Eagle Star banks on Air Miles lift-off

The revelation that Eagle Star is to be the first insurer to join the Air Miles loyalty scheme (MW September 11) marks the first serious attempt to break out of the price war since Direct Line effectively started it 12 years ago.

The move will give Eagle Star motor and home insurance policyholders Air Miles points for renewing policies. And comes after a 12-month period in which the company has attempted to improve its distribution through a process of acquisition and own-label deals with the likes of the Bradford & Bingley and Abbey National.

But many observers believe its greatest significance will come if it can shift the market away from price.

Loyalty schemes are not unusual in financial services. For years the biggest and one of the most expensive credit card issuers, Barclaycard, has defended its market share by adding value to the brand through reward schemes and offering incentives such as money off Ford cars and Cellnet bills.

In April, the UK’s largest health insurer – Bupa – launched a loyalty scheme allowing policyholders to contribute to the Bupa Health Fund and fight cheaper health insurance providers.

But both Barclaycard and Bupa are market leaders. Eagle Star, part of British American Financial Services (BAFS), languishes in fourth place in the general insurance market behind Royal Sun Alliance, Churchill Insurance and market leader Direct Line. The latter has built about 50 per cent of the motor and home insurance markets based on price and yet Eagle Star, from a relative position of weakness, is aiming to promote service on top of price as part of its core proposition.

Apart from being the weakest brand in BAFS’ portfolio, Eagle Star has also had management problems. In July, it hired its fourth chief executive in five years, BZW chief operating officer Patrick O’Sullivan, to replace Clive Coates who retired just one year after taking the job.

Last year, BAFS chief executive Sandy Leitch announced a strategic review of Eagle Star’s general insurance business and admitted to considering selling the company.

Though a number of changes have been made since the review was announced, the last set of financial results released in July indicate that general insurance continues to suffer. UK profits for BAFS fell by 6m to 205m, mainly because difficulties in the motor insurance market resulted in a 15 per cent fall in Eagle Star’s profits to 76m.

The insurer has sought to improve distribution through acquisition and in July bought Preferred Direct for 50m. It has also become an own-label provider of insurance products to boost its availability further. In March, Marketing Week revealed that Eagle Star was in talks with Air Miles parent British Airways to form a joint venture selling its motor, household and life products to BA customers (MW March 28).

In April, it signed a joint venture agreement with the AA to target 350,000 AA members’ policies in addition to AA Insurance’s 1 million motor and 500,000 household policyholders. The division is called AA Underwriting.

But the fact that it has gone down the own-label route only further supports the argument that Eagle Star is weak in the market. It launched an advertising campaign last year which featured a running joke about how dull insurance advertising was.

But the ads, featuring shots of table football and a car windscreen covered in a mass of bird lime, were criticised by the ad industry for being more dull than the ads they parodied and saying absolutely nothing about the brand. Though the insurer’s agency – Ogilvy & Mather – claimed that the ads achieved an increase in calls, it is understood that Eagle Star will axe the campaign in favour of new branding work.

“The problem for Eagle Star is that it needs to have a major point of difference but it hasn’t,” says a source close to the company. “Though the brand is strong among independent financial advisors (IFAs) it is very weak among consumers.”

It is not the first time insurers have attempted loyalty. Allied Dunbar, also owned by BAFS, launched a credit card which was perceived within the company to have flopped and two years ago Churchill Insurance launched its own card, through MBNA.

Other insurance companies have offered cash-back loyalty schemes. While Commercial Union insurance is involved in the Shell Smart trial in Scotland. However, Eagle Star’s tie-up with Air Miles – the UK’s biggest loyalty scheme – is the first time an insurer has signed up to a scheme which offers information on customers on a continual basis.

It also signals the first serious attempt by an insurer to break out of a market dominated for the past 12 years by price. Helen Mitchell, researcher in marketing at the Cranfield School of Management, says the move differentiates Eagle Star and may catch insurance rivals such as Churchill and Direct Line on the hop.

But she adds that if Eagle Star is to be successful it will have to do more than simply offer Air Miles. “If you look at Tesco, the reason its schemes have done so well has more to do with improvement in value and customer service than offering rewards. The key differentiator in this sector has to be service if it is to move away from price competition.” Eagle Star will have to offer a qualitatively better service to customers and build its reputation if the scheme is to be effective.

It is unlikely that others in the market will follow Eagle Star’s lead. A Direct Line spokeswoman says: “We feel that schemes like Air Miles are not appropriate to this market, which is focused on price and service. Reward schemes are more suited to regular purchase markets.”

But a spokesman for Eagle Star says: “Motor insurance is a price-sensitive market. If we can get motor insurance customers to think about things other than price when they buy or renew their insurance we are getting somewhere.”

But with weak advertising and poor market presence in an increasingly tough sector, BAFS may find that the only way Eagle Star can truly get somewhere is if it gives up trying to fight its corner and merges it with a rival general insurer – its sister life assurer Allied Dunbar.