Last week’s revelation that Direct Line Insurance is reviewing its 8m (Register-MEAL) advertising account came as a surprise to many (MW June 21).
Its agency, TBWA, is widely credited with helping to build Britain’s most admired financial services brand, and contributing to its runaway success in the early Nineties – red phone and all.
Officially, Direct Line claims that the review is the latest stage of a wide-ranging reassessment of its business under new chief executive Ian Chippendale, and new head of marketing Karen Jones.
But observers believe the advertising review, along with other developments, are indicative of a wider malaise. Direct Line is searching for more than a new agency. It needs a new position in a market which it originally created but is now finding uncomfortable.
Last year, Direct Line celebrated its tenth birthday by winning the ITV Awards for Marketing “Brand of the year” prize. In its relatively short life it had established itself as the UK’s largest private motor insurer – selling twice as many policies as its nearest rival – and the country’s second biggest household insurer.
But 12 months on it is a different story: in May it announced a 90 per cent fall in profits to 5m, the biggest fall in its history. A conscious decision to sacrifice short-term profits to build long-term market share, through a large number of loss-leading new products, and the erosion of its strength in its core motor and household markets were blamed. Last July, it was forced to cut up to 20 per cent off its car insurance premiums in an attempt to force weaker rivals out of the market.
Both its motor and household premium rates have fallen: new motor polices fell by 30 per cent. This under-performance has led to a reappraisal of its place in the market. The agency that wins the account will have to deal with a company in a state of flux, uncertain of the direction it needs to take.
There is no quick-fix solution for Direct Line. Its greatest problem appears to be its founding philosophy. When it launched in 1985, Direct Line was a niche business targeting “sensible”, low-risk drivers who were frustrated at subsidising high-risk drivers elsewhere.
It cut prices, and eliminated commissions and salesforces by going direct to “sensible private motorists aged 25-plus who drive sensible cars sensibly”. It developed its business and became market leader.
Graham Gould, a partner at strategic consultancy The Coba Group, says Direct Line’s greatest strength is maintaining profitability by keeping costs down. “Each product is standalone and profitable in its own right, whereas the bancassurers and insurance companies cross-subsidise.”
But other companies have caught up. AA Insurance managing director Mark Wood says that Direct Line’s premiums in the low-risk categories are not as competitive as they once were. Hundreds of competitors have swamped the market. “Direct Line is withdrawing from the real cut-throat sector that it made its mark in, cherry-picking easy low-risk customers,” he says.
Many of its more established rivals, such as Eagle Star and Norwich Union, responded to Direct Line simply by copying it. They eliminated insurance brokers and commission, launched their own direct telephone sales operations and sold much cheaper products.
The AA, which has been busy cutting its costs and prices, plans to launch a direct-selling operation in the autumn called Insurance Direct. Wood claims that AA Insurance has been a net taker of Direct Line business since last November.
Faced with saturation, Direct Line has tried to extend its “low-risk” strategy into other sectors of the market targeting the same “sensible” customers. Home insurance was first in 1988 but in the past two years it has launched four new products in the same vein including mortgages, life and PEP products. A savings account was launched earlier this year, designed to help finance its mortgage lending operation, and it is also testing travel insurance.
However, analysts argue that these markets are also becoming saturated. The opportunities to cherry-pick have lessened as other players have wised up – all of which threatens to drive the red phone into a cul de sac.
Last year, Peter Wood, then chairman and chief executive, announced plans to offer a breakdown recovery service to low-risk customers. He dubbed it “Red Phone Recovery”. The AA responded promptly by offering special deals to low-risk drivers. Wood, who has moved to set up a US-version of Direct Line, floated a lot of ideas to assess the reaction of the market but they often came to nothing.
According to advertising sources, TV campaigns no longer attract these low-risk profitable customers but, rather, those who make a large number of claims. If that chimes with Direct Line’s experience it will inevitably lead to reduced advertising spend and greater investigation into other marketing techniques.
Most of Direct Line’s new products are aimed at existing customers, rather than new ones. But it is a Catch 22 situation. It needs to develop its customer retention in line with rivals but that can be expensive, threatening its cut-price positioning.
AA Insurance’s Wood believes Direct Line’s management took its eye off the ball. “It is still busy trying to recruit customers and ignoring retention. Customer retention is now the number one priority.”
However, Gould says: “If Direct Line developed loyalty and retention programmes it would be a mistake, because its ability to offer the best value would be reduced.”
Direct Line’s Jones says that the focus has changed more towards customer service, highlighted by the opening of an accident management centre and a repair service. She claims the company enjoys retention levels of 80 per cent and refutes the view that adding services adds costs. “Our latest figures show that our costs are still 50 per cent lower than the industry average.”
But the main problem for the agency which wins the Direct Line account will be where to take its brand image. Value for money has been wiped out as a sustainable position in the market as major insurers and other players have jumped on the telephone insurance bandwagon. The red telephone image, while instantly recognisable, is dated.
Recent advertising has emphasised the friendliness of Direct Line’s service. But its selling point remains value for money and speed of service. These brand values have been difficult to transfer to the life, mortgage and PEP markets where speed is more difficult and cheapness of less value to customers.
The rush to launch new products in the past two years appears to have more to do with pleasing Direct Line’s parent, Royal Bank of Scotland, and the City.
Though it accounts for less than 20 per cent of RBS’ income, Direct Line’s strong brand image directly affects the performance of its parent. RBS is going through an uncertain period, with takeover rumours.
The agency that picks up the business will have to deal with a company that has not only lost its way but must fundamentally change if it is to get back on track. Having broken into the market and then wrecked it, all its well-heeled rivals followed suit and cut prices. Direct Line has to change, otherwise it will be virtually impossible to find anybody willing to offer it a life insurance policy of its own.