Atlas Magazine July 2015

Low-cost is dead, long live ultra low-cost

With prices defying all competition, ultra low-cost could well overshadow the low-cost business model from which it has drawn inspiration. Towards which of these two schemes the insurance industry is required to get closer depends on the location, the class of business and the opportunities.

The low-cost model stands as a mini-revolution for insurers. It is mainly available in the Internet offers along with discount products being underwritten online.
As for an airline cheap ticket, the basic formula is customizable as customers are willing to pay just for the services that are actually provided to them. The rate can also be modulated according to the use itself of the insured item. These are the "pay as / how you drive" formulas that adjust the premium according to the distance and to the driving style in the motor insurance.

Ultra low-cost does not revolutionize much the consumption mode of products already dematerialized. It rather focuses on the way these products are being designed. Things cannot be done in halves when it comes to achieving economies of scale. We do not bother much about production costs; it is the whole value chain that undergoes a complete overhaul.

Microinsurance, which perfectly illustrates this principle in emerging countries, has been an extremely competitive field, targeting the masses for an entry ticket of few dollars. Not surprising to see this niche invested by new players experienced in discount schemes. Telephone companies which initially went into business as simple digital intermediaries are now struggling to have the status of an insurer. Also, alternative peer to peer insurance schemes, based on a property-sharing economy within small communities, are now flourishing in Europe.

Ultra or simple discount, no one doubts that insurers will have to try out these new disruptive patterns to be closer to increasingly demanding customers, used to high-tech and free deals.

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