Motor Third Party Liability Insurance in Russia: Gaining Competitive Advantage

by

Konstantin ROGOZIN

2006

An individual report (part of a management project) presented in part consideration for the degree of MBA

TABLE OF CONTENTS
1. Introduction ........................................................................................................... 2 2. Report Structure ..................................................................................................... 3 3. Nature of Motor Third Party Liability Insurance ....................................................... 4 4. Russian Third Party Liability Insurance Market ........................................................ 5 4.1. Background..................................................................................................... 5 4.2. System of Limits, Tariffs and Coefficients ........................................................ 5 4.3. Competitive Environment ................................................................................ 7 4.4. Outlook........................................................................................................... 9 5. Insurance as a Service-Based Business .................................................................. 11 5.1. Services Definition......................................................................................... 11 5.2. Services vs. Goods......................................................................................... 11 5.3. Classification of Services ............................................................................... 12 5.4. Quality of Service .......................................................................................... 14 6. Gaining Competitive Advantage ............................................................................ 15 6.1. Choice of Strategy ......................................................................................... 15 6.2. Role of Supplementary Services ..................................................................... 16 6.3. Creating Customer Value: Kano Method ........................................................ 22 7. Conclusion ........................................................................................................... 24 8. Bibliography ......................................................................................................... 25

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1. INTRODUCTION
An introduction of compulsory MTPL (Motor Third Party Liability) insurance on Russian market has been considered by insurance community as a major development, which has had a massive impact on Russian insurance industry. It brought to Russian insurance companies millions of new customers and created instant cross-selling opportunities prompting insurance companies to re-think the way they market their products and services. A profitability of MTPL insurance and its strategic flair make this business segment to be highly attractive for insurance companies. However, a standardised nature of MTPL insurance implies limited opportunities for product differentiation. Nevertheless, an imaginary insurance company may wish to embark upon strategy aiming to achieve a competitive advantage over its competitors. The aim of this report is to identify which factors of service-based offerings are of utmost importance for customers, to consider which areas of MTPL insurance may contain a potential sources for differentiation, and to stress importance of knowing customer needs and requirements. This report should assist the insurance company to categorise and systematise relevant information so as to develop a product position, which may give a competitive advantage.

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2. REPORT STRUCTURE
This report consists of two distinctive parts. The first part introduces a nature of MTPL insurance and briefly outlines a rationale behind making it compulsory class of insurance. It also provides a general overview of Russian MTPL insurance market by looking at such areas as existing tariffs and limits of liability, nature of competition in this segment and likely developments in the future. Thus, the first part sets a ground for future analysis. The second part starts from identifying important characteristics of service offerings, which differ services from goods, thus implying implementation of specific marketing approaches for service-based businesses. It then considers a number of frameworks, which are drawn from extensive pool of marketing literature, and attempts to relate these frameworks to practical issue, in particular Russian MTPL insurance market. A particular focus of this exercise lies within analysis of the ways of gaining a competitive advantage in MTPL insurance segment.

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3. NATURE OF MOTOR THIRD PARTY LIABILITY INSURANCE

The liability insurance plays a prominent role in a modern society in a number of ways: It provides a mechanism ensuring that those who suffer losses, caused by another party, are compensated for these losses;

It protects the party, who is responsible for causing the loss, against financial distress, since insurance can be relied upon to pay compensation; It gives behavioural incentives to both individuals and businesses for better risk management; It drives up standards by putting pressure on factors that generate insecurity.

In some cases liability insurance is compulsory by law. The MTPL insurance, which covers liabilities arising from the use of motor vehicles on the roads, is a prime example of compulsory insurance. Owning or driving a motor vehicle entails considerable risks. Thus, according to the UKs Department for Transport, between 1951 and 2005, 305,972 people were killed and 17 million persons were injured in accidents on British roads. Although UK has one of the lowest road death rates in EU, this still represents a serious problem. For instance, in 2005 in Great Britain there were 199,000 personal injury road accidents, which resulted in 271,017 casualties with 28,954 people being seriously injured and 3,201 killed. Thus, MTPL performs an important social security function and is compulsory in many countries. Although legal requirements differ from one country to another, the essence of MTPL insurance is one and the same, i.e. to provide a cover against liability for: 1) injury or death caused to third parties; and 2) third party property damage.

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4. RUSSIAN MOTOR THIRD PARTY LIABILITY INSURANCE MARKET

4.1. Background A Russian Federation Federal Law No. 40-FZ on Compulsory Insurance of Vehicle Owners Civil Liability came into force on 01.07.2003 and since then has considerably contributed to changes in the marketplace. Not only it created a new RUB 60 billion (GBP 1.19 billion) 1 market thus boosting premiums in non-life insurance sector from RUB 196.4 billion (GBP 3.89 billion) in 2002 to RUB 283.0 billion (GBP 5.6 billion) in 2003, but also has significantly broadened the scope of insurance companies activities. The MTPL insurance is considered to be as one of the major factors contributing to the impressive growth of Russian insurance market. Importantly, an attitude towards MTPL insurance is positively changing within Russian society. Thus, according to ROMIR Monitoring, a market research company, the percentage of vehicle owners, who consider compulsory MTPL insurance as yet another state-imposed tax, reduced from 40.2% in March 2005 to 27.1% in March 2006. Whereas among those, who experienced a road accident within the last year, a transformation is even more noteworthy, i.e. from 30.4% to 13.1% respectively. It has been widely recognised that compulsory MTPL insurance was also a catalyst, which significantly raised insurance awareness of population and encouraged purchasing other types of insurance, principally motor own damage. 4.2. System of Limits, Tariffs and Coefficients At present, the aggregate liability limit of RUB 400,000 (GBP 7,919) per event is split as follows: Bodily injury RUB 240,000 (GBP 4,752) per event, but limited to RUB 160,000 (GBP 3,168) per person;

Property damage RUB 160,000 (GBP 3,168) per event, but limited to RUB 120,000 (GBP 2,376) per person.

A current tariff system in respect of MTPL insurance envisages the use of a base tariff, established for every type of motor vehicle, and a range of increasing/decreasing
1

RUB 1.00 = GBP 0.019798 as per Bank of Russia rate of exchange at 06.10.2006

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coefficients (or factors) such as regional attribute, experience of driver, power of motor vehicles engine etc. For instance, some of the rating aspects are as follows: A base tariff for private passenger cars has been set at RUB 1,980 (GBP 39); The factor of 2 is assigned for Moscow, 1.8 for St. Petersburg and 0.4 for rural area; A loading factor of 1.3 is applied for drivers, who are less than 22 years old and have less than 2-year driving experience. According to adopted law, the cost of MTPL insurance for a particular motorist also depends on his/her previous loss experience. The practice of calculating premiums based on insureds past loss experience is known as experience rating. In MTPL insurance a special form of experience rating, called bonus-malus system, is normally used. The essence of this rating approach is that it penalises at-fault accidents by premium surcharges (or loadings) and rewards claims-free years by discounts (or noclaims bonuses). The law also implies that all motorists should be assigned a particular class reflecting his/her individual claims experience and linked to a particular factor (Table 1). This approach makes it possible for insurers to calculate individual base premium for every customer every time he or she renews the cover.
Table 1: Table of classes in respect of MTPL insurance in Russia Class at at the beginning of policy period M 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Class as at the end of policy period taking into account a number of at-fault accidents committed during the previous policy period 3 4 and more No 1 2 accidents accidents accident accidents accidents 0 M M M M 1 M M M M 2 M M M M 3 1 M M M 4 1 M M M 5 2 1 M M 6 3 1 M M 7 4 2 M M 8 4 2 M M 9 5 2 M M 10 5 2 1 M 11 6 3 1 M 12 6 3 1 M 13 6 3 1 M 13 7 3 1 M
www.97rus.ru/osago5.htm

Factor 2.45 2.30 1.55 1.40 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50

Thus as time passes by, motorists with claims-free experience would be upgrading their class paying less for their MTPL insurance, whereas the ones causing road
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accidents would see their class downgraded resulting in more expensive MTPL cover. However, to achieve an effective functioning of such a system insurance companies should establish and operate information-sharing procedures whereby they exchange with each other the information about their MTPL customers claims experience. This is intended to prevent insureds from disguising or falsifying their true claims history if they switch to another insurer. Unfortunately, due to lack of common data standards, limited information accessibility, poor co-ordination with state institutions involved and other organisational and technical difficulties an intended industry-wide system of operating a collective database did not take off in Russia. 4.3. Competitive Environment Presently, there are approximately 160 insurance companies operating in MTPL insurance business. However, the MTPL insurance market is predominantly controlled by large insurance companies, which own wide regional networks and make an effective use of available distribution channels (Table 2). This makes their MTPL policies easily accessible by clients in different geographical regions of Russias vast territory.
Table 2: Top 10 Russian insurers in respect of MTPL business, 2005 N 1 2 3 4 5 6 7 8 9 Company Rosgosstrakh RESO-Garantia Ingosstrakh UralSib Insurance Spasskye Vorota ROSNO VSK Standard-Rezerv Nasta Total Premiums written, RUB mln 16 203 5 595 3 230 2 687 1 898 1 690 1 554 1 192 1 185 1 172 36 406 Market share, % 29.84% 10.30% 5.95% 4.95% 3.50% 3.11% 2.86% 2.20% 2.18% 2.16% 67.4% 67.05% 54.54% 46.09% Market concentration, %

10 Maks

Source: Expert RA rating agency

The market share of next 10 insurance companies accounts for further 13.14%, which brings a share of top 20 MTPL insurers to more than 80%.
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This type of mass insurance, which has not been experienced by Russian insurance companies in the past, has significantly changed a nature of competition on Russian insurance market. The competitive forces combined with inability to implement a bonus-malus system prompted Russian insurers to offer marketing discounts and hefty agent commissions thus departing considerably from an integral concept of experience rating. Such factors as relatively low liability limits, continuing market growth, crossselling opportunities and others make MTPL insurance to be very attractive for insurance companies (Figure 1).
Figure 1: Premiums written and claims paid in MTPL insurance, 2003-2006 (calendar year basis)
RUB bn 54.3 49.1

60.0 50.0 40.0 30.0 20.0 10.0

27.8 25.0 19.2

29.4

15.1

1.2 0.0 2 h/y 2003 2004 Premiums written 2005 Claims paid 1 h/y 2006

Source: Federal Insurance Supervision Authority, Ingosstrakh Insurance Company

Although market equilibrium in respect of premiums and losses may not has been reached yet, the market loss ratio has most recently stabilised which is also being considered by insurance community as a promising signal (Figure 2).

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Figure 2: MTPL insurance market loss ratio development, 2003-2006 (calendar year basis)

80%

60% 51.2% 39.1% 40% 51.4%

20% 4.8% 0% 2 h/y 2003 2004 2005 1 h/y 2006

Source: Federal Insurance Supervision Authority, Ingosstrakh Insurance Company

After being in existence for over three years this market segment continues to attract new entrants which tells about unused market potential. 4.4. Outlook Obviously, future developments in MTPL insurance business will largely depend on legislative changes, such as change in tariffs or liability limits. For instance, yet in 2005 Ministry of Finance suggested that liability limit in respect of bodily injury claims can be increased to RUB 240,000 (GBP 4,752) per event and per person. However, according to market practitioners an increase in liability limits is unlikely to take place in foreseeable future. It is expected that such aspects as improving quality of countrys overall fleet, growing number of motor vehicles and adjustments of increasing/decreasing coefficients will contribute to the moderate growth of MTPL insurance market in 2006. Whereas inflation and an effect of adaptation to a still relatively new law are believed to remain a major factors driving up claims. For instance, an average claim per accident increased from RUB 20,518 (GBP 406) in 2004 to RUB 22,567 (GBP 447) in the 1st halfyear 2005. According to Interfax, 99% of all claims relate to property damage and only 1% to bodily injury claims. This disbalance exists due to presently bureaucratic and complicated bodily injury claims settlement procedure. However, an introduction of the industry-wide methodology in respect of bodily injury claims cost evaluation and adjustments aimed to facilitate claims settlement procedure, both of which are
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currently being considered, should encourage third parties to more actively pursue this type of claims. Such factors as ability of insurance company to achieve economies of scale as well as to benefit from cross-selling opportunities brought about by MTPL insurance may significantly impact organisations strategic decisions. According to Princeton Partner Group, in 2004 there were about 23 million privately owned cars in Russia and only 45% of them were insured under motor own damage cover. Therefore, the potential for momentous cross-selling opportunities is tremendous indeed. A long-awaited implementation of bonus-malus system may also intensify competition on MTPL insurance market (Box 1).
Box 1: Implementation of bonus-malus system
In August 2006 Russian Union of Motor Insurers has tested an information system developed for information sharing between Russian MTPL insurers. Two major insurance companies, ROSNO and Ingosstrakh, have participated in test launch of new system. To check customers claims history insurers only need to know a unique vehicle identification number, i.e. something, which is easily obtainable either from insurers own databases or from the customer. The system allows insurers to get a claims history and other relevant data about particular customer within 10-15 seconds after submitting simple online query. In the next 3-4 months a newly developed system will be tested by such companies as Rosgosstrakh, RESO-Garantia, AlfaInsurance and others. According to Russian Union of Motor Insurers, bonus-malus system will start to function properly after the companies, an overall market share of which in respect of MTPL insurance exceeds 50%, will join a newly developed information system.
Source: Rozhkov (2006)

Given above discussion, it can be suggested that Russian insurance companies regard MTPL insurance as a highly lucrative segment, and competition is likely to remain very keen. Therefore, Russian insurers may wish to consider strategies, which may enable them to compete more effectively on MTPL insurance market, increase market share and outperform competitors.

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5. INSURANCE AS A SERVICE-BASED BUSINESS

5.1. Services Definition Palmer (2001) suggested the following definition of services: The production of an essentially intangible benefit, either on its own right or as a significant element of a tangible product, which through some form of exchange satisfies an identified need. 5.2. Services vs. Goods There are a number of characteristics that differentiate services from goods and have an impact on the way in which services are marketed. Four of the most commonly cited characteristics of services are: 1. Intangibility services have little or no tangible properties, since they are mostly performances rather than objects which makes it impossible for customers to experience them before a purchase is made; 2. Inseparability of production and consumption services are produced and consumed simultaneously which results in a high degree of customer involvement in production process; 3. Heterogeneity (variability) the potential exists for high variability, which becomes apparent not only in terms of outcomes, but also in terms of processes of production; 4. Perishability of output services cannot be stored, i.e. they cannot be put aside and released to meet upsurge in demand, which requires a systematic approach with regard to a match between supply and demand. Although these characteristics remain widely referred to, they have been criticised as too generic. Lovelock and Yip (1996) suggested an alternative set of eight characteristics that differentiate services from goods, but at the same time they acknowledged, not every service is equally affected by all of them. These characteristics include the following: 1) nature of output performance (not an object); 2) customer involvement in production; 3) people as part of service experience; 4) greater likelihood of quality control problems; 5) more difficult for customers to evaluate; 6) lack of inventories; 7) importance of time factor; and 8) electronic channels of distribution.

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There is a growing recognition that generic characteristics cannot be universally applicable to all services, since they fail to pinpoint individual characteristics of manifold service-based businesses. For instance, OECD (Organisation for Economic Cooperation and Development) included insurance within a broad range of knowledgebased industries and services which comes from the recognition of the fact that an insurance industry is relatively intensive in its inputs of technology and/or human capital. Apart from the general characteristics, knowledge-based services have additional characteristics such as credence properties, high customisation, complexity, risk and uncertainty, and high value added (Jackson and Cooper, 1988). Indeed, as OLoughlin et al (2004) pointed out, financial services are excellent examples of highly intangible and complex service-based offerings, which vary enormously in context, use, consumption, delivery, duration and significance to the customer. 5.3. Classification of Services Patterson and Cicic (1995) placed insurance in Cell 1 in their classification of services (Figure 3). Their proposed framework highlights differences among service firms based on two dimensions: 1) degree of tangibility, i.e. relative involvement of goods in service package; and 2) degree of face-to-face contact with the client required for service delivery. Although the framework analyses service firms in a broader international context, it does provide a starting point for further investigation within an area of MTPL insurance on Russian market.

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Figure 3: Organisational profile of international service firms

Cell 1 Location-Free Professional Services Low (pure services) Typical firms: executive recruitment, market research, environmental science consulting, transportation, finance and insurance, information technology, product design services Cell 2 Location-Bound Customized Projects Typical firms: project management, engineering consulting, management consulting, human resource development consulting, larger market research firms, legal services

Degree of Tangibility

Cell 3 Standardized Service Packages Typical firms: software development, installation/testing of new hardware/equipment, distance education courses, compact disks Low

Cell 4 Value-Added Customized Services Typical firms: on-site training, serviced offices, facilities management, accommodation services, catering, software training and support High

High (services bundled with goods)

Degree of Face-to-Face Contact

Source: Patterson and Cicic (1995)

Based on above framework, Styles et al (2005) classified insurance as a wholly intangible service, whereby reputation is a key factor enabling the firm to achieve a sustainable competitive advantage. This notion confirms Sharps (1995) view that a company with a known name is thought to be more likely to deliver better quality service than a company with an unknown name. Thus, customers often perceive the companys reputation as a substitute of quality. With regard to a purely domestic product, such as Russian MTPL insurance, it may be suggested that insurance companies providing this type of cover on a local basis solely, would need to be re-classified from being in Cell 1 to being in Cell 2. This is because provision of insurance services implies a certain amount of personal interaction, which may occur between customer and service provider before, during and after the provision of service. Hence, such factors as customer service, interpersonal skills of staff, and local presence become of vital importance for successful development of insurance company on the local market in general, and in

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MTPL insurance segment in particular. Intuitively, one may suggest that all these factors evolve around one major aspect, namely the quality of service. 5.4. Quality of Service It has already been established that in financial services customers do face a certain degree of risk and uncertainty, since they cannot evaluate the service providers performance before the purchase is made. Devlin (1998) labels financial services as mentally intangible, which means that an average customers understanding of particular features and benefits may be very limited. As a result of customers inability to confidently and competently evaluate a complex service offering, they place a great deal of faith and trust in service provider (Bloom, 2001). It may lead to increased customer reliance upon experience and credence qualities of service. Hence, the quality of service at the point of purchase often is a determining factor resulting in purchase decision and, what is more important for customer-focused business, in customer post-purchase behaviour (in a context of insurance services, willingness to renew an insurance contract with a particular insurance company). This notion puts a particular emphasis on the importance of systematic analysis and improvement of service delivery since an excellent service experience is a cornerstone of continuous customer patronage and loyalty. According to Best (2005), a poor customer service is a major reason for customer dissatisfaction. Service failures inevitably have a negative effect on firms reputation and may result in a negative word-of-mouth communication. Indeed, a bad service experience can negate the entire marketing effort (Best, 2005). This concept highlights a critical role the quality of service plays in service industries such as insurance.

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6. GAINING COMPETITIVE ADVANTAGE

Arguably, most of the top 10 Russian insurance companies in respect of MTPL insurance business have high awareness, the same prices, convenient locations, wide distribution networks, qualified sales force and provide effective recommendations to customers. Nevertheless, an insurance company, which regards MTPL insurance as one of its strategic products and wishes to continue offering it in the future, may wish to develop a product position that is in some ways differentially superior to that of its competitors. 6.1. Choice of Strategy Positioning strategy is essentially associated with a set of actions the organisation embarks upon in attempt to gain a competitive advantage over its competitors. Porter (1980) identified three generic types of potentially successful advantage-based strategies: 1. Overall cost leadership, whereby the firm aims to reduce its production and distribution costs so as to be able to charge lower prices; 2. Differentiation, whereby an organisation seeks to differentiate its offerings from that of its competitors thus increasing customer value; 3. Focus, whereby the company may choose to serve particular market segment, e.g. specific group of buyers or specific geographical region, rather than aiming for the whole market. However, relating the above-mentioned strategies to specific market and particular product, i.e. Russian MTPL insurance, it may be suggested that insurance companies do not possess a full range of alternatives, with a choice being limited to differentiation strategy. This is so because a standardised and compulsory nature of Russian MTPL insurance implies uniform terms and conditions, the same tariffs, defined benefits, alike or identical claims settlement procedures etc. Therefore, opportunities to truly differentiate a standardised MTPL insurance are rather low. According to Palmer (2001), service quality and price are two very basic dimensions of positioning strategy which are relevant to service industries. Since there are limited or no opportunities for price differentiation, service quality becomes a major source of differentiation in this particular segment of the market. In other words, an insurance
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company can achieve competitive advantage over its competitors by offering greater quality relative to price. The service quality in this context may be regarded as a composite of speed, convenience and availability of service, competence and responsiveness of staff, access to supplementary services and additional benefits etc. Therefore, insurance companies, wishing to gain competitive advantage in a highly competitive MTPL insurance market, may wish to investigate how to make their MTPL insurance to stand out from the crowd. In which respects buying MTPL insurance from our company is different? How can we make it to be more attractive? What is important for our customers? Are our customers satisfied with the service we deliver? Those are types of questions a management of the insurance company needs to think about. 6.2. Role of Supplementary Services Typically, all products, be they goods or services, consist of a core element accompanied by a range of supplementary elements. Augmented product, extended product, product package, bundle of benefits All above-mentioned terms are used to describe the supplementary elements, which go along with a core product and thus add extra value to it. Different authors use different terms when referring to a core and supplementary elements of service offerings. Thus, Mathur (1988) uses terms merchandise and support, whereas Devlin (2001) speaks about features and quality of the core service provided and functional or process service quality respectively. In essence, both sets of above-mentioned terms refer to one and the same observation in respect of provision of services, i.e. what is being made available to customers as a core service offering and how the service is provided. An empirical study of Devlon (2001) confirmed that functional service quality, or support elements, is generally perceived as significantly more important in adding value to more complex services. Moreover, in a modern era of a highly competitive business environment it has been widely acknowledged that these supplementary elements not only add value, but also provide an essential and literally never-ending source of differentiation, which may assist an organisation in setting apart its service offerings from that of its competitors. This conception immensely grows in importance when possibilities for differentiation of a core product are very limited, if any, as is a case with Russian MTPL insurance. Hence, it can be suggested that supplementary elements, viewed as part of an overall quality

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of service offering, represent one of the main sources of competitive advantage on Russian MTPL insurance market. Lovelock and Yip (1996) grouped different supplimentary services into eight categories, namely information, consultation, order-taking, hospitality, caretaking, exceptions, billing, and payment. These categories comprise The Flower of Service model, whereby supplementary services surround the core product (Figure 4).
Figure 4: The Flower of Service

Information Processes Information Payment Consultation

Billing

Core

Order-taking

Exception Safekeeping Physical Processes

Hospitality

Source: Lovelock and Yip (1996)

Using the above-mentioned framework I will now examine which supplementary services Russian insurance company may offer to its customers with regard to MTPL insurance. Information The insurance company may wish to make product information available to its customers. Taking into account a relatively low level of insurance awareness as well as
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difficulties in evaluating product features and benefits, such information should be easy to understand and convey we speak your language message. It may take a form of leaflets or brochures explaining why customers need MTPL insurance and what are the main characteristics of it. This educating approach may well reduce customer uncertainty, gain trust and increase customer loyalty. Consultation and advice The companys personnel should be prepared to give a qualified advice, consultations and recommendations to the customers. A particularly useful approach may be the one related to issuing specific guidelines along with the standard policy. For instance, these guidelines may be designed to inform customers about particular actions they should take after occurrence of a road accident, contain important contact details such as motor vehicle evacuation and/or repair service centres etc. The insurance company may also consider operating a 24-hour call centre to ensure that consultations are provided at the times when customers need them most. Order-taking The points of purchase should be made easily accessible and provide customers with an opportunity to make a purchase at times convenient to them. The insurance company therefore should select appropriate distribution channels and may also consider provision of services outside the normal office hours, on weekends and public holidays. Apart from companys own sales force, a vast number of channels is available: car dealers, leasing companies, commercial banks, car parking places, post offices, supermarkets etc. Obviously, a care should be taken as regards provision of services of consistent standard across different channels. A right combination of distribution channels and their accessibility may lead to substantial increase in sales. Unfortunately, low internet penetration in Russia (according to Internet World Stats, only 16.5% of population had an access to internet as of December 2005, compared to 62.5% in the UK) does not allow to make a full use of this potentially strong resource. On the other hand, it indicates that this channel has plenty of untapped potential. With increasing number of internet users the online sales are bound to grow which should be taken into consideration when developing a distribution network.

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Hospitality No doubt, customers wish to be treated as individuals with their unique needs and requirements. The company, which realises this and treats its customers as guests when they visit the companys facilities, can significantly enhance customer value and satisfaction. For example, installing in premises a simple coffee machine and offering coffee to the customer, who cannot be attended immediately, may be one of the quality enhancing elements. As Bloom (2001) noted, the firm that is adept in projecting a caring image, and that backs the image up with a substantive reality, will do well in the marketplace. Safekeeping Customers may wish assistance with regard to looking after their personal possessions while they are visiting a service suppliers site. For instance, the insurance company may wish to consider allocating car-parking slots designated to the companys visitors. Exceptions Exceptions concern situations, which fall outside the routine procedures of service delivery. They may comprise such issues as special requests, problem solving, handling of complaints, compensating customers for service failures etc. Although it may turn out to be an expensive strategy, it is important to demonstrate that customers can expect high level of responsiveness and prompt corrective action if something goes wrong. An evidence emerging from the field of relationship marketing suggests that customers, who experience quick and seamless problem resolution, exhibit greater loyalty and satisfaction with the companys level of services. Whereas the ones, who encounter problems and experience poor response to their complaints, are more likely than others to switch to alternative service provider. Neglecting this concept may lead to erosion of loyal customer base. This view should constitute an important message for insurance companies, since the costs of switching to another MTPL insurance provider are minimal. Billing It would be desirable to provide customers with clear explanations as to how insurance premium in respect of individual MTPL insurance policy has been calculated. It may be
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done through printing out a separate sheet to accompany an insurance policy that would show a base premium, increasing/decreasing factors attributable to particular customer, current class of the customer according to the rating table etc. It may also show an insurance premium the customer would be charged for the next policy period, subject to no accidents committed, thus giving an incentive for safer driving and establishing a sense of credibility. Advances in information technology allow to achieve this relatively easily, with no major cost involved. Payment Different payment options should be made available to customers thus ensuring ease and convenience of payment, for instance acceptability of credit and debit cards. Also, the possibility of paying premium in instalments, in particular by corporate clients and in respect of large fleets, should not be overlooked. Palmer (2001) considered a general insurance product outlining its core and, what he referred to as secondary service, and suggested, the level of quality to which a service is designed is a crucial element in the total service offering (Figure 5).

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Figure 5: The core and secondary service of an insurance product

SECONDARY SERVICE

Features: period of policy, flexibility, benefits payable CORE SERVICE Tangibles: brochures, policy documents Packaging: other benefits, included in package (e.g. advice services) Core benefit: Peace of Mind

Branding: importance of companys reputation Processes: methods used to process policies and claims

Accessibility: whether available direct or through insurance brokers Quality: level of customer satisfaction sought with respect to outcomes and processes

Source: Palmer (2001)

Here, the secondary service contains both tangible and extended elements of the core service offering, and it can be noted that significant overlaps exist with The Flower of Services model. The company, which seeks to achieve a competitive advantage through adding benefits, may need a wider range of supplementary services than those outlined by the means of The Flower of Services model. The company should also aim for a higher level of performance in all categories. Naturally, such issues as nature of the product, competitive practices, market trends and dynamics, customer requirements and expectations should be carefully analysed in order to determine which supplementary services must be offered and which might be added so as to most effectively enhance customer value. Moreover, whichever supplementary service advantage it is, be it wider distribution network, a product information of excellent quality, transparent billing etc., the
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company should strive to ensure that this advantage is: 1) meaningful for the customers; and 2) sustainable. 6.3. Creating Customer Value: Kano Method There is a growing recognition that customers expect to be served as individuals and are less willing to compromise on service quality. This explains why companies from different sectors assign increasing importance to enhancing customer value and satisfaction, which ultimately depends on the fulfilment of customer needs. Obviously, to meet customer needs organisations should attain a thorough knowledge of what is valued by customers, what their requirements and expectations are etc. Insurance companies too must determine which supplementary elements or additional services that may be bundled with a standard MTPL insurance policy would bring more satisfaction than others. Such knowledge would allow insurers to identify and target the areas of utmost importance thus avoiding ineffective allocation of resources. The Kano method may be particularly useful in designing a service in such a way that meets customers foremost requirements, focuses on the areas of highest impact for customer satisfaction, and avoids areas of indifferent interest. The Kano method addresses six categories of quality attributes: 1. Basic attributes must-be features or dissatisfiers, which are regarded as prerequisites and are taken by customers for granted; the absence of these features would inevitably lead to customer dissatisfaction, but will not cause satisfaction if they are present (because they are expected); basic attributes therefore establish a threshold for market entry; 2. Excitement attributes attractive features or satisfiers, which contribute to customer satisfaction if delivered, but would not cause dissatisfaction if absent (because they are not expected); these attributes surprise customers and drive customer satisfaction; 3. Performance attributes one-dimensional features, which have a direct impact on customer satisfaction; these features cause satisfaction to the degree they are present, and result in dissatisfaction to the degree they are absent; performance attributes therefore call for a particular attention as they represent a major source of competition;

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4. Indifferent attributes features, which customers do not care about as they cause neither satisfaction nor dissatisfaction; since they do not create any value, it would be advisable to eliminate these features to avoid unnecessary investment; 5. Questionable attributes whereby it is unclear whether these features are expected by customers or not; 6. Reverse attributes unwanted or frustration features, which may cause some degree of dissatisfaction if they present, but would not have an impact on customer satisfaction if they are removed; since they are unwanted and do not create any value, it would be advisable to withdraw these features. The Kano method aims to test customers reaction under two scenarios, i.e. in case a product contains particular feature or element and in case it does not, and involves much more technicalities. A complete analysis of Kano method is beyond the scope of this section. Rather, the aim of it was to demonstrate that there are tools and techniques that may provide a valuable insight into customer needs and preferences. Application of these tools may enable insurers to shape their service offerings so as to most effectively meet and exceed customer expectations.

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7. CONCLUSION
After being in existence for over three years, Russian MTPL insurance market still represents a highly attractive business segment. Introduction of compulsory MTPL insurance not only created a new sizeable market, but also broadened a scope of insurers activities, stimulated new product development and significantly intensified competition. It is expected that such factors as low liability limits, cross-selling opportunities, tolerable loss ratios, expected implementation of bonus-malus system and others will continue driving competition on MTPL insurance market. Notwithstanding a standardised nature of the product and hence limited differentiation opportunities, an imaginary insurance company may opt for a strategy, which allows gaining a competitive advantage over its competitors. It has been highlighted that quality is considered to be a key aspect of service delivery. Whereas supplementary elements, which are part of an overall perceived quality, have been identified as a major source for differentiation allowing insurance company to gain a competitive advantage. Relating The Flower of Service model to MTPL insurance market, specific suggestions have been made as to which supplementary services insurance company may offer along with a standard MTPL policy. It has also been suggested that a good understanding of customer needs and requirements makes it possible to design and position a product so as to increase customer value in a most effective way. The Kano method breakdowns quality attributes into six categories and, when applied correctly, may provide an in-depth view into customer needs, expectations, and preferences. This knowledge may enable insurance company to shape a total MTPL insurance offering according to customer requirements thus achieving a product position favoured by customers. The insurance company, which aims to gain a competitive advantage through service differentiation, should have strong marketing abilities, creative vision and fresh ideas, reliable brand and reputation, strong co-operation from channels, and many other factors. Then a dedicated marketing effort may bring positive results even in case of a highly standardised product, such as MTPL insurance.

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