addition to this, some players are adding additional coverage for caring for ill close relatives or mental health issues. Other aspects that allows for differentiation is with regards to the exclusion periods should an insuree get unemployed or ill.
To summarise, players in the industry are doing what they can in order to differentiate their offering and tailor it to the needs of their specific customer base.
Pricing and commission levels
There is a direct link between the pricing of the insurances that the consumer pays and the commission levels that are extracted by the companies. Looking at both components, we can see that there is a vast difference between relatively similar product offerings.
To be more specific, we can see that there is a 2.5X difference between the offerings with the lowest price and those with the highest. Further, we can see that some players are extracting up to 93% more in commissions. To add to these different pricing and commission strategies, we can see that some players put a large emphasis on the profit sharing element of the insurance (i.e. what is left after indemnities and other costs), whilst others are not.
Breaking down the pricing and commission levels down on the subsegments of players offering the insurance, i.e. 1) large banks, 2) challenger banks, 3) lenders, and 4) brokers, one can see trends in the subsegments but also who seems to be the winners in this market.
Clearly there are a lot of different pricing strategies being applied in the market and the choice of a strategy does have a direct impact on the various players’ bottom line. These are details we are happy to go deeper into - just reach out.
The user flow - technical & operational aspects
As mentioned above, execution really is key in this product line. In our analysis of the market, we have spoken with some key industry players and their insights paint a similar picture; if the user experience is not designed, built, and operationally executed in the right way, very significant churn levels are to be expected.
Technical aspects
As with any insurance related product, the customer touchpoints are few by nature; you sign up for the insurance, you pay for the insurance, and in case of an accident, you notify the insurance company and start a claim to get indemnified - none of which are very enjoyable for the consumer. So with few and non-enjoyable touchpoints, you want to make sure that you make them as smooth as possible.
We have seen first hand how well designed and built user flows that are adapted to the target audience and their preferences, perform really well and drive the conversion rates up and churn rates down. Similarly, we have seen those who have not spent enough time on the user experience struggle with very poor performance - the difference being as high as 7x between best- and worst-in-class players from what we have observed. In order to be a top performer, one needs to utilize the available technical solutions (one concrete example being open banking), integrate proper analytics, and continuously improve the flow based on where users drop off.
Other technical aspects to be taken into consideration is easy to use back office interfaces for the sales personnel (if one does sales over the phone) so that these can increase the number of handled clients per hour. This becomes especially important as a result of the regulatory requirements, which we will go more in depth into below.
Operational aspects
As the insurance industry is a regulated market, sales personnel handling customer inquiries are required to have undergone formal training in how insurances are allowed to be sold to clients. Most players invest in training some of the personnel, who calls are forwarded to in case a client would like to buy the insurance over the phone. In order to make this work efficiently in reality, one needs to ensure that the scheduling of when trained personnel works and that the telephony platform one uses both run smoothly.
Clearly, there is great potential for running a highly profitable product line in addition to one's lending operation by implementing an insurance offering. However, the strategic choices, the technical implementation and the operational execution has a major impact on the results. If you would like to improve your insurance operations, if you are thinking of implementing an insurance offering, or if you are just curious, reach out to us and we are happy to present you with a more detailed analysis including hard data broken down into segments and best in class KPIs.
