Nature of insurance

As it has already been established, insurance as a service can be defined as complex ser-vice. In the context of this study, term “ insurance” refers to the non-life insurance only. In-surance as a business is strictly bound to laws and regulation. In that sense, inIn-surance is defined as “a contract with which the other party (insurer; i.e. service provider), against premium paid by the other party (insured; i.e. customer), is committed to compensate the occurred loss connected to the risk that is specified in insurance policy, to insured or suf-ferer (Vakuutussanasto 1996, 137).

Taking the service point of view, Järvinen (1998, 14) provides a more service-related definition of insurance by suggesting that insurance is “a service with special terms and conditions agreed in an insurance policy“. Järvinen’s definition describes insurance from contentual point of view: insurance consists of many terms, regulations, and conditions determined in an insurance policy.

In order to interpret the above presented two different approaches on defining the nature of insurance, following arguments can be presented. First, the essential nature of insurance as a service is to provide a customer with a collection of terms and conditions in a form of insurance policy which is agreed between the customer and service provider.

Second, the main purpose of the purchased insurance is to offer cover against financial losses if the risk determined in the policy will be realized. And third, while purchasing insurance a customer, on the other hand, buys a feeling of security. For instance, if the customer purchases home insurance and his house burns down the occurred (financial) loss is compensated to him. However, at this point it is essential to address that one of the basic principles of insurance is that the compensation is equal to the occurred loss, noth-ing more but nothnoth-ing less either. The above presented arguments are supported by Gid-hagen (2002) suggesting that the nature of insurance services can be determined through the delivery of feeling of security, and (in the event of a loss) the damage adjustment and claim settlement.

Although earlier research states that all of the service characteristics are not met in insurance context (e.g. Järvinen and Järvelin 2001), I suggest that in order to get a more thorough view on the essential nature of insurance, it can be reflected through the IHIP framework (see chapter 3.1.1). As insurance can be characterized as complex service, this point of view is also included in the discussion on the characteristics of insurance pre-sented in the following paragraphs.

Both high physical and mental intangibility are characterizing insurance. In addition to intangibility, Edvardsson and Olsson (1996, 144) have proposed that insurance can be characterized as lasting service since the service outcome is not temporary in its nature as it is, for instance, in case of a haircut. Concerning intangibility, insurance can be

character-ized as complex and abstract service due to its high level of intangibility in both physical and mental sense. By this I am referring to the facts that the only concrete physical item reminding a customer about insurance typically is just a piece of paper (i.e. policy docu-ments), and this piece of paper is often full of written terms and conditions describing the content of the purchased service, which might be particularly challenging for the custom-ers to comprehend.

Further, insurance policies, even though somewhat standardized in terms of juridical regulations and conditions for private customers (i.e. consumers), still are heterogeneous.

By this I am referring to the fact that although insurance cover is more or less standardized for consumers, the content of insurance cover is ultimately specified through the needs of a certain customer, and his life situation. In case of home insurance, for instance, the prop-erty and the value of the building always have to be determined case-by-case, even though the general content of the service product (home insurance policy) would be somewhat standardized. At least this is the case in the Finnish insurance context.

In terms of inseparability (or simultaneity) customer has an active role in producing and consuming insurance service. Using home insurance again as an example, customer first delivers detailed background information about the building and its contents (prop-erty) he wishes to insure to an insurance company in order to enable the completion of in-surance policy. If the risk(s) identified in the policy document is realized customer actively participates in the consumption process of insurance service by reporting the claim to in-surance company. In this regard, customer’s active participation is one of the characteristics of insurance as a service but inseparability is not. As the above described example establishes, service is not necessarily, if ever, produced and consumed at the same time. According to the principles of insurance, it would not, in fact, even be possible, since insurance is pur-chased for covering the customer against possible risk(s) which might, but will necessarily not, emerge in the future. Thus, inseparability is not applicable characteristic to insurance services. Instead, insurance can be characterized as separable service that refers to the situ-ations in which service production and consumption does not have to happen at the same time (e.g. Lovelock and Gummesson 2004, 29).

As to perishability, many aspects can be taken up. In order to consider the pure mean-ing of perishability, it refers to the fact that services cannot be stored as discussed in chap-ter 3.1.1. In that sense the argument holds true also in the context of insurance services.

However, as Lovelock and Gummesson (2004, 30) point out, some information-based services³ can, for instance, be recorded to be consumed again in the future in replayable media. As insurance can be considered as information-based service since it basically is information transfer between a customer and a service provider, it can be argued that

3 Information (-based) services are defined as “that aspect of service in which information is the primary value exchanged between two parties (e.g. buyer and seller) (Rust and Lemon 2001, 86)

insurance as a service is also perishable to some extent. For instance, the possibility to get compensation if damage occurs is not limited. Instead, when the insurance premium is paid by the customer, he is legitimated to receive compensation as many times as the dam-age occurs during the insurance period. In other words, under the above described condi-tions insurance service can be inventoried to be used again in the future if needed.

Outside the IHIP framework earlier research has discussed lack of ownership as a char-acteristic of service (e.g. Zeithaml and Bitner 2006). Referring to the notion of Järvinen and Järvelin (2002) that lack of ownership is not found as a characteristic of insurance ser-vice I argue that the ownership aspect is essential to be shortly discussed also here. In their article Järvinen and Järvelin state that, against premium paid by a customer he is autho-rized to require claims settlements if the identified risk(s) occur (p. 134). The settlements are paid from the reserves of insurance company. Hence, Järvinen and Järvelin propose that customers “own” their part of the financial reserves of insurance company. Further, the fact that insurance is purchased against future financial loss and to acquire a feeling of security supports the statement about the ownership. Following the logic of ownership and adapting it to the insurance context the customer purchases the right of enjoying the feeling of security in becoming financially compensated if the risk(s) identified in insur-ance policy emerges in the future. In this regard, it can be argued that insurinsur-ance services include ownership to some extent.

Finally, low frequency of use is one of the crucial characteristics of insurance. For in-stance, some banking services, such as paying bills, are often used weekly, or in some cases even daily, whereas insurance services might usually not be used weekly, monthly, or even yearly. Therefore, using insurance services will not become routine among the customers but the frequency of use remains low, and the abstract and complex nature of insurance might be even more confusing for the customers. On the other hand, it certainly serves customers’ interests that he does not have to be in contact with an insurance service pro-vider since it might often mean that something negative (i.e. damages) has happened.

To conclude the discussion on the essential characteristics of insurance as a service, it can be generally stated that complexity and abstract nature appropriately reflect the essential nature of insurance. From the IHIP framework point of view, the extent of in-tangibility, both physical and mental, can be considered high. Insurance service, although homogenous to some extent, is usually more heterogeneous. As to inseparability (i.e. si-multaneity), insurance can rather be perceived as separable service since the production and consumption of a service typically do not occur at the same time. Further, insurance can be perceived as information-based service which, in some cases, can be recorded to be consumed again in the future. Combined with the fact that service is typically not pro-duced and consumed at the same time, insurance service, especially electronic insurance service, can be perceived as perishable service to some extent.

All in all, based on the discussion above it can be argued that the nature of service itself makes offering and designing insurance services particularly challenging. This is the case especially in the context of electronic services. This view is discussed more thoroughly in chapter 4.1.5 while characterizing electronic insurance services. In the next sub-chapter the general nature of service design, especially topics referring to the design of service environment, is discussed.