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CHAPTER II
REVIEW OF LITERATURES
This chapter presents relevant theoretical and empirical evidence related to customer
loyalty.
The chapter has designed to meet three objectives. The first is to review
constructs related to loyalty form various literatures and previous studies. The second is to
use this information to identify the antecedents and outcomes of loyalty. The third is to
develop testable hypotheses in order to test empirically. In order to achieve these
objectives and for further clarifying the implications of the study the chapter starts with the
theoretical reviews and move on to empirical literatures.
2.1. Review of literature: customer loyalty
This literature survey reviewed the driving forces to customer loyalty (service quality,
customer satisfaction, customer trust and switching cost) starting from definition of
loyalty.
Next, benefits of loyalty, how to measure customer loyalty and finally, the
antecedents of customer loyalty in insurance perspective are assessed based on literatures
and previous studies.
2.1.1. Concept of customer loyalty
Nowadays, customer loyalty has received much consideration and attention in the business
environment. Johnson & Gustafsson(2006, p.xiii) claimed that “ Over the past two decades
,many companies have moved sequentially from focusing on quality to focusing on customer
satisfaction and then on loyalty as a panacea of the day. According to this argument
companies should satisfy and retain their customers in order to survive or prospers in today’s
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volatile competitive business environment. As most agree loyalty matters much for business,
it should be defined clearly.
Lovelock and Wirtz (2004, p.76) defined customer loyalty as : “Loyalty has been used to
describe a customer’s willingness to continue patronizing a firm over the long term and
recommending the firm’s products and services to friends and associates” .In addition to this,
Heskett et al (1994) gave definition of customer loyalty as: Customer loyalty represents the
repeat purchase, and referring the company to other customers, also Bloemer & Kasper
(1995 as cited in Kheng et al 2010 ), viewed loyalty in relation to commitment as, loyalty
is interpreted as true loyalty rather than repeat purchasing behavior, which is the actual rebuying of a brand, regardless of commitment. Similarly, Gremler & Brown (1996as cited in
Kheng et al 2010) viewed customer loyalty the degree to which a customer exhibits repeat
purchasing behavior from a service provider, possesses a positive attitudinal disposition
toward the provider, and considers using only this provider when a need for this service
exists.
On the other hand, Zikmund et al (2003) claimed customer loyalty refers to a customer’s
commitment or attachment to a brand, store, manufacturer service provider or other entity
based on favorable attitudes and behavioral responses such as repeat purchase. Oliver,
(1999) also contend as, customer loyalty is a buyers overall attachment or deep commitment
to a product, service, brand or organization. To put in a nutshell, the definition of customer
loyalty presented above, describe three points as:
1. Customer’s willingness to continue patronizing a firm over the long term
2. Recommending the firm’s products and services to friends and associates
3. Customer exhibits repeat purchasing behavior from a service provider
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As the definitions indicate a loyal customer is committed to continue long-term and
renewal policies from the present provider. He /she continually making cross selling and
extend the good reputation of company experience to other people.
Furthermore other scholars defined customer loyalty more deeply and widely as: Rogers et
al (2011, p. 132) defined loyalty entirely in three different ways:
1. Behavioral loyalty: simply looking at the brand and purchase. Similarly, Ball et. al.,
2004) argued behavior loyalty is
repeated transactions or percentage of total transactions
and total expenditures and it can be simply measured with observation approach.
2. Affect loyalty: Affects are the feeling of components attitude and include ‘liking and
references”. The proponents of this model assert that loyalty is determined not by simply by
looking at what is purchased but also by looking a person likes and preference of the brand.
Attitude loyalty reflects customer’s cognitive, affective, and co-native predispositions to
continue relating to the brand or company (Oliver, 1999). According to Ball et. al., (2004),
combining of behavior loyalty and attitude loyalty is powerful. Reichheld (2003) considered
and accent in psychological factor of loyalty as attitudinal and emotional loyalty.
3. Situational specific model of loyalty which states that the relationship between attitude
and behavior is moderated by other variables as individual economic circumstances,
personality and the buying situation (on-the shelf –availability, low price, sales promotion,
etc.). Thus, Roger et al (2011) classified loyalty into four types by two dimensions as depicted
below.
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Repeat purchase
Strength Strong
Of
Strong
Weak
True loyalty
Latent loyalty
Spurious loyalty
(Inertial loyalty)
No loyalty
Affect
weak
Figure 2.1: Four types of loyalty
True loyalty is based on a strong positive affect toward the brand, liking and preference.
When there is no feeling toward brands there may be no loyalty. Latent loyalty customers
have positive feelings toward a brand, but for variety of reasons do not buy.
Nevertheless, Day (2003) introduced the two-dimensional concept of loyalty, which stated
that loyalty should be evaluated with both behavioral and attitudinal criteria. This means
behavioral and attitudinal are the two the dimensions for the customer loyalty. The behavior
dimension refers to a customer’s behavior on repeat purchase that is more than one policy
from the same provider.
Attitudinal dimensions, on the other hand, refer to a customer’s intention to purchase
different policies and recommending company reputation to others, which are good
indicators of a loyal customer. Moreover, a customer who has the intention to purchase
different and more policies and recommends the reputation of the company to others is very
likely to remain with the insurance company. Similarly, Zikmund (2003) viewed loyalty
from two distinctive perspectives as:
i.
Behavioral brand loyalty: how consistent customers are in repurchasing brands.
John and Michael (1998) classified brand loyalty continuum and classify customers from
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complete loyalty to complete brand indifference. For the purpose of demystification we
can put the continuum in the figure as below.
Undivided
Indifference
Loyalty
Occasional
Switched
switcher
Divided
loyalty
loyalty
Figure 2. 2: Variations in behavioral brand loyalty
(Zikmund et al, 2003, Rogers’s et al, 2008) described each continuum as:
Undivided loyalty describes the behavior of a customer who always selects the same
brand
An occasional switcher usually selects the same brand over time but may want a
change of pace now and then, or may face an out –of stock situation.
Switched loyalty describes a customer who has experienced a change of heart or a
change of brand.
Divided loyalty shows a customer who is loyal to more than one brand
Indifference represents the customer who sees no distinction between brands or who
could not care less which brand is purchased.
ii. Attitudinal brand loyalty: This approach takes the view that loyalty involves much
more than repeats purchase behavior. It holds that brand loyalty must also include a
favorable attitude that reflects a commitment expressed overtime. Customers’ attitudinal
component represents notions like, repurchase intention or purchasing additional products
or services from the same company , willingness of recommending the company to others,
demonstrations of such commitment to the company by exhibiting a resistance to switch to
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another competitor ( Narayandas, 1996 ), and willingness to pay a price premium (
Zeithaml and Parasuraman 1996).
Many researchers indicate that for loyalty to exist
there must be affect loyalty i.e. a strong commitment to the brand or company. Loyalty is a
commitment by an existing customer to a particular store, brand or service provider when
other options are accessible. It creates favorable attitudes resulting in repeat purchasing
behavior over time. On the other hand, Ball, et. al., (2004) argue customer loyalty can be
divided into two dimensions: passive loyalty and active loyalty.
Active loyalty is like customers’ word-of-mouth and their intention to use preferred
products and services. Passive loyalty means customers don’t switch the choice for their
preferred products and services even under less positive conditions.
Similarly, Oliver (1999) defines loyalty as even though the environment has changed, and
even though the sales efforts of competitors have latent influences on consumer variety
seeking behavior, the customer still has a high degree of commitment to purchase or
consume their preferred products and services, that cause the repeated purchases for one
brand or one group of brands.
In insurance industry , customer loyalty can be interpreted as policyholders who make
repeat purchase of policies , renewal contracts and continue with the existing company ,
encourage friends, relatives and acquaintances to join the company (exhibit their devote
by recommending others to the company).
As customer loyalty is quite a new concept various definitions are given
summarized as below.
which is
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Table: 2.1: Summary of Customer Loyalty Definitions.
Definitions of customer loyalty
Authors
Customers’ attitudinal component represents notions like:
Cronin & Taylor,
(1992); Narayandas,
(1996); Prus &
Brandt,
(1995)Feick, Lee, &
Lee, (2001)
repurchase intention or purchasing additional products or
services from the same company, willingness of recommending
the company to others, demonstration of such commitment to the
company by exhibiting a resistance to switching to another
competitor
willingness to pay a price premium
Zeithaml, Berry, &
Parasuraman,(1996)
Customer loyalty as the mindset of the customers who hold
Pearson (1996)
favorable attitudes toward a company, commit to repurchase the
company’s product/service, and recommend the product/service
to others.
A deeply held commitment to rebuy or patronize a preferred
Oliver (1999)
product/service consistently in the future, thereby causing
repetitive same-brand or same brand-set purchasing, despite
situational influences and marketing efforts having the potential
to cause switching behavior
Customer loyalty can be divided into two dimensions: behavioral
and attitudinal. Behavioral loyalty is repeated transactions and
attitudinal loyalty is often defined as both positive affect toward
the relationship's continuance, and the desire to continue to
remain in the relationship
Ball, et. al., (2004).
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Still there is no universally agreed definition of customer loyalty, but for the purpose of
this study the definition : Customers’ repurchase intention or purchasing additional
products or services from the same company, willingness of recommending the company
good reputation
to others, demonstration of such commitment to the company
by
exhibiting a resistance to switching to another competitor or commitment to continue
doing business for long-term has been taken. As we agreed on the definition of customer
loyalty we move on to benefits of customer loyalty in the following paragraphs.
2.1.2. Benefits of customers’ loyalty
Companies need to build customer loyalty aiming at increasing their revenue. Loyal
customers have direct impact of company’s profitability. “When a company consistently
delivers superior value and wins customer loyalty, market share and revenues go up, and
the cost of acquiring and serving customers goes down” (Rechheld 1993, p. 64). This
means market share and revenues increase as a result of loyal customers who make repeat
purchases and make referrals. The company’s costs also decrease because less money is
spent trying to lure in new customers. Reichheld & Sasser’s (1990 as cited in Roger et al
2011 p.138) study showed that even a small increase in customer retention rates could have
a major impact on profitability. In addition to this Deighton et al (1996 as cited in Rogers
2011. p.138 )showed that it was much more cost effective for a company to retain their
current customers than to acquire new ones.
It is claimed that 5% increase in customer retention leads to an increase of profits by
25% to 95% (Sallberg, 2004 as cited in Nana 2010). Customer loyalty strategy can help
companies to save money on a variety of costs (Sallberg, 2004 as cited in Nana 2010), for
instance:
Costs of advertising to attract new customers;
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Costs of personal selling effort to new prospects;
Costs of setting up new accounts for new customers;
Costs of explaining business procedures to new customers;
Costs of inefficient behavior during the customers’ learning process.
Furthermore, loyal customers could easily understand company processes and can offer
suggestions for improvement. Their feedback can help with R&D as well as process
enhancement efforts. According to Dick and Basu, 1994; Zeithaml, 2000; Chaudhuri and
Holbrook,( 2001 as cited in Ball 2006) loyalty is beyond repeat purchase and described as:
loyalty is the desire on the part of the customer to continue the relationship even if
competitors lower prices, willingness to recommend to friends, and intention to continue to
patronize.
Roger et al (2011) and Rowley (2005) described the consequences of loyal customers to the
company as: Loyal customers buy more - and are often willing to pay more. This creates a
steadier cash flow. Loyal customers are likely to purchase additional products with less
marketing effort. Loyal customers tend to place frequent, similar orders and, therefore
usually cost less to serve. Loyal customers purchase more policies or services in a company
as they know procedures well and can extract more value in terms of convenience and
purchase efficiencies and are not price sensitive.
Similarly, CSIA (2005) explained advantages of loyal customers for the insurance in the
motto of making the year 2005 “year of customers” as: Loyal insurance customers not only
stay with a company and go to it for all their needs, but they are also more likely to
recommend the company to new customers as well. They refer new customers to the
company at virtually no cost – saving you the marketing and advertising costs of acquiring
customers.
Loyal customers allow service provider to recover in the event of service
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failure i.e. they understand your processes and can offer suggestions for improvement and
becomes this way a sort of quality controller.
Companies with loyal customers can financially outperform competitors with lower unit
cost and higher market share (Roger et al 2008). Business with high customer retention
rates have proven to reach great financial results. Nationwide Insurance study found that a
1% increase in customer retention increased annual premiums by $1 million “(Insurance
Technology, 2008). However companies’ problems are retaining customers in the company.
The graph below depicts what drive company profit:
Figure 2.3: The loyalty effect (adapted from Fred Reichheld (1996)
The above graph 2.3 which is adapted from Fred Reich held,(1996 ) illustrates the
components that drive company profit. From the components that contribute to company
profits, three of them reflect customer loyalty: retention (measured in years), advocacy
(measured as referral).
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Reichheld (1996) claimed that only a 5% improvement in customer retention can lead to
an increase in profitability between 25% and 85%, depending upon industry sector.
Loyal customers are those who make repeated purchases of a product/service. Studies have
consistently shown that it is loyal customers that add the greatest value to a business and
contribute the highest profits. Ernst & Young (2012) conduct research on insurance sector
of Japan and the findings showed that cross –selling is the key to boosting profitability of
insurance company. According to this survey Trust in the provider is the main factor driving
repeat purchases. This means that profitability is increasingly driven by retaining customers
for longer periods of time and increasing revenue per existing customer, in other words
increasing customer lifetime value. This makes it essential for insurers to increase their
cross-selling efforts
Therefore increased ‘customer loyalty’ has a direct and major relationship with increased
profitability. Loyal customers are typically repeat customers. This means that these people
will return to one particular company, resulting in a steady income for that business. Loyal
customers also typically recommend their favorite companies to family and friends, which
brings in more business.
Customer loyalty is also advantageous for customers. Long –term relationships with
service providers minimize customer perceived risk, simplify choice, and provide a feeling
of optimal satisfaction for the customer and foster confidence ( Cowless 1994 , Brown 1996
, Gremler and Brown 1997 ). Moreover, customers are also benefited in terms of reduction
of customer stress and empowerment. Berry (1995) suggests risk reduction is a key
outcome of service provider relationships. However, this relationship to be real
scholars
allude to the notion that trusts in the service provider or the keeping of promises by the
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provider is particularly important dimensions of the relationship from the customer's
perspective (Barnes 1994,
Bitner 1995,
Grenroos 1990as
cited in Gwinner 1998).
Relationship is all about loyalty, why is that loyalty preferred to acquisition? The following
paragraphs focus on this issue.
2.1.3 Customer acquisition or customer retention?
Customer acquisition is the process of acquiring new customers for the business. Business
Dictionary defines customer acquisition and customer retention as: Customer acquisition is
the process of persuading a consumer to purchase a company's goods or services while
retention is the condition of retaining (keeping) customers in the existing provider.
Similarly, Mohamed & Sagadevan(2008, p.19, 32) posited
“customer acquisition is the
term used to describe the process of bringing new customers to a particular brand, product
or service, customer retention is the process of keeping customers in the firm by meeting
the needs and exceeding the expectations of those customers”. According to various
scholars customer acquisition is five to ten times more expensive than customer retention
( Bhattacharjee 2006, p.102 ) .
Similarly, “M cKinsey showed that repeat customers generate over twice as much gross
income as new customers” ((Roger et al ,2011, p.240) and also Reichheld & Sasser as cited
in Roger et al ( 2011 , p.134)showed the importance of retention as “ a 5% increase in
customer retention consistently resulted in 25%-100% profit swings “.In addition Berry (
1995)complained it is more expensive to acquire customers than to retain customers , and
also customer acquisition is five to ten times more expensive than customer retention
(Gerson, 1995and Kottler et al, 1999). However, customer retention becomes a challenge
for business organizations as the operating environment is in fierce competition.
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American satisfaction index indicates (26%) of insurance customers will switch insurance
providers, based solely on a bad experience with the company. For better understanding we
can lend from Bhattacharjee (2006, p.102) leaking bucket theory to show the need of
acquiring new customers and retaining the old one for business success in the figure below.
Service Company A
Service Company B
10%new customers
every year
10% loss of
5% loss of customers
customers
After 14 years
Service Firm ‘A’
Double its customer base
Service Firm ‘B’ has the same
customer base
Figure 2.4: Leaking Bucket theory adapted from Bhattacharjee (2006)
The leaking bucket theory in figure 2.4 above shows, all things being equal (firm size,
service offer, rate of customer acquisition, etc.), a firm which has half the customer leakage
than its rival, will have double the market base in 14 years i.e. if two service firms intend
to have the same market base but have different customer retention capabilities they will
require different acquisition volume. The service firm with better retention ,service
company ’A’ in the above figure as example will need to acquire less customers than its
rival service company “B’ ( Bhattacharjee 2006).
It might be useful to see the above bucket theory in the other way. Let us say a hole in
the bucket causes a loss of water. The same happens with customers. In order to keep at
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least the same level of activity, we now have to compensate by attracting new customers,
or customers who are currently linked to a competitor. There are two options of reacting if
you ascertain a leak. The first one would be to find more customers coming in than those
going out. The second tactic consists in plugging the leakage. So that this implies the first
option is not preferable. The second alternative customer retention is much better. A small
increase in retention rates can add millions of dollars to premium revenue in insurance,
(SAS, 2009).
Many authors have stressed that customer loyalty has a clear positive influence on
business performance ( Reinartz and Kumar, 2003. Thus, loyalty has to become a strategy
and should be applied to customers, employees, and investors. Because of the
interconnection of these key players, it is not possible to operate on only one. For example
it would be a non-sense idea to concentrate on customer loyalty if employees were not
motivated to do so, or if the investors reacted only to short term profits. It has to be
considered as an indivisible system. Therefore, as customer loyalty is a means of survival
and prosperity of companies, so insurers should continuously monitor & measure
customer loyalty in order to improve drawbacks. How to measure customer loyalty is
discussed below.
2.1.4. Measuring Customer Loyalty
Measuring customer loyalty in insurance allows a company to identify its weakness and
control it to achieve its objectives. There is not a unified approach for measuring the
construct of customer loyalty even though there appears to be considerable agreement on
its conceptualization. Stum and Thiry (1991) hold that customer loyalty should emphasize
behavioral indicators, and proposes four types of indicators to measure customer loyalty:
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repeat purchases, purchasing the firm’s other products, recommendation to others, and
degree of immunity to competitors. In insurance policyholders loyalty can be indicated by
cross-selling behavior, word of mouth referrals and retention. The more customer leave,
the greater the loss of revenue, loss of the initial acquisition investment, and loss of stable
market base (dyche2008). The longer a customer stays with a firm the likelihood of
purchasing by cross- selling more and the more promoting positive word of mouth. The
questions to be answered here are:
•What makes customers to repeat purchase?
•What makes customers to play the role of advocacy?
•What makes customers to increase their immunity from other providers?
Customer intentions to purchase and actual purchases are dependent on the quality of
service, satisfaction with the service, and trust in the supplier (Carrillat et al., 2009).Thus,
we would try to assess service quality, customer satisfaction, customer trust and
additionally switching cost in the following paragraphs.
2.1.5. Antecedents of Customer Loyalty.
When any organization loses a customer they are not only losing future earnings but also
incurring the cost of finding new customers. Over time loyal customers become less pricesensitive therefore, losing loyal customer means giving up high margins. Considering the
technological advancements and its easy access to every individual, customers are
becoming intolerant and they can dissolve the relationship as soon as any problem arises.
This means customer loyalty is the core concern of insurance sector.
Therefore, it is logical to ask the drivers of customer loyalty since every marketer needs
loyal customer for business success. There are many components that affect customer
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loyalty in the insurance company such as service quality which supposed to lead to
customer satisfaction and then to customer loyalty, customer trust and switching cost. This
section details the determinants of customer loyalty in order to answer the questions raised
above. In short, determinants of customer loyalty are depicted in the figure below.
Trust
Trust on
Employ
ees
Trust on
company
Service
Assuranc
product
e
Customer
loyalty
Satisfaction
Service
quality
Tangible
Reliabilit
y
Responsi
Empathy
Interaction
veness
Switching
cost
cost cost
Transaction
cost
Psychologi
cal cost
Figure 2.5: Factors affecting customer loyalty
These factors are discussed one by one in the following paragraphs.
2.1.5.1. Service quality
i.
Defining and assessing service quality
Considering the competitive environment, there is a need for insurance companies to
develop their strategies that will differentiate them from other insurers. This can be
achieved through the delivery of high service quality.
Delivering quality service is
considered an essential strategy for success and survival in today's competitive environment
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(Dawkins and Reichheld 1990, Parasuraman, Zeithami, and Berry 1985, Reichheld and
Sasser 1990; Zeithaml,P arasuraman, and Berry 1990 as cited in
American marketing
association 2011). Thus, after describing definition of service quality we move on to how to
measure service quality in the following paragraphs.
Parasurman et al (1985) defined service quality as the degree of discrepancy between
customers’ normative expectation for service and their perceptions of service performance.
The definition of service quality was further developed as “the overall evaluation of a
specific service firm that results from comparing that firm’s performance with the
customer’s general expectations of how firms in that industry should perform (Parasuraman
et al., 1988). Furthermore, Nitecki et al (2000) defined service quality in terms of meeting
or exceeding customer expectations or as the different between customer perception and
expectations of service. According to this definition, in the insurance sector, service quality
results from the difference between the
customers’ perceptions for the services offered by
the insurers and their expectations. As service is intangible, customers
cannot judge its
“quality” or “value” prior to purchase and consumption. They judge quality by comparing
their perceptions of what they receive with their expectations of what they should receive.
Wikipedia, the free encyclopedia (17 June 2013) defined service quality as a comparison of
expectations with performance. Customers compare perceived service with expected service
in which if the former falls short of the latter the customers are disappointed.
Customers evaluate service quality provided by insurers to them by comparing to what
they expect and with what the service provider actually presents to them. Therefore
service quality can be defined as the difference between customer's expectations and
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their understanding of the actual performance of the company. Nitin and Deshmukh
(2004) critically examine 19 different service quality models as some presents below:
i).Technical and functional quality model (Gro nroos, 1984). A firm in order to compete
successfully must have an understanding of consumer perception of the quality and the
way service quality is influenced.
ii). GAP model (Parasuraman et al., 1985).
Parasuraman et al. (1985) proposed that
service quality is a function of the differences between expectation and performance along
the quality dimensions. The service quality model or the ‘GAP model’ developed by a
group of authors- Parasuraman, Zeithaml and Berry at Texas and North Carolina in 1985,
highlights the main requirements for delivering high service quality. It identifies five
‘gaps’ that cause unsuccessful delivery. Customers generally have a tendency to compare
the service they 'experience' with the service they ‘expect’. If the experience does not
match the expectation, there arises a gap.
GAP 1: Gap between consumer expectation and management perception: This gap arises
when the management does not correctly perceive what the customers want.
GAP 2: Gap between management perception and service quality specification: Here the
management might correctly perceive what the customer wants, but may not set a
performance standard. An example here would be that insurers may tell the claim
department to respond to a request ‘fast’, but may not specify ‘how fast’.
GAP 3: Gap between service quality specification and service delivery: This gap may arise
owing to the service personnel, the reasons being poor training, incapability or
unwillingness to meet the set service standard.
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GAP 4: Gap between service delivery and external communication: Consumer
expectations are highly influenced by statements made by company representatives and
advertisements. The gap arises when these assumed expectations are not fulfilled at the
time of delivery of the service.
GAP 5: Gap between expected service and experienced service: This gap arises when the
consumer misinterprets the service quality. The physician may keep visiting the patient to
show and ensure care, but the patient may interpret this as an indication that something is
really wrong (Wikipedia, the free encyclopedia).
iii). Attribute service quality model (Haywood-Farmer, 1988).This model states that a
service organization has “high quality” if it meets customer preferences and expectations
consistently. According to this model, the separation of attributes into various groups is the
first step towards the development of a service quality model.
Each of the 19 models is representative of a different point of view about services. The
review of various service quality model revealed that the service quality outcome and
measurement is dependent on type of service setting, situation, time, need & other factors.
Furthermore the result of the study revealed that the key ingredients to service quality
improvements are: Clear market and customer focus, motivated staff, clear understanding
of concepts of service quality and factors affecting the same, effective measurement and
feedback system, effective implementation system, efficient customer care system.
The study covers 19 models in the process of delivery of services from conventional to ITbased services and it generally shows that service quality outcome dependent on the type
of service setting, situation, time, need, and other factors. This demand, for a continuous
effort to learn more about the service quality, in order to meet customer needs. The models
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in service quality enable management to identify quality problems and thus help in
improving the efficiency, profitability and overall performance. Evaluations of service
quality presents in the following paragraphs.
ii. Service quality matters for insurers
Ernst & Young (2012) Insurance Survey on India insurance indicates that switching
behavior may increase as customers become more demanding that products and service do
not meet their evolving needs and expectations. Over the next five years, 33% of customers
say that they are likely to switch providers unless service is improved. According to this
survey of the Indian respondents who have not changed their provider in the last five years
claims servicing was the main driver for their loyalty. The key factors are service (58%)
and trust (41%).
iii. Measuring service quality
The measurement of servicer quality is a very complex issue and firms need to rely on
customers perception of service quality ( Parasuraman et al., 1985).
Among general
instruments, the most popular model used for evaluation of service quality is SERVQUAL,
a well-known scale developed by Parasuraman et al., (1985, 1988). SERVQUAL is based
on the proposition that service quality can be measured as the gap between the service that
customers expect and the performance they perceive to have received. This means Service
quality is the difference between consumer expectations of ‘what they want ‘and their
perceptions of what they get. This can be depicted in the figure below.
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Word- ofmouth
Past
experience
Personal needs
External communication
to customers
Expected
service
Perceived
service quality
Service quality gap
Perceived
service
Source: A. Parasuraman University of Miami Library Assessment and Benchmarking Institute
(LAB 2002) Monterey, CA September 13, 2002
Figure 2.6: Perceived Service Quality gap
As the figure above depicts service quality can be measured by comparing customers’
prior expectations about the service and the service they actually received. The derivers of
their service expectation can be their past experience, individual needs, the news they hear
from others about the service which is influenced by external communication.
Parasuraman, Zeithaml and Berry (1988) held that when perceived or experienced service
is less than expected service, it implies less than satisfactory service quality. But, when
perceived service is less than expected service, the obvious inference is that service quality
is more than satisfactory. So that they
proposed service quality measurement scale
SERVQUAL the gap model. The SERVQUAL scale constitutes an important landmark in
the service quality literature and has been extensively applied in different service settings.
Parasuraman, Zeithaml and Berry (1985) identified a set of 10 dimensions
quality construct.
1. Reliability: Consistency of performance and dependability
2.
Responsiveness: Willingness and readiness to perform services.
of service
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3.
Competence: Possession of skills and knowledge to perform.
4.
Understanding: Knowing the customer's needs and requirements
5.
Access: Approachability and ease of access to management.
6.
Communication: Providing the customer with effective information.
7.
Courtesy: Friendliness of personnel and ownership..
8.
Credibility: Trust and personal characteristics of personnel.
9.
Security: Safety, financial security, and confidentiality.
10.
Tangibles: Physical evidence of service
The higher (more positive) the perception minus expectation score, the higher is perceived
to be the level of service quality. Parasuraman et al. (1988) later reduced the ten
dimensions into five (RATER) dimensions which are depicted as below.
1.Tangibles: Appearance of physical facilities, equipment, personnel, and communication
materials.
2.Reliability: Ability to perform the promised service dependably and accurately.
3.Responsiveness: Willingness to help customers and provide prompt service.
4.Assurance: Knowledge and courtesy of employees and their ability to inspire trust and
confidence.
5.Empathy: Caring, individualized attention the firm provides its customers.
The RATER dimensions measure customers’ Expectations (what customer expect service
provider should offer) and Perceptions (customer belief’s about service experienced) (E
and P) of services in a firm. So service quality is calculated as the difference in the two
scores. The negative P-E difference is characterized as a gap or quality flaw which causes
dissatisfaction, while a positive discrepancy leads to customer delight ( Parasuraman et al.
1988). This means the higher P-E score the higher is service quality. Despite its extensive
application, the SERVQUAL scale has been criticized on various conceptual and
94
operational grounds. Some major objections against the scale relate to use of (P-E) gap
scores, length of the questionnaire, predictive power of the instrument, and validity of the
five-dimension structure (Cronin and Taylor, 1992).
Francis Buttle (1995) in the study of reviewing SERVQUAL mentioned two critics of
SERQUAL.First,SERVQUAL has been inappropriately based on an expectations
disconfirmation model rather than an attitudinal model of SQ. Second, it does not build on
extant knowledge in economics, statistics and psychology. SERVQUAL is based on the
disconfirmation model widely adopted in the customer satisfaction literature. In this
literature, customer satisfaction is operational zed in terms of the relationship between
expectations (E) and outcomes (O). If O matches E, customer satisfaction is predicted. If O
exceeds E then customer delight may be produced. If E exceeds O, then customer
dissatisfaction is indicated.
Cronin and Taylor (1992) criticized SERQUAL and proposed SERVPERF. It includes all
the SERQUAL scale dimensions but uses only service performance (perception) as a
measure of service quality instead of the gap between P& E approach of SERQUAL
(Wong et al, 2010).This means service quality can be measured by SERVPERF, with five
dimensions of customer’s perceptions of service provider performance. SERVPERF
provides better predictive validity than SRQUAL which is gapping based (Cronin and
Taylor, 1992).
Cronin and Taylor (1992 cited at Wang & Shieh 2006) indicated four different
measurement models including SEQUAL and SERVPERF as: Weighted
SEQUAL and
Weighted SERVPERF among which SERVPERF was considered the most valuable. They,
therefore, opined that expectation (E) component of SERVQUAL be discarded and instead
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performance (P) Component alone is used. They proposed what is referred to as the
‘SERVPERF’ scale. SERVQUAL scale measures service quality, based on difference
between expectation and performance perception of customers using 22 items and fivedimensional structure. In the SERVPERF scale, service quality is operationalised through
performance only score based on the same 22 items and five dimensional structure of
SERVQUAL.
Another service quality model which was used by Sureshchandar et al. (2001) has stated
that the customer’s perceived quality depends upon five factors:
(1) Core service.
(2) Human elements of service delivery.
(3) Non-human element of service delivery.
(4) Tangibles of services.
(5) Social responsibility.
The core service refers to the essence of a service. In a service sector the service features
offered are as important as how they are delivered. Human element of service delivery
refers to all aspects (reliability, responsiveness. Although service quality structure is found
rich in empirical studies on different service sectors, service quality measuring insurance
services is not adequately investigated. Further, for service quality measuring, a set of
dimensions is required, but there seems to be no universal dimension; it needs to be
modified as per the service in consideration. Thus, the dimensions issue of service quality
requires reexamination in context of insurance services. This study utilizes SERVPERF
(performance- based) scores containing perceived performance component based on five
dimensions: Tangibles, Reliability, Responsiveness, Assurance and Empathy
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iv. The relationship between Service quality and customer satisfaction
Service quality and customer satisfaction are the two constructs that have been frequently
confused (Roger et al., 2011). According to Parasuraman et al. ,(1988) both service quality
and customer satisfaction involve a comparison between expected and perceived service,
but while satisfaction refers to the predicted service (expectations of what the service is
likely to be), service quality deals with the ideal or desire (what the service should be) .
Parasuraman et al. also distinguish service quality and satisfaction: “perceived service
quality is a global judgment, or attitude, relating to the superiority of the service, whereas
satisfaction is related to a specific transaction”.
It is expected that customers who are treated with high level quality service would be
satisfied. This means Service quality leads to customer satisfaction ( Ekinci 2003, Spreng
and Mackoy, 1996). Companies recognize the importance of providing quality service in
order to maintain high level of customer satisfaction and customer loyalty .The hope is that
Service quality improvement leads to customer satisfaction and this will increase customer
loyalty and company profit.
Service quality affects customer satisfaction and customer
satisfaction influences customer loyalty. Here customer loyalty plays the role of mediation
between the independent variable service quality and customer loyalty the dependent
variable.
Roger et al.,(2011) profess the customer company profit chain as service
quality-customer satisfaction- loyalty - company profit. The proposed chain is depicted in
the figure below.
Service quality &
Others controllable
Marketing variables
customer satisfaction
(transaction specific
& cumulative)
customer retention company
& loyalty
profitability
Figure 2.7: customer- company profit chain. (Adapted from Roger et al 2011)
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According to the above model company profit is related to customer loyalty, customer
loyalty is related to customer satisfaction and customer satisfaction is related to service
quality. Service quality helps to increase customer satisfaction and which leads to customer
loyalty.
Research has shown that the service quality and customer satisfaction and customer loyalty
are fundamental for the survival of insurers. Service quality of after sales services, in
particular, can lead to very positive results through customer loyalty, positive word- ofmouth, repetitive sales and cross-selling (Taylor, 2001).
Sureshchandar
et al., (2003) identified that strong relationships exist between service
quality and customer satisfaction while emphasizing that these two are conceptually distinct
constructs from the customers’ point of view. Oliver (1997) suggests the fact that the
difference between the concepts “service quality” and “customer satisfaction” can be
synthesized from the perspective of three major aspects:
1. Assessment of the service quality can be done by the assessment of different attributes and
aspects specific to the service, whereas the assessment of satisfaction is more general and
more global.
2. Expectations regarding service quality are based on the perception of perfection, whereas
the satisfaction is done by assessments that include certain reference aspects, as: personal
necessities and requirements, the equitable treatment to which it is subjected.
3. Analysis and assessment of service quality is a more cognitive thing, whereas the analysis
and assessment of satisfaction has a largely emotional side.
Researchers found that service quality is the antecedent of customer satisfaction
(Parasurman et al., 1988 and Kumar et al.,2010).As a summary, Yones Rasoul & Alireza
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Fazli (2012)summarized the list of researchers who claims service quality and customer
satisfaction are positively related in the table below.
Table 2.2: The Effect of Service Quality on Customer Satisfaction as Summarized by Yones
Rasoul and Alireza Fazli (2012)
Independent
variable
Service quality
Dependent variable
Relationship Researchers
Year
Customer satisfaction
positive
Parasuraman & et al 1985
Service quality
Customer satisfaction
positive
Parasuraman & et al 1988
Service quality
Customer satisfaction
positive
Cronin & Taylor
1992
Service quality
Customer satisfaction
positive
Peter & et al
1993
Service quality
Customer satisfaction
positive
Rust & Oliver
1994
Service quality
Customer satisfaction
positive
Lee & et al
2000
Service quality
Customer satisfaction
positive
2000
Service quality
Customer satisfaction
positive
Sivadas & BakerPrewitt
Cronin & Taylor
Service quality
Customer satisfaction
positive
Brady & Robertson
2001
Service quality
Customer satisfaction
positive
Caruana & Malta
2002
Service quality
Customer satisfaction
positive
Arasli & et al
2005
Service quality
Customer satisfaction
positive
Olorunniwo & et al
2006
Service quality
Customer satisfaction
positive
Gonzalez & et al
2007
Service quality
Customer satisfaction
positive
Lin & et al
2007
2000
In spite of these, Bitner (1990) pointed out that customer satisfaction is antecedent of
service quality. However, Roger et al., (2011) argued by raising question to the response
as: How do you expect customer satisfaction with void of service quality?
While it is generally agreed that the concept of service quality and customer satisfaction
are related,
some feel that customer satisfaction is transaction
specific where as a
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customer attitude toward an organization’s service quality is an enduring attitude.
Cumulative satisfaction is an evaluation based on the total purchase and consumption
experience with a good or service over time, cumulative satisfaction measure ( measure of
service quality )are more useful in determining the effectiveness of customer retention
efforts” Roger et al., (2011).
Mei-Fang et al., (2009) in their study of moderating role of switching barriers on customer
loyalty in the life insurance industry confirmed
that service quality has a significant
influence on customer satisfaction. The characteristic of the need of high contact in the life
insurance industry recognizes the importance of personal interaction in creating satisfied
customers. Most clients of a life insurance company realizes their inability to compare
policies effectively even with the aid of computers and insurance experts. Thus, customers
often rely on the salesperson’s ability to reduce perceived uncertainty. High service quality
means that the customer is able to rely on the salesperson’s integrity and has confidence in
the salesperson’s future performance, because the level of past performance has been
consistently satisfactory.
Nowadays all companies are realizing the significance of delivering and managing service
quality, which leads to customer satisfaction. Service quality that is delivered can meet or
exceed customers expectations are mainly influenced by customer’s prior expectations.
Thus, we can conclude that there is a significant positive relationship between customer
satisfaction and customer loyalty. As such, customer satisfaction is acting as a mediator
between service quality and customer loyalty.
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v. The relationship between service quality and customer loyalty
Ghobadian et al., (1993) research findings shows that companies with perceived high
quality “goods” and “services” typically had higher market share, higher return on
investment and asset turnover than companies with perceived low quality. This means
Service quality affects the repurchase intentions of customers. Another Market research
has shown that dissatisfied customers with a service tell their experiences to more than
three other people (Horovitz, 1990).Thus, it is reasonable to conclude that poor service will
reduce the potential customer base.
An Ernst & Young (2012) Global insurance survey on insurance of Asia-Pacific countries
shows that, service is important in winning and retaining business. The study reveals that
customer service will continue to play an important role in winning new business and
retaining existing customers. This implies insurers need to be sure they have clarity
around their service proposition and focus on those areas of investment that are going to
provide the most significant returns, for example, understanding customer needs, clear
communication throughout the claims process and introducing
simple and easy to
understand products.
Furthermore, Ernst & Young (2012) study indicates customer switched to other provider
due to poor claim management. a poor experience will make a customer change insurer:
16% of regional respondents say that they are certain that they would look elsewhere as a
result of poor claim experience. The implication is poor claims management is a major risk
for customer loyalty.
According to Zeithaml
et al., (1996) the existence of a relationship between service
quality and customer retention at a higher level indicates that service quality has an impact
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on individual consumer behavior, where superior service quality leads to favorable
behavioral intentions (i.e. customer loyalty), and while unfavorable behavioral intentions
are a consequence of inferior service quality.
2.1.5.2 Customer Satisfaction as a Driver of Customer loyalty
i. Definition and assessment of customer satisfaction
In order to cope with fierce competition companies have moved from a product and sales
philosophy to a marketing philosophy, which gives a company a better chance of
outperforming competition (Kotler, 2000).
Thus, companies must able to satisfy
customers to generate more profits for companies. Oliver (1997, p.13) define satisfaction
as: Satisfaction is consumer’s fulfillment response. It is a judgment that a product or
service feature, or the product or service itself, provided (or is providing) a pleasurable
level of consumption-related fulfillment, including levels of under-or over-fulfillment.
Here pleasurable implies fulfillment gives pleasure. According to Hansemark and
Albinsson (2004 cited at Angelova & Zekiri 2011) satisfaction is an overall customer
attitude towards a service provider, or an emotional reaction to the difference between
what customers anticipate and what they receive, regarding the fulfillment of some need,
goal or desire.
Furthermore, Kotler (2000) defined satisfaction as: “a person’s feelings of pleasure or
disappointment resulting from comparing a product perceived performance (or outcome) in
relation to his or her expectations”.
Kotler gave emphasis on expectation.
expectation matters? According to Angelova & Zekiri (2011)
Why
Consumers expect to be
delivered quality products and services; therefore companies try to offer quality products
and services. The term expectations really matters to companies because they want to
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know what customers’ expectations are. The term “expectations” has different uses, in the
satisfaction literature, it is viewed as a prediction made by a consumer about what is likely
to happen during an exchange or transaction. According to Oliver (1981) expectations are
consumer-defined probabilities of the occurrence of positive and negative events if the
consumer engages in some behavior.
In contrast, in the service quality literature it is defined as desires and wants, what a service
provider should offer rather than would offer. Customers form their expectations from their
past experience, friends’ advice, and marketers’ and competitors’ information and
promises (Kotler, 2000). In related to perception Angelova & Zekiri (2011) argued that
perception is an opinion about something viewed and assessed and it varies from
customers to customers, as every customer has different beliefs towards certain services
and products that play an important role in determining customer satisfaction. Customer
satisfaction is determined by the customers’ perceptions and expectations of the quality of
the products and services. In many cases, customer perception is subjective, but it provides
some useful insights for organizations to develop their marketing strategies. Providing high
level of quality service has become the selling point to attract customer’s attention and is
the most important driver that leads to satisfaction. Therefore, customer perception and
customer satisfaction are very closely linked together, because if the perceived service is
close to customer’s expectationst leads to satisfaction. Satisfied customers provide
recommendations; maintain loyalty towards the company and customers in turn are more
likely to pay price premiums (Reichheld, 1996).
Customer satisfaction is a function of the discrepancy between a consumer’s prior
expectations and his or her perception regarding the purchase (VI, 1990).When an
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experience is better than the customer expectation there is thought to be positive
disconfirmation of the expectation, and a favorable customer evaluation is predicted.
At this point to make better understanding, it might be appropriate to discuss the
expectancy- disconfirmation model. Oliver (1981 as cited in Haemoon, 1999) introduced
the expectancy- disconfirmation model for studies of customer satisfaction in the retail and
service industry. Expectancy- disconfirmation theory posits that customers form their
satisfaction with a target product or service as a result of subjective (or direct) comparisons
between their expectations and perceptions. Customers are directly asked to provide their
perceptions or evaluations of the comparisons, using a worse than/better than expected
scale. The resulting perceptions are conceptualized as a psychological construct called
subjective disconfirmation. The expectancy- disconfirmation model asserts that customer
satisfaction is a direct function of subjective disconfirmation. That is, the size and direction
of disconfirmation determine, in part, the level of satisfaction. When confirmation occurs,
customers are believed to remain neither satisfied nor dissatisfied. Both expectations and
perceptions also have been found to influence customer satisfaction and subjective
disconfirmation under various circumstances (Churchill and Surprenant, 1982as cited in
Haemoon, 1999).
In the customer satisfaction literature, this model is referred as the “Disconfirmation
paradigm”, in the service quality literature it’s referred to as “the gap model”. Therefore,
customer satisfaction can be defined as the level of service quality performance that meets
policyholder’s expectation. Service quality is a comparative function between consumer
expectations and actual service performance ( Pasuraman ,1985). Policyholders have
expectations related to the service will be offered, complain processing and so on.
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Customer satisfaction is crucial for success in insurance because customers demand a high
quality service and if they are unsatisfied, they will cancel their contract with the insurers.
Lowe(2005) states that there are three alternatives either to lead to more purchase or
switching depending on how the company is able to meet expectation as depicted in the
figure below.
Delight
Customer
Expectation
Satisfaction
Dissatisfaction
Go back for more
Shopping around in case
there is anything better
Switching to another
supplier
Figure 2.8: Customer expectation and satisfaction
The figure above shows how expectations are met: delight, satisfaction or dissatisfaction.
In the insurance industry customers switch if they are dissatisfied but satisfaction does not
guarantee them for staying (Capgemini, 2007).The more satisfied customers are the more
likely to be loyal customers. Customer satisfaction is the state of mind that customers have
about a company when their expectations have been met or exceeded over the lifetime of
the product or service. The achievement of customer satisfaction leads to company loyalty
and product repurchase.
Numerous studies show the positive association between satisfied customers and
repurchase intentions (Mittal and Kamakura, 2001, Reichheld and Sasser, 1990, Zeithaml
et al., 1996 Faullant et al 2008). Positive effects of satisfaction on loyalty are reflected in
the customer’s intentions to repurchase a product or service and his/her willingness to
recommend it other people. It is observed that new customers are better attracted by
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recommendations of their relatives, friends and others people as the personalized
transmission of word-of-mouth to the new customers is seen as a more trustworthy source
of information.
According to (Knauer V. 1992 as cited in Roger et al., 2011) dissatisfied customers
(90%) will not purchase again from such companies..Furthermore, Bhattacharjee (2006)
shows that extremely dissatisfied customers play the role of terrorist i.e. distributing their
bad experience of the company. The more customers satisfied the more they will be more
loyal and tend to purchase different policies, reducing company costs but increasing
revenues.
Satisfied customers,‘Apostles” performing the role of unpaid company
employees, promoting the service of their own free will. The more satisfied customers are,
the greater is their retention ( Ranaweera and Prabhu, 2003). These statements were
supported by Kotler, (1994) saying: The key to customer retention is customer satisfaction.
You cannot expect dissatisfied customer to be loyal.
Besides this, Oliver (1999) argues
customer satisfaction is strongly associated with
customer loyalty. And also Ehigie (2006) suggests that there is a significant positive
relationship between customer satisfaction and customer loyalty/retention. There is
relationship between satisfaction and loyalty but it is not a simple linear relationship
(Roger et al.,2011).The link between satisfaction and retention is asymmetric
(dissatisfaction has a greater impact on retention than satisfaction) and is nonlinear (Kumar
and Reinartz, 2006). It is obvious that satisfied customers may not be loyal customers. A
satisfied insurance customer is not necessarily a loyal one. According to Bhattacharjee
(2006) relationship between customer satisfaction and loyalty is not always linear.
However one research has shown that the satisfaction profit link is asymmetric and non
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linear, with a (1%) increase in satisfaction, increasing return on investment ROI (2.4% )
but a (1 %) drop in satisfaction decreasing ROI by 5.1% ,(Roger et al ., 2011. p.132).
American Customer Satisfaction Index explored insurance customers who (40%)
dissatisfied are more likely to tell others about their bad experience .Dissatisfied customers
are a real cost to a company, because they criticize the company to others – and research
has shown that dissatisfied customers are likely to tell more people about their
dissatisfaction than satisfied customers tell about why they are satisfied. Satisfaction is
therefore said to have an asymmetric impact on loyalty. Thus leaving a customer
dissatisfied damages a company into ways: loss of business from that customer and
negative word- of – mouth leading to the loss of business from many others Rogers et al).
Moreover, Govind Johri (2009) claims that one satisfied customer tells his perception/
grievance to 11 others who in turn happen to tell yet to another 5 each.
The insurance customers need : better problem solving approach, prompt and accurate
issue of document , prompt and fair settlement of claim, good listening mechanism,
reliable manner of service, meeting their requirement on time every time. This means in
order to retain them they should have to be kept satisfied. As policyholders have so many
options available, he/she once lost is most likely a loss forever. Claim settlement can be
used as a marketing tool as to attract new customers.
So insurers must seek to gain an
understanding of the precise drivers of retention. They should measure customer
satisfaction every time. Therefore, measuring customer satisfaction has to take all matters
into account, Szwarc Paul (2005).
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ii. Factors that Influence Customer Satisfaction
From literature review, there are many factors that affect customer satisfaction. Such
factors include friendly employees, courteous employees, knowledgeable employees,
helpful employees, accuracy of billing, billing timeliness, competitive pricing, service
quality, good value, billing clarity and quick service (Hokanson, 1995 as cited in Angelova
& Zekiri 2011). From the studies of customer loyalty in insurance sector carried out in
some countries, factors like: service quality, and perceived value, are the key constructs
affecting the customer’s satisfaction. Studies also point out that customer satisfaction
results ultimately in price tolerance, and customer loyalty. Therefore, satisfying customers
is becoming
a backbone for insurance industries. Issues like: customer satisfaction,
service quality, customer trust, customer loyalty, are the main concerns of insurance
companies, which improves company’s performance and translates into more profits.
Ernst & Young (2010) analyzed and evaluated the impact of six key drivers of customer
satisfaction, verifying which are most likely to impact the rating customers give insurers,
and how successfully companies are currently delivering them which are depicted below.
Details of claim
recorded
Correctly first time
I was kept regularly
updated
Claim dealt
with quickly
Staff was
Knowledgeable
Claim settled at
fair value
Staff was
sensitive to
my situation
Figure 2.9: The importance and performance of six key drivers of customer satisfaction
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The analysis shows that customers consider the most critical factor is to feel that their
claim is being handled by someone knowledgeable and competent (see figure above).
Regular updates of information and showing sensitivity are areas of relative
underperformance. Improving communications skills and the processes that support
communication is therefore likely to have a significant impact on customer satisfaction.
These findings reinforce the view that claims handling offers a unique opportunity to
develop a customer relationship and that the quality of communication is critical.
Equipping staff with the skills to demonstrate knowledge and sensitivity is challenging, as
is ensuring that communication is embedded into the claims process and that staff are
empowered to deal empathetically with the issues that will inevitably arise.
Generally, customers select their provider based on: price, claims-handling management,
customer service, and the financial health of insurance are considered. Therefore, insurers
need to assess their customer satisfaction status every time.
Customer satisfaction and customer loyalty are very closely related and customer
satisfaction functions as an antecedent of customer loyalty. It prevents customer defection
and consolidates retention, thereby constituting an important cause of customer loyalty
(Fornell, 1992, Reichheld, 1996). Customer satisfaction is the most important factor that
affects customer loyalty (Hoq et al., 2010). Satisfied customers form the foundation of any
successful business as customer satisfaction leads to repeat purchase, company loyalty, and
positive word of mouth. According to the American customer satisfaction index customer
dissatisfaction in the insurance industry, stemming from poor service design and delivery,
the inability to match customers perceptions with expectations and inferior quality of
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services largely account for this and because of this, the average customer satisfaction had
gone down by (2.5%) for life Insurance.
Ernst & Young (2010) made survey of European Motor insurance claims and their findings
indicate that high overall satisfaction does have
bearing on customer loyalty.
So that,
the present study aimed at to understand whether customer satisfaction affects customer
loyalty. Thus, for the purpose of this study customer satisfaction is evaluated based on:
Customer service, Customer complains management, customer interaction with the
company & customer treatment. Customer satisfaction measurement is undertaken with an
understanding of the gap between customer expectations and attributes performance
perceptions. However, customer satisfaction is not sufficient to promote customer loyalty;
switching cost and trust are also influence customer loyalty. They will be reviewed in the
following paragraphs.
2. 1.5.3 .The relationship between Customer Trust and customer loyalty
i. Definition & assessment of customer trust
Researchers and practitioners have witnessed a gradual paradigm shift in the area of
marketing that essentially emphasizes the retention of current customers, rather than the
pursuit of new customers or the focus on singular exchanges. In this context, the critical
role of trust in promoting loyalty and more relational exchanges has been emphasized
(Berry, 1996; Ganesan, 1994; Nooteboom, Berger,& Nooderhaven, 1997 as cited in Santos
&Fernandes 2008).
Scholars believe that trust is produced when vulnerability appears or when there is
uncertainty within the environment, because people will then tend to rely on the ability of
others to increase the certainty of the future, thus forming trust is the process. According
110
to Santos & Fernandes (2008) feelings of trust offer a “pledge” that the performance of the
company will be consistent and competent, this in turn means that the consumer will
continue to gain value from future service encounters with the same provider. Reducing
risk in business exchanges, trust contributes to giving continuity to the relationship and to
creating feelings of loyalty
Trust is a concept studied in various disciplines and, as a result, there are different
definitions of trust. A dictionary definition of trust: “A psychological state where a person
accepts vulnerability based upon positive expectations of the intentions of another.”
Vulnerability means thinking the trustee will not take advantage of you, and that you are
willing to transfer the decisive and controlling power of your personal affairs to the trustee,
thus transferring emotion and power during the process. The table below summarizes
definitions of trust.
Table 2.3: Collection of Trust Definition
Author and date
Descriptions
Christine et al
Customer
trust in the company is the expectations held by the
(1993) ,
customer that the service provider is dependable and can be relied
Sirdeshmukh & et
on to deliver on its promises.
al( 2002)
Christine et al
defined trust as ”the willingness of a party to be vulnerable to the
(1993) Gefen et al (
actions of another party based on the expectation that the other will
2003
perform a particular action important to the trustor , irrespective of
the ability to monitor or control that other party.
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Ganesan (1994)
Willingness to rely on an exchange partner in whom one has
confidence. Two distinct components: (1) objective credibility,
belief that the other has the expertise to perform the job; and (2)
benevolence, belief that the other has motives beneficial to the
target when new conditions arise for which a commitment was not
made.
Hawes, Mast, and
Reliance upon information from another person about uncertain
Swan (1989)
environmental states and outcomes in a risky situation.
Lagace and
An attitude that leads someone to commit to a possible loss
Gassenheimer
contingent on the future behavior of the other person.
(1991)
Lagace and
A person committing to a possible loss contingent upon the
Marshall (1994)
subsequent behavior of a specific other person
Schurr and Ozanne
The belief that a party’s word or promise is reliable and that a party
(1985)
will fulfill its obligations in an exchange relationship.
When there is trust customers believe that the marketer is reliable and has integrity and a
customer has confidence that the employee is honest, fair and responsible and his or her
word can be relied on. Nobody expects a long-term relation with a partner that cannot be
trusted. When there is trust in a relationship all parties believe that none will act
opportunistically. Morgan and Hunt (1994) stated that trust exists only when one party has
confidence in an exchange partner’s reliability and integrity. They posit that trust is a major
determinant of relationship commitment: brand trust leads to brand loyalty because trust
creates exchange relationships that are highly valued.
Furthermore, Zikmund et at., (2003) and Spekman (1998) call trust a corner stone of the
strategic partnership. The National consumer Federation (Sep.2011) classified types of
Trust into four as depicted below.
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1. 1.Trust based on intimacy. I know you, you know me well enough to anticipate
my needs (and satisfy them)
2. Trust based on insight. I believe you, you know me well enough to act in my best interests
3. Trust based on integrity. I believe you are sufficiently honest and fair-minded to do
what is right (possibly under difficult circumstances)
4. Trust based on competence. I believe you have the necessary expertise, knowledge
and/or qualifications to do what is required and expected
As it can be seen for the classification of types of trust, derivers or bases of trust is
intimacy between two parties, level of one knowing the other, honesty of the party and
competency.
ii.
Reasons why trust matters for insurance companies.
Insurance is a promise to perform in future in return for a present monetary consideration.
Such a promise is made in an environment when the customer is absolutely not sure
whether the promise will be fulfilled if and when the need arises. Insurance is intangible
product and uniquely depends on trust. Halliburton and Poenaru(2010) pointed out that
when interviewed, marketers unanimously emphasized the importance of customer trust:
“For us, trust is the Holy Grail, its importance is 11 out of 10…we are saying
to our customers, ‘trust us with your future’ ”(Marketing Manager Interview, Banking).
The main benefit of trust is customer loyalty, which in turn leads to a longer term
relationship, and higher advocacy or word-of-mouth. Trust is
more important for an
insurance company than any other type of business because insurance company is selling a
promise. Insurance companies collect the premiums of the customer, manage the premiums,
and disperse the risk to ensure they can pay off any losses. The signing of the insurance
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contract is based on trust, which means the customer is required to inform the actual
condition to the insurance company for risk assessment and calculate the premiums, while
the customer must clearly acknowledge the contents of the contract to make sure all benefits
are acquired. Thus, “trust” is one key factor for success of the deal (Dwyer et al., 1987).
Insurance industry suffers from a general lack of trust (Christian, 2008). A customer
survey on “trust in consumer relationship “which conducted in UK and US revealed that
the overall customer trust in Banks is (57%), in insurance provider is (48%) and in mobile
network operator is (45%). The findings also illustrated drivers of customer trust as:
reputation, past customer service, management policies, communications, services and trust
in employees. The survey provided the following recommendations:
Providing efficient services and getting the service right
Greater transparency
Admit mistakes and solve them fast
Reward loyalty more-existing customers
Improved security
More transparent
Similarly, Halliburton & Poenaru (2010), conducted a research on “the role of trust on
consumer relationship” and revealed by October 2011 showed only (48%) of UK and US
consumers trust their insurance providers. And the study suggests that “communication
would have the greatest impact in terms of developing trust to build customer loyalty.
Insurance providers can improve their relationships with customers by ensuring that every
customer interaction is personalized and relevant to meet the needs of each individual.
Creating a relationship and engendering customer loyalty that extends beyond the policy
renewal date must consistently be the top priority”
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Customer trust is more important for an insurance company than any other type of
business because it is selling a promise. Trust exists when one Party has confidence that
he/she can rely on the other exchange partner.
Maas Pet al (2011) argued that traditionally, insurers maintain product centricity, where
product characteristics and price are the drivers to reach a unique selling proposition. For
customers, product is only one dimension of a multidimensional value perception. They
value the relationship and therefore, the emotional aspects more. An empirical insurance
survey (Ernst & Young 2012) of Indian life insurance research shows that price is an
important component of value, but it is not the only one in provider selection. Customers
will also consider the service they have received and the trust they have in the provider.
According to this survey in Indian insurance company, 33% of customers indicated that
price is a factor in provider selection, company trustworthiness (69%), customer service
(43%) and convenience (38%).
Furthermore, 38% of customers who purchased more than one product from the same
provider did so because they trusted the company (Ernst & Young 2012). This means that
trustworthiness is uniquely essential in insurance sector as insurance is selling promises. In
building trust customers need to see things in the company as: company’s capability to
deliver on promises, company’s fair treatment for customers, and honesty and authentic of
company employees, management company as a whole.
Therefore, insurers need to, spend their energy delivering on what they promised to offer
to customers. Goodman .N (2012) stated people naturally prefer to hide mistakes, but
insurers should be direct and open as much as possible. According to Goodman (2012″any
sense of secrecy, concealment, or dishonesty will undermine the public’s trust. When you
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make a mistake, own up to it immediately, share what you’re doing to correct it, and
follow through. Customer trust in insurance is posited to affect customer loyalty toward
the service provider directly. Thus, with increasing trust in customer trust, customers’
loyalty is likely enhanced. Lyle (2005) examined trust, satisfaction and loyalty in CRM:
an application of justice theory and he confirmed that trust and loyalty are positively
related. Thus, with increasing trust in company employees and insurer, customer loyalty is
likely to enhance.
Reichheld (1996), Morgan and Hunt (1994) suggest that brand trust leads to brand loyalty
and commitment because trust creates exchange relationships that are highly valued. Trust
towards insurance according to Gronroos (2001) depends not only on the laws, industry
regulations and contracts but also on the professionalism of the other party. If a customer,
for example, has entered into a long-term contract with a service provider, the customer
trusts that the service provider will perform according to expectations. Therefore, customer
trust has a positive influence on customer loyalty. The greater the customer trust is, the
higher the customer loyalty becomes. Both customer trust in the employees and customer
trust in the company are positively related to customer loyalty ( Sirdeshmukh & et al.,
2002).
Customer trust derives from beliefs about management policies such as principles, values,
statements, contracts, regulations, and guarantees: “structures and favorable conditions, in
which customers feel safe, assured, and comfortable about the prospect of depending on
the businesses (Yousafzai et al. (2005).Though ,
divergent, in
the concept of customer trust is
this study trust is viewed as a set of trusting beliefs, in employees and
insurance companies, captured as customer confidence in the quality and reliability of the
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services offered and complaint process. So the study tries to measure customer trust from
two approaches i.e. customers trust in company employees and customer trust on the
insurance companies.
2.1.5.4 The relationship between switching cost and customer loyalty
Reichheld (1996) found that a five percent increase in customer loyalty produces an
eighty-five percent increase in profitability in the financial industry. However, in this
competitive environment to attract new customers and retain existing ones have become
critical (Wong, 2005).
Here a question may arise, why customers defect their providers ?Customers defect their
provider due to so many reasons, Roger et al., (2011) described causes for customer
switching to other providers as: novelty seeking behavior, lack of personal attachment to
the brand, lack of consistency in performance, new competitors offer better value, etc.
Furthermore, Mohamed and Sagadevan (2008) also listed out reasons for customer
defection as: when the customer specific need has not been fulfilled, due to dissatisfaction
to the service provided, seeing better service of competitors, developing misunderstanding
with the delivery system, poor or inappropriate response, etc. Nowadays, companies
recognize that the more customers stay with them the more their revenue. Thus, in order to
retain customers, companies develop different strategies to retain customers as using
switching barriers. These barriers are costs faced by customers when switching suppliers.
For a customer to change his/ her provider can involve efforts in researching the different
options available; it may be time consuming to leave or customers may have signed
contracts that incur a financial penalty in switching the company. Economists have called
these costs of changing supplier, ‘switching costs’.
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According to National Economic Research Associates (2003) Switching costs refer to the
buyer’s perceived costs of switching from the existing provider to a new supplier. These
include the cost of changing services in terms of time, monetary and psychological
expenditure (Jackson 1985and Porter 1980). Switching costs can be defined as the real or
perceived costs that are incurred when changing supplier, but which are not incurred by
remaining with the current supplier (Dick and Basu 1994). Furthermore, Burnham and
Mahajan (2003) identified three types of switching costs as: transaction costs, learning
costs and contractual costs.
1. Transaction costs
Transaction costs are costs that happen when starting a new association with a provider
and occasionally also include the required to terminate an existing relationship. For some
products, there are transaction costs in changing supplier, which are not incurred when
staying with the existing supplier. If a customer changes his insurer he/she may face
significant costs in terms of time and direct financial costs.
2. Learning costs
Learning costs present the effort required by the customer to achieve the equal stage of
comfort of familiarity acquired of using an item for consumption.
3. Contractual costs
Contractual switching cost can also be created while the customer signs an undertaking to
remain loyal for a certain period of time or give an exit consequence. According to
National Economic Research Associates (2003) switching costs can increase a firm’s
“market power”, firms can sometimes artificially create switching costs to discourage
customers from changing supplier. These switching costs include frequent flyer programs,
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loyalty cards, loyalty discounts, joining fees for gyms etc. In addition to these, National
Economic Research Associates (2003) described two additional costs: Uncertainty cost
and psychological cost.
Uncertainty costs: If the product is an experience good (a good where its quality
/suitability for the consumer can only be known after consumption), consumers may be
reluctant to switch to untested brands as they are uncertain whether the product will suit
them.
Psychological costs: Psychological switching costs can arise where the use of a product
can cause a person to change their preferences so that they prefer that product over a
functionally identical one e.g. mum’s cooking. This creates a psychological barrier to
switching supplier.
According to Burnham, and Mahajan (2003) the more consumers recognize the switching
cost, the higher retention rate even though customers have dissatisfaction on the service.
However, it is observed that not all customers are sensitive for switching cost. National
Economic Research Associates (2003) argue that myopic consumers do not consider the
future when making a today’s purchase decision. Consequently, in each period such
consumers choose whichever product is cheaper for them in that particular period. That is,
a myopic consumer will ignore the presence of switching costs and the expected total
lifetime costs of the product and instead choose whichever firm charges the lowest price in
a given period. In each subsequent periods, the consumer will trade-off the cost of
continuing to purchase from its supplier with the cost of purchasing one unit from another
supplier and the switching cost of changing to an alternative firm.
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One of the most interesting and important aspects of switching costs is its effect on entry.
As Farrell and Klemperer (2001) noted, whilst it may at first sight appear that the existence
of lock-in costs would deter entry, and indeed does so in many cases, under certain
circumstances the presence of switching costs can in fact be conducive to entry. This
depends upon: the size of the switching costs, the scale of entry, market dynamics and the
existence of economies of scale.
Under other circumstances, switching costs can actually facilitate entry into the market,
albeit on a limited scale. This is most likely when switching costs are neither too high nor
too low and when firms cannot price discriminate. For example, the presence of switching
costs can mean that some retained customers that are apparently satisfied are actually
dissatisfied but do not switch insurers because of high switching costs. Thus the level of
switching costs may have effect on the customer retention. Lee et al., (2001) stated that
customer loyalty may be due to satisfaction or it may be due to dissatisfaction in a product
category in which relatively high switching costs make it more difficult for customers to
change providers. Similarly, customer disloyalty can be due to dissatisfaction or linked to
satisfaction in a market in which low switching costs make it easy for customers to change
providers.
Ping (1993) found that when customers perceive switching costs to be high (associated
with leaving the current relationship and establishing a new one), they tend to be loyal.
Jones and Sasser (1995) mentioned switching costs as one factor that determines the
competitiveness of market environment, since high switching costs discourage consumers
to switch to alternate providers. This means switching costs are said to arise when there is
a cost incurred by changing insurance that is not incurred by remaining with the current
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company. The ability to retain and lock in customers in the face of competition is a major
concern for insurance, as switching costs can, under certain conditions, make more
profitable.
Mei-Fang et al., (2009) research result shows when consumers switch service providers
they also incur various costs ranging from time spent in gathering information about
potential alternatives to foregone benefits that require continued patronage of an existing
provider. Therefore, consumers frequently go through a ‘switching dilemma’ cognitive
process to decide to either stay with or leave a service provider.
Thus, the larger are the switching costs, the higher is the customer retention of the same
service provider. Ping (1993) argues that higher switching costs related to customer
loyalty.
In relation to higher switching cost Farrell and Klemperer (2001 as cited in
National Economic Research Associates 2003)) noted, the most significant impact of
switching costs is its effect on entry. Whilst it may at first sight appear that the existence of
lock-in costs would deter entry, and indeed does so in many cases, under certain
circumstances the presence of switching costs can in fact be conducive to entry. It is
perhaps obvious that very high switching costs can deter entry: if most customers were
locked-in at a given point in time, then a new entrant would have to price at a substantial
discount to the incumbent’s price in order to attract business, which would make entry
rather unattractive. It does not follow, however, that increasing switching costs always
deters entry. In fact, the literature suggests that moderate levels of switching costs can
make entry easier than with very low or no switching costs.
Once a customer chooses his /her provider, he could realize that there exists a switching
cost for changing his insurer,
such costs may include search costs (the costs of time
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spent for searching information about claims settlement service, investment behavior, and
financial stability of insurance companies, etc.) and transaction costs (the costs of time
and effort needed for bargaining price , thus the customer reduces his
intention of
switch to other provider. He inclined to stay even if he is dissatisfied with the current
provider because, there is no cost incurred by remaining with the current supplier.
Switching costs create fear into the customer not to shift to other company and serves as a
barriers of switching. These costs enable the insurer to generate revenues by reducing
acquisition costs for new customers.
According to Mei-Fang et al., (2009) on the moderating role of switching barriers on
customer loyalty in the life insurance industry, in addition to service quality elements,
companies create barriers to switching by imposing financial penalties on switchers so as
to maintain a long-term relationship. These financial cost barriers are very significant and
competitors often cannot easily overcome them to succeed in attracting customers to
switch. It means that the relationship between customer satisfaction and customer loyalty is
contingent on switching barriers. In other words, sometimes customers continuously
patronize a service provider, not simply because of loyalty, but rather partly because of
reluctance to incur the costs and inconveniences involved in switching.
2.1.5.5. Relationship between Demographic factors and customer loyalty
Law dictionary define demographic factors as: Characteristics assigned to age, sex,
education, income, marital status, job, religion, birth rate, death rate, family size, and
marriage . It is done to every member of the population. Marketers typically combine
several variables to define a demographic profile. A demographic profile provides enough
information about the typical member of this group to create a mental picture of this
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hypothetical aggregate. For example, a marketer might speak of the single, female, middleclass, age 18 to 24; college educated demographic (Wikipedia, the free encyclopedia July
2012).
Understanding the customers’ perception and attitude towards insurance and creating an
insurance culture is essential in facilitating the success of insurance services. A better
understanding of customers’ behavior through demographic analysis can play an important
role in predicting demand for insurance. The study aims to find out the relationship of
demographic characteristics of the respondents with five important factors influencing
customer loyalty in insurance sector. Hwang and Gao (2003) emphasized that increased
levels of income, higher education levels, and demographics (such as family structure and
the number of dependent children) were important factors in determining life insurance
demand in China. Hwang and Greenford (2005 identified key factors affecting life
insurance purchases in China as income, education, social security, social structure, &
economic development.
2.2 Review of some accomplished studies
Despite the importance of customer loyalty in insurance sector , so far no researches has
been done in Ethiopia .However, some studies related to customer loyalty in different
sectors
have been accomplished in other parts of the world . Thus, empirical research
conducted on customer loyalty in insurance sector are examined and presented below.
1. Customer loyalty in insurance sector
Sancharan Roy (2012) conducted research to identify the level of loyalty towards
insurance companies. The variable under study was services offered by insurers. The
finding shows that customer loyalty to insurance can be enhanced by improving value
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oriented service and presenting them to customers continuously. The implication of this
study is that companies would focus their attention on both their customers and their
employees, since the employees are the people who interact with customers and provide
quality service.
2. Rasoul A. (2011) undertook a research on customer loyalty in insurance sector of Iran
to design customer loyalty model in insurance sector. The findings indicated that quality of
service and customer satisfaction is highly correlated. The study proposes customer loyalty
model as: Quality service –customer satisfaction –customer loyalty. Another study by
Moradi et al., (2011) on customer loyalty model in insurance sector confirmed that service
quality and customer satisfaction are highly correlated. High quality service (tangible and
intangible service) leads to high rate of customer satisfaction. The result of the study,
relationship between service quality and customer satisfaction
could contribute for
insurers in order to deploy resources as empowering intangible factors (teaching and
inspiring staff to make responsive to customers)
However, these findings contradict to, Kumar and Reinartz (2006, P.159 as cited in Roger
et al., 2011.p.136) in that the link between customer satisfaction and loyalty is asymmetric;
dissatisfaction has a greater impact on loyalty than satisfaction. According to Roger most
of the dissatisfied customers (90%) will not buy again from the company. Dissatisfied
customers tell more people about their bad experiences with a company than satisfied
customers with good experiences. Thus leaving a customer dissatisfied damage a company
by loss of business from the customer and negative word of mouth leading to the loss of
business. To keep customers loyal, they must be satisfied. Customer satisfaction is the
customer’s evaluation of the product or service to ascertain if it met his/her needs and
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expectations. Failure by organizations to meet the expectation of customers will lead to
dissatisfaction with the product or service, as customer loyalty flows from customer
satisfaction (Zeithaml et al., 2006).
From these contradictory findings with respect to customer satisfaction we can conclude
that satisfied customers may not remain loyal while dissatisfied customers certainly will
not remain loyal if they have choice. According to Roger et al., (2011, p.131) satisfaction
construct alone cannot be expected to lead to loyalty since it indicates that only a weak
bond exists between customer and company.
3. On the other hand, Mei-Fang Chen & Liang-Hung Mau (2009) conducted a research in
order to investigate the effect of customer trust on customer loyalty in life insurance
industry. The findings show that customer trust in the company make positive contribution
to customer loyalty. This means customer trust affects customer loyalty which implies
insurer who aimed at to increase customer loyalty in the company need to deploy resources
to strengthen customer trust in the company. The application of organizational culture,
morality and discipline may contribute for the creation of trust in the company.
Interactions with policyholders dilute illusions which gradually build customer trust in the
company and giving birth to customer loyalty.
4. Mei-Fang et al., (2009) examined the role of switching barriers on customer loyalty in
insurance industry. The results revealed that service quality is a critical determinant of
customer satisfaction as expected. Higher levels of service quality will increase higher
levels of customer satisfaction. Thus, the service benefits that the consumers could obtain
from their policies will certainly play an important role in determining the customer
satisfaction. From a managerial perspective, since service quality is a vital determinant of
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customer satisfaction, how to design a good life insurance policy to meet with a customer’s
demand is very important. The results also revealed that customers who are more satisfied
with service providers will result in more loyal to company. Indeed, if there are more
attractive alternatives available in the marketplace, then customer satisfaction will not
necessarily be an assurance of customer loyalty anymore. Customer defections often
happen in this situation. However, when consumers switch service providers they also
incur various costs ranging from time spent in gathering information about potential
alternatives to foregone benefits that require continued patronage of an existing provider.
Therefore, consumers frequently go through a ‘switching dilemma’ cognitive process to
decide to either stay with or leave a service provider.
5. Liu Jia and Zhao Ping (2000) carried out an e empirical Study to test the constructing
Quality-Satisfaction-Loyalty chain System in insurance Industry in China. Results show
that perceived quality has direct impact on satisfaction. At the same time, trust is proved to
be an important mediator between satisfaction and loyalty. Furthermore, the findings
shows customer satisfaction and loyalty is gradually becoming the key factors that
influence profits and long-term developments of insurance companies.
6. Ahmad & Sungip(2008) made a study to evaluate customers’ general expectation and
perception towards the current performance on insurers in terms of the services offered in
Malesia. The study utilized the survey approach. The result shows huge gap for reliability,
responsiveness and empathy, which reliability shows highest gap between customers’
perception and expectation. This research illustrates reliability emerged as the most critical
determinant of SERVQUAL measure for service quality. The other dimensions (tangible,
responsiveness, assurance and empathy) appear important but reliability dominates. Thus,
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results of this study underscore the need for insurance providers to gear customer service
and quality improvement efforts towards components of reliability. The study intends to
promote a better theoretical understanding and recognition of the complexities to service
quality and its measurement.
7. Moradi et al., (2011) made study to explore customer loyalty model in insurance sector
of Iran. For this study path analysis was utilized to examine a model linking service
quality, customer satisfaction, and loyalty at the level of individual insurance. The result of
the study shows that quality of service and customer satisfaction is highly correlated.
According to this model service quality leads to satisfaction and satisfaction leads to
loyalty..Researchers proposed a model which can be utilized for similar sectors. The model
is depicted as below.
Tangible
Service quality
Service
Quality
Satisfaction
Customer
Loyalty
Intangible
Service
quality
Figure 2.10: Moradi et al., (2011) model.
.8. Li-Hua Lai et al (2011) carried out a research to assess the moderating effects of
switching costs and inertia on the customer satisfaction-retention link in insurance.
Satisfaction, inertia, and switching costs are important factors affecting customer retention.
A questionnaire was constructed and data were collected from 686 policyholders of auto
liability insurance in Taiwan. Confirmatory factor analysis and regression techniques were
then applied to analyze the data. The results indicate that customer satisfaction, inertia, and
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switching costs have positive effects on customer retention. For the moderating effect, the
impact of satisfaction on customer retention decreases under conditions of high inertia and
switching costs. The findings also show that the barriers made by switching costs and the
behavioral lock-in effect produced by inertia create a pull-back effect, which prevents
customers from switching to another insurance provider even in the face of dissatisfaction
with the quality of service by the existing provider. Furthermore, the key findings specify
that switching costs strengthen the moderating effect of inertia on the satisfaction-retention
link and cause dissatisfied customers to retain their existing transaction relationships.
9. Negi D and Singh P. (2012) conducted research to identify the effects of demographic
factors in purchase Indian life insurance products. The study objective was to examine the
effect of demographic characteristics on five important factors (Product Quality and brand
Image, Service Quality, Customer Friendliness, Brand Loyalty and Commitment)
influencing the purchase of a life insurance product The data was collected through the
use of questionnaires distributed to respondents. The sample for the study consisted of
policy holders of both private and public life insurance companies operating in
Uttarakhand.
The result shows that male customers are giving more preference to ‘Product Quality &
Brand Image’ and to ‘Commitment’. On the other hand, female respondents are giving
more preference to ‘Customer Friendliness’. Thus, while dealing with customers, the
insurance companies should take care of gender category of the customer. Thus insurance
companies should have different strategies for male and female customers. Furthermore,
there is a significant difference in the mean of different factors across the different income
category respondents. Thus, the insurance companies should follow different strategies
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among different income category of the customers. The similar trend can be seen while
studying the mean of different factors among different level of education of respondents
with ‘Brand Loyalty’ being given the least preference and ‘Product Quality and Brand
Image’ the highest. But on the contrary, it can also be seen that ‘Brand Loyalty’ is being
given the highest preference among the Under Graduate customers, while it is least for the
Graduate and Post Graduate customers.
10. Ibok, Nkanikpo Ibok (2012) made a study to analyzed factors affecting health
insurance consumption in Akwa Ibom State. Data were collected on consumer’s education,
income, age; sex, marital status, access to health insurance information, occupation and
family size. The data were analyzed using descriptive statistics and regression analysis.
The socio-economic and demographic profile of the people revealed that most married
with average income, and were still in their active ages, and demonstrated meaningful
exposure to insurance health information, which enable them to be or not to be active
participants of the scheme. It was evident that all the variables influenced insurance
consumption positively. Based on this, they recommended among other things, a realignment of health insurance marketing strategies with consumers socio-economic and
demographic characteristics, as a measure to boost patronage.
2.3 Chapter summary
Insurance sector has traditionally operated in a relatively stable environment for decades.
However, with the advent of technological development, the industry is characterized by
dramatically aggressive competition. Over the last few years, developments in the
insurance sector have resulted in a paradigm shift in the way the business is conducted. In
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a free market scenario, the customer has a choice from whom to buy. He exercises this
choice based on perceptions formed through his experiences. If customers’ needs are not
meet they can easily shift providers. Researchers find out the fact that customer acquisition
is five to ten times more expensive than customer retention (Gerson, 1995, Bhattacharjee,
2006, Kottler et al, 1999)
Thus, building customer loyalty today has become the focal point of insurance companies.
Nationwide Insurance study found that a 1% increase in customer retention increased
annual premiums by $1 million “(Insurance Technology, 2008).
Researchers reveal that there are a couple major benefits of customer loyalty. First, loyal
customers are typically repeat customers; they can buy different policies from the same
provider. Ernst & Young (2012) survey on Indian life insurance shows 38% of customers
purchased more than one product from the same provider. . This means that these people
will return to one particular company, resulting in a steady income for that business. Loyal
customers also typically recommend their favorite companies to family and friends, which
brings in more revenue to the company.
Due to this fact, insurers are now emphasizing for the retention of current customers, rather
than the pursuit of new customers or the focus on singular exchanges. In order to become
competitive in Ethiopian insurance business, insurers need to
give priority for customer
delight, service quality, customer trust & in the presence of switching barriers in the
insurance sector. Numerous studies have pointed out that
effective means of generating
customer loyalty is to delight customers (Lee, Lee,& Feick, 2001; Oliver, 1999) and to
deliver superior value derived from excellent services and quality products (Parasuraman
& can significantly influence customer loyalty (Fornell, 1992; Lee et al., 2001; Oliver,
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1999) and trust by customers is more important for an insurance company than any other
type of business because it is selling a promise.
From the above discussion we can realize that. Service quality increases satisfaction that
leads to customer loyalty. Switching cost also has positive influence on customer loyalty.
The greater the customer satisfaction and switching cost, the greater will be the customer
loyalty (Beerli, 2004). As the insurance sectors provide promised services so trust of the
customers on the services of the insurance is very important. Trust has positive influence
on customer loyalty