Cell phones began hitting the mass market in the late 1990s. Handset insurance soon followed. Since, the world of mobility has evolved rapidly — smartphones dominate our daily interactions, subscribers consume tons of data, and telecom providers constantly enhance their networks to keep up. Yet, handset insurance is largely the same as it was at the turn of the century.
Does a system built for feature phones still fit the connected devices of today? It’s worth retracing the industry evolution to consider the question.
Advent of Cell Phones
Back in the early 2000s, Nokia, LG, Motorola, Sony, and others were pumping out cell phones that flipped opened and slide closed, numbered keypads and full keyboards, front facing and internal facing screens. Blackberry was on the cutting edge of innovation. Consumers counted their monthly outgoing text messages and waited for nights and weekends to make “national” calls over 2G to reign in their cell phone bill.
Subscribers rarely realized the cost of their cell phone because it was marketed as “free” and bundled in with their service plan. It was an exciting time as cell phones proliferated, but the frequent new releases and many OEMs led to difficulty managing incidents like damaged or lost phones.
If a subscriber damaged their phone, the carrier had a huge churn risk. Competitors were always touting an offer to switch and get a new phone “for free”. Handset insurance helped carriers solve that churn risk. It gave subscribers a way to fix a damaged phone and kept them with their carrier longer. Managing the variation across many OEMs and models was far too much for carriers to manage. Further, regulations were emerging for the new insurance products and carriers didn’t want to become involved in the regulatory complexity of offering insurance themselves. It made a lot of sense for carriers to outsource handset insurance to third parties.
Cell Phones Get Smart
As consumers swapped out their feature phones for smartphones, they began paying more for their increasingly fragile phones. Glass screens replaced keypads and small displays. Carriers began shifting more of the cost of the phone to subscribers, subsidizing only a small portion in exchange for a multi-year service plan contract. Network capacity, performance, and maintenance drove greater costs as 3G turned into 4G to keep up with exponential demand.
Shouldering a larger share of the smartphone cost, subscribers found even more reason to protect their expensive phones. Handset insurance helped make the jump to the latest smartphone release less risky. Consumer-driven demand and higher device costs led to price increases for handset insurance. Carriers saw handset insurance as a growing source of product margin and a way to help manage churn. Their subscribers didn’t need to find a new carrier to get a working phone, they could get their phone fixed or get a refurbished replacement.
Era of the Subscriber
Today, network demands continue to climb and carriers across the world are investing billions to roll out 5G in response. Subscribers rely on their phones more than ever. The industry has shifted as a result. Carriers have de-coupled the cost of a phone from the service plan in most markets and subscribers are opting for unlimited data, month-to-month service plans over multi-year contracts. Phone subsidies are a fond, distant memory for most subscribers as carriers focus investment on network buildouts.
Shouldering the entire cost of a smartphone, subscribers are keeping their phone longer than ever and paying for it over many months. Carriers have positioned themselves to be the primary provider of 0% financing plans so they can maintain a contract with subscribers for multiple years. And in many cases, that financing contract is the only thing that ties a subscriber to their carrier for longer than one month.
So, how does handset insurance stack up to the modern era? Let’s consider how well it suits subscriber and carrier needs.
Today’s subscribers are always connected. The average person touches their phone 2,617 times a day¹. The phone is the essential tool to organize and navigate life. Because of this attachment, when subscribers have issues with their phone, the pain is big. Yet, handset insurance only covers about 15% of issues that people have with their phone². Most of the time, it isn’t a damaged or missing phone; it’s slow performance, a battery that won’t hold charge, not enough storage, outdated software, and the likes. Given how central phones are to life, even nuances like a phone that is too big or too small or too bulky can have an outsized impact.
Across all industries, consumers wield more power and influence than ever. Consumer’s expectations are high. They want brands to deliver on-demand and offer highly curated customer experiences. Yet, handset insurance asks subscribers to play by its rules designed decades ago. It still requires long, confusing claims processes followed by a waiting period only to produce an old, refurbished replacement for a damaged phone.
The modern, empowered consumer expects to always be connected with their phone and, unfortunately, handset insurance simple doesn’t cater to subscriber needs.
Does it still drive the results carriers desire?
Carriers recognize consumer’s expectations for high quality service and constantly search for points of differentiation and improved customer experience across all aspects of the relationship. Yet, globally, almost all carriers still offer handset insurance that’s largely identical to their competition. Carriers are constantly fighting for differentiation, yet, all settle for the same “me too” handset insurance product that only addresses a small minority of their subscriber’s problems.
When an insured subscriber does have a damaged or missing phone, carriers give up control of the customer experience. Subscribers are immediately routed through third party channels to prove they deserve a solution through an arduous claims processes. This runs counter to a carrier’s brand experience goals. Carriers carefully construct their customer experience to keep subscribers engaged and happy, yet at the point of frustration and challenge, they hand over control of that experience to one of the least customer experience friendly industries — insurance.
In earlier eras, carriers had a strong business case to promote handset insurance to help reduce churn. Today, handset insurance creates misaligned incentives and can even exacerbate churn. It should be thought of as the anti-device sales product. When someone successfully completes a claim, they typically get a refurbished device of the same model — a less than ideal outcome. It’s also a missed opportunity to get someone a new phone they want on a new financing plan. As noted, the financing plan is typically the only source of stickiness the carrier has with a subscriber. Consequently, subscribers are “out of contract” sooner and may delay the purchase of their next phone. More and more “out of contract” subscribers erodes stickiness and leads to greater churn risk. A carrier’s economic interests no longer align with handset insurance outcomes.
Why do carriers continue selling a product that creates churn risk and dampens their own sales? Why are subscribers paying more for the same product that only covers them in the rare case of damage or missing phones?
As the rest of the industry continues to evolve, handset insurance has stagnated. It’s remained largely unchanged for decades. Yet, the price keeps increasing. By sticking with the old handset insurance model, carriers are short-changing themselves and their subscribers.
We see the mounting disconnect between industry evolution and handset insurance stagnation. It’s time for a new model that better serves carriers and their subscribers.
²Kingfisher N. America Consumer Research, 2021.