Traditional European auto insurers tend to rely on standard risk criteria such as age and accident rates to target customers and set prices. But that dependence leaves companies vulnerable to new, low-cost competitors. A survey of 2,200 auto insurance customers in Germany, Italy, and the United Kingdom¹ suggests that if insurers supplemented their conventional customer segmentation approaches with one based on an enhanced understanding of consumer behavior, they could retain and serve their current customers better and target new prospects more effectively.

In recent years, understanding the motives of customers has become particularly important because of the proliferation of low-cost insurers that sell policies through the Internet and call centers. These competitors, unburdened by the costs that traditional insurers must bear, make it easier for customers to compare prices and switch carriers. Indeed, we found that from 2000 to 2004, the number of policies purchased through remote channels doubled in Italy, to 8 percent, and more than doubled in Germany, to 16 percent. This trend is striking, given the affinity for face-to-face selling in Italy—the top reason Italians gave for not switching insurers was that they like their agent—and regulations in both Italy and Germany that restrict the ability...