The key findings from the report have been summarised in a series of blogs.
This blog discusses the sources of competitive advantage that can be identified across the AFM membership as well as the areas of divergence across the sector. Replays some of the report’s findings around the competitive differences between AFM providers that serve specialist markets and those that serve mass markets. Lastly, suggests a number of questions for CEOs and leadership teams that encourage a discussion around core proposition and attitude to growth.
AFM members display different sources of competitive advantage based on their core proposition and the market they are serving. We looked at four key markets:
Health and Protection
AFM members that operate within the health and protection market are extremely purpose driven, meaning both their strategic decisions and product offerings are primarily based around their core purpose, which in turn often remains strongly aligned to the original heritage of the organisation. A further observation that has been made from this market is that the pricing of health cover premiums from AFM members is often considerably lower than that of PLCs, with the average premium for UK private health cover being £120 per month (Bought by many, 2019), compared to the health cover offered by AFM members which is less than a tenth of that price. Although there is a clear distinction in value proposition with regards to the level of health coverage a customer receives, the primary challenge here is to clarify remaining ambiguity around what the additional benefits are to customers, of being covered by a mutual health and protection provider, versus a PLC.
For income protection providers, the benefits of being with a mutual are often associated with the claims handling process, as AFM members are committed to dealing with claims as promptly and efficiently as possible in order to limit the stress and anxiety for their members. As well as this, their mutuality also results in them having a different disposition to PLCs when it comes to paying out claims: historically, mutuals have been shown to pay out on a significantly higher proportion of claims compared to PLCs, with 94% of income protection claims being paid out in 2020, much more than for non-mutuals, and only a little down on the record of 95% in 2019.
For AFM members focused on savings and investments, the challenge is how they position themselves in the market with undifferentiated products and a relative lack of mass-market brand awareness compared to PLCs with large marketing budgets, which makes marketing via intermediaries very challenging. Mutuals therefore tend to market direct, through their own sales team or introducers, where the value of the mutual proposition can be more clearly demonstrated.
Since AFM members providing life insurance and savings cannot always compete on premium and savings rates against PLCs, mutuals tend to focus on utilising mutuality as a differentiator by ensuring that they offer members a level of customer service that would be difficult for large corporates to replicate. Aspects such as being able to speak to an empathetic member of staff when needed, is valued by members. AFM providers of life insurance and savings often target a specific demographic that prioritise these benefits over premium and savings rates. This finding is supported by AFM’s 2021 consumer research which found ‘quality of service’ to be ranked above ‘competitive pricing’, when asked what the most important factors are when selecting an insurance or savings provider. Having relatable and personable staff was also cited as important when appealing to members, along with clarity of communication.
When looking at general insurance providers within the AFM membership, competitive advantage appears to manifest slightly differently. For example, premiums tend to be either higher, or at least in line with the competitive market. Although on the surface this may be surprising given that the mutual structure of many AFM members means that they do not have the cost of paying dividends to shareholders, their relative lack of scale and financial resource compared to the wider insurance markets means that they are often unable to significantly invest in efficiency gains which in turn, impacts on premium price.
The key challenge here, linking back to the difficulty regarding communicating the tangible benefits of being a member of a mutual, is that there appears to be a lack of understanding from current and prospective members as to why the premium price of a mutual insurer can be more than that of PLCs. As well as a lack of economies of scale, AFM members also offer a personal level of service and often go above and beyond to support their members and communities, especially those most vulnerable, all of which have financial implications which lead to higher premium pricing. However, the question remains regarding whether members associate these benefits with the value of mutuality and whether they choose a mutual insurer over a PLC, despite the premium price, due to these benefits.
Specialist providers are clearly purpose-led and have limited direct competition, their focus appears to be more around member service and retention rather than growth, scale and member acquisition.
When looking at AFM insurance and savings providers that target niche/ specialist markets, it is apparent how they position themselves and develop their competitive advantage. Providers such as Transport Friendly Society and Cornish Mutual were both set up over 100 years ago to serve a purpose very similar to the purpose they serve today. They each have a clearly defined and discrete target market, and their primary focus has been to continually serve the needs of this market by nuancing their product offering in order to adapt accordingly. Therefore, their priority is more around member service and retention rather than perpetual growth, scale and member acquisition.
These organisations also often have an available flow of new members from their target market, mainly from established relationships with institutions such as universities and trade unions who appreciate the history and heritage of the AFM providers and have a longstanding loyalty to them. An example of this can be seen from the medical indemnity providers who have an ongoing pipeline of relationship building with medical students who then join the organisations and stay with them throughout their careers. Thus, reducing the pressure on member acquisition and shifting the focus towards member retention.
As well as the focus on member retention, rather than acquisition, specialist AFM providers also have a very noticeable competitive landscape. Livery Companies Mutual, Transport Friendly Society, IPB Insurance and the medical indemnity providers are just a number of examples whereby the organisations are operating in a market with very limited direct competition.
For those specialist providers offering business insurance and savings products, their competition could be considered the wider insurance and savings markets outside the borders of the AFM membership. However, specialist AFM members serve such niche target markets and have such familiarity with the complex needs of their members who often have high associated risks, the reality is that large PLCs are unlikely to find this an attractive market proposition, at least for now.
Mass market providers have evolved from their original purpose and are often operating in a more competitive market, so their focus is more around member acquisition and ensuring commercial viability.
For AFM providers serving products to mass markets, we observe a somewhat different competitive position. As these mutual insurers and friendly societies have often evolved significantly from their original purpose and heritage, both in terms of target market and product offering, it can be less obvious how they differentiate in the wider market context. They are often operating in a more competitive and saturated market against non-AFM members and so their focus is more around member acquisition, achieving scale and ensuring commercial viability.
This finding is also supported by the data analysis which shows mass market providers have driven both stronger premium (5.24%) and asset (4.40%) CAGR for the period of 2016 – 2020, over and above the AFM membership as a whole (4.03% and 2.95%, respectively).
In summary, the analysis that underpins the report’s findings identified a number of observations and trends in terms of how AFM member organisations strive to achieve competitive advantage. The full report discusses the sector and key markets in more detail and helps paint a picture of the broader market dynamics.
Questions for CEOs and Leadership Teams: Competitive Advantage
- If asked to deliver a 5-minute presentation on your business’ competitive advantage over other mutuals and privately owned competitors, what characteristics would you include and why?
- Of the range of characteristics you would reference in this presentation, what are the strategies you are currently deploying, or could deploy, to emphasise these characteristics to your members?
- Are you clear on your position in the market in terms of whose needs you serve and how you serve them?
- If you can’t compete on price, do your members understand the reasons for your higher premiums and the extra benefits they receive as being a member?
- For specialist providers, given the concentration risk, how will you future proof your organisation? (Expand your target market, diversify product offering, maintain awareness of wider market trends?)
- Will your focus remain on member retention, member acquisition or both going forward and what strategies do you have in place to achieve these objectives?
- How critical to the organisation’s survival is scale and growth and how will you ensure you achieve these growth ambitions?