The market for insurance policies includes individuals or consumers, businesses, and governments. Across these markets, there exist many different types of insurance policies, each one designed to meet the needs of a specific group of people.
Insurance companies use a variety of factors to decide which policies to offer, how to price them, and whom to target.
In this article, we will discuss insurance market segmentation using these 5 variables: type of customer, object to being insured, insurance risk, value to be insured, and range of insurance coverage.
Let’s dive in!
The Importance of Segmenting the Insurance Market
When buying insurance each customer’s needs are different. Some are looking to insure their home, others their health, others their car, and still others their lives.
Insurance companies need to have a way of dividing up the market so that they can assess risk and design products that will appeal to each group. This is where insurance market segmentation comes in.
By understanding the different segments in the insurance market, insurance companies can develop targeted marketing campaigns and create products that will meet the needs of each group.
Variables for Insurance Market Segmentation
The insurance market can be segmented along many different lines. In this article, we will discuss insurance market segmentation along these axes:
- Type of Customer (Consumers, Businesses, Governments)
- Object to be insured
- Insurance Risk
- Value to be insured
- Insurance Coverage
Most insurance companies will specialize in certain types of insurance or certain types of markets.
For instance, some insurance companies will target businesses while others will target consumers. Some insurance companies will focus on life insurance while others will focus on property and casualty insurance.
Then there are Re-insurers. Reinsurers insure insurance companies against large insurance losses. In short, insurance companies transfer some of their insurance risk to the reinsurer. This risk reduction allows the insurance company to insure more people and also frees up capital that it would otherwise have to keep cover its risks.
Let’s look closely at each of these factors impacting insurance market segmentation.
Insurance Market Segmentation based on Type of Customer
The most obvious way to perform insurance market segmentation is based on the type of customer.
As we’ve seen in the introduction, the insurance market consists of three types of customers: individuals or consumers, businesses, and governments.
Some companies focus only on individuals and offer insurance for items like health, life, and cars.
Other companies may focus on businesses and offer insurance for things like property damage, product liability, workers’ compensation, and business interruption.
Then there are insurance companies that focus on insuring government entities and public property. This can include insurance for events like natural disasters like earthquakes and floods as well as for man-made disasters like fires and terrorism.
Segmentation based on the Object being Insured
Another fairly common way to perform insurance market segmentation is based on what is being insured. As we saw in the previous section, individuals, businesses and governments tend to insure different objects.
Individuals will insure personal items like their car, house, health, life, travel, and high-value possessions like jewelry and art.
Businesses tend to purchase insurance for things like their buildings, equipment, inventory, and against business interruption. Demand for this last type of insurance has grown since the forced lockdowns of the Covid-19 era, which pushed many businesses on the brink of bankruptcy.
Businesses may also purchase insurance for their employees. A common example is health insurance. But they may also offer other types of insurance like life insurance, which can be used to provide death benefits to employees’ families.
Businesses also tend to purchase insurance for risky activities like product liability and workers’ compensation. Likewise, if a company is working on a critical project, they may purchase insurance to cover any delays or cancellations.
Governments tend to purchase insurance to cover public property like roads, bridges, and tunnels. They may also purchase insurance for natural disasters like floods, earthquakes, and tsunamis. And a reflection of life in the 21st century is that governments now also buy insurance against terrorist activities.
Segmentation based on Insurance Risk
Insurance Risk is an important factor for insurance companies when they are assessing which markets to enter and which types of insurance to offer.
There are four main types of insurance risks:
Property Risk
Property Risk is the risk of loss or damage to property. It can be further divided into two sub-categories: direct risk and indirect risk. Direct risk is when the property is directly damaged or destroyed. Indirect risk is when the property is not directly damaged but suffers a loss in value due to some other event.
Casualty Risk
This is the risk of loss or damage caused by an accident. It can be further divided into two sub-categories: pure risk and speculative risk. Pure risk is when there is a possibility of loss but no chance of gain. Speculative risk is when there is a possibility of both loss and gain.
Liability Risk
This is the risk of being held liable for damages or injuries caused by someone else. It can be further divided into two sub-categories: general liability and product liability. General liability is when a company is held liable for damages that were not caused by its products or services. Product liability is when a company is held liable for damages that were caused by its products or services.
Health Risk
This is the risk of loss or damage to health. It can be further divided into two sub-categories: physical health risk and mental health risk. The physical health risk is when the body is physically harmed. The mental health risk is when the mind is harmed.
Segmentation based on the Value to be Insured
Different objects can be insured for different amounts and so one way to perform insurance market segmentation is based on the value of the object being insured.
Segmentation based on value is important because insurance companies need to know how much coverage to provide and what premiums to charge.
Some insurance companies may specialize in insuring high-value objects like jewelry, art, and collectibles. Others may focus on more mundane objects like cars and houses. And still others may insure only businesses or only governments who tend to need insurance for very large values.
Segmentation based on Range of Insurance Coverage
Range of insurance coverage refers to the extent to which an object is insured and therefore to the amount of money that an insurance company will pay out in the event of a claim.
Some insurance companies may specialize in providing insurance with a very broad range of coverage. Others may focus on providing insurance with more limited coverage and only in specifically defined circumstances.
Some insurance companies may reimburse only for the residual value of the insured property. Others may reimburse for the replacement value of the property. And still others may reimburse for the replacement value of the property plus the cost of any repairs that are necessary.
A good example is car insurance, where some insurance companies will only insure the car for damage caused by an accident, while others will also cover theft, vandalism, and weather-related damage.
Likewise, some car insurance policies will have a copayment while others will not. Some insurance policies will offer a replacement car but others will not.
Conclusion
As you can see the insurance market can be segmented using different variables and analyzed from different points of view.
In this article, we reviewed insurance market segmentation using these factors: type of customer, object to being insured, insurance risk, value to be insured, and insurance coverage.
Insurance companies use market segmentation to decide what new insurance products to build, how to modify existing products to attract more customers, how to market these products, who to target, and how to reach their ideal customers.