1

A STUDY ON THE PERCEIVED SERVICE QUALITY IN AUSTRALIAN CAR INSURANCE INDUSTRY

Sharareh Mansouri Jajaee, Dr. Fauziah Binti Sheikh Ahmad

Nowadays, companies are using different marketing strategies in business. Although other marketing strategies are beneficial, some companies use defensive strategies to protect current customers. Earlier Researches demonstrate defensive strategies can be more valuable since they bring higher profit. Different companies will achieve their goal, when they serve their customers with a high quality service. To maintain a high level of quality, quality needs to be measured. On the other side, car insurance is one of the fastest growing types of insurance since it is mandatory in most states in the world. So, high quality service in insurance industry has become an important concern. Despite the importance of this issue, no significant study measures service quality of car insurance. To fill this gap, current study measures service quality throughout the Australian car insurance industry by employing the SERVQUAL scale which is an accepted framework for measuring service quality. For data collection, an online questionnaire was distributed among 384 respondents who are residing in Melbourne, Australia and have car insurance contract with one of the 40 chosen insurance companies. With respect to the findings, service quality in the car insurance industry for investigated area is high. Moreover, the SERVQUAL scale is established for the Australian car insurance industry although was not confirmed in some ranges. The result indicates this scale relates better with service quality in advanced economy of Australia compared to the less advanced economy countries which was investigated in earlier studies. The possible reason for this difference is diversity in economic and culture but to generalize, we need more study in different economic level states and various industries.

Field of Research: Marketing

________________

Sharareh Mansouri Jajaee, University Technology Malaysia (UTM), email: sharare_mj@yahoo.com

Dr. Fauziah Binti Sheikh Ahmad, Graduate California State University, Fresno, University Technology Malaysia (UTM), email: fsa@ibs.utm.my

2

1. Introduction

1.1. Importance of Car Insurance

In the recent years, individuals look for different insurance policies to protect themselves and their properties. Because of various motives, people select several insurance categories according to variations available such as property, health, car, and medical insurance. Regardless the type of selected insurance, the most significant issue is how insurance makes life easier by carrying peace of mind and helping lower total costs. The peace of mind comes from the confidence gained knowing that if anything happens, security is provided.

In addition, insurance is a potential compensation for particular losses in future in exchange for a periodic payment. Agreement to the terms of the insurance policy makes a mutual contract between individuals and another party who is the insurance agent. Car insurance is one of the policies that offer financial protection against losses and liability which was established in the early 1900s, and has been applied since it is now mandatory in most places around the world. In Australia, it is compulsory when you purchase a car with a loan to buy a comprehensive insurance which can compensate for potential loss to the car as well as any damage incurred to individuals so; people look for car insurance as it is a legal requirement. It is clear that driving without car insurance puts both one and other drivers at risk. People can use car insurance which is a valuable program to assist the costs and disturbing actions. It is important to consider insurance as an inseparable cost among the total financial expenses, due to it can be an influential tool capable of protecting properties invested in a car and spending medical costs since any accident. Not only is car insurance necessary for protecting personal property from any loss and providing peace of mind while on the road, but it is also a valuable asset to society.

1.2. Background of Service Quality

Currently, different companies are using various marketing strategies to attract new customers. They apply these policies to differentiate from other competitors, successfully and try to increase profitability. The company owners invest in Marketing, Distribution, Research and Development, and other functional departments and attempt to meet customers needs better and sooner than other rivals within the industry.

According to the Roberts (2005) and Lotayif (2006), some companies use defensive strategies to keep their current customers. Even though other marketing strategies are also valuable, research proves that defensive strategies can be more beneficial. In other words, trying to save current customers brings greater profit for companies than strategies focusing on market share expansion or cutting cost. Earlier research has shown that a small increase in customer retention has great effects on company

3

profitability by also cutting cost along the way to attracting new customers (Lenskold, 2003) since by protecting current customers, the cost to advertise and other marketing strategies to attract new customers, is less. Different companies will succeed in this way, when the customers who make the money for company are served by the high quality service. Therefore, quality must be maintained in order to keep existing customers. To maintain a high level of quality, quality therefore needs to be measured. By measuring service quality, the areas where the provided service must be improved based on customer observation come to light. Thus, it becomes possible to provide services closer to customer expectations. Customers are obviously more pleased with high quality service so, profitability is ensured.

1.3. Research Objective

In spite of the results of service quality as well as its effects on company profitability, only limited studies have been conducted in various industries. Research is so far limited on service quality in different industries such as Banking and Higher Education (Sureshchandar, et al., 2002; Yunus, et al., 2009) as well as the insurance industry in Greece (Tsoukatos & Rand, 2006). However, despite the importance of service quality in the car insurance industry especially, no studies have addressed this issue in the Australian car insurance context. Therefore, this study wants to fill this gap. This empirical study is based on the purpose of measuring service quality in Australian car insurance industry by applying the SERVQUAL scale (Parasuraman, et al., 1991) so, to achieve the study objective, this following question should be answered:

According to the SERVQUAL Scale, at what level is the service quality of Australian Car Insurance?

Moreover, car insurance is one of the most dramatically growing kinds of insurance and service quality plays essential role for the companies within this industry since quality guarantees profitability. The significant elements of this issue have therefore been the motivation behind this research.

2. Literature Review

2.1. Service Quality

The service quality theory is considered one of the most debated subjects in service literature (Ooi , et al., 2011) since it lacks agreement when it comes to describing and defining service quality (Gupta , et al., 2005; Babakus & Boller, 1992). Service quality is a focused evaluation reflecting the customer's perception of specific service dimensions

4

including reliability, responsiveness, assurance, empathy, and tangibility (Zeithaml & Bitner , 2003). According to Roth and Van Der Velde (1991), there is a positive relationship between service quality level and financial performance, meaning that improved service quality results in higher financial performance levels. Similarity, Bennet (1992) documented that the outcome of developed service quality is positive financial performance.

In addition, Bowen and Hedges (1993) recognized that advanced service quality is related to market share growth. Thus, efforts to recognize service quality have been made over the last three decades, with service quality being widely researched and presented throughout service marketing literature (James & Kang, 2004). Investigators have also attempted to conceptualize and measure service quality and identify its relation to the performance of companies (Tsoukatos & Rand, 2006). In the existing marketing literature, the service quality issue is related to customer attitudes towards services, while more attention is given to the relationship between customer expectations and their perceptions of provisions quality (Wan Azmi, et al., 2004). This correlation was first presented by Gronroos (1982) as perceived service quality. Gronroos proposed that perceived service quality is the outcome of customers assessing their expectations and perceptions of what they receive. Thus, he determined that two factors relate to service quality, namely customer service expectation and customer service perception. Parasuraman, Zeithaml and Berry (1985) documented that a customers evaluation of total service quality depends on the gap between customer service expectation and perception. Therefore, efforts to minimizing this gap are a way to successfully provide high service quality ( Shafie, et al., 2004).

2.2. The SERVQUAL Scale

Defining and measuring service quality are not as easy as measuring product quality due the intangible nature of service. There are different factors such as length, depth, width, weight, and color which help assign product quality, but evaluating service quality might be more challenging due to the fact that services offered are intangible. Different scales have been created by scientist to measure service quality. Among the scales are the Technical/Functional Quality framework generated by Gronroos (2001) and the SERVQUAL scale created by Parasuraman, Zeithaml and Berry (1985). It is a gap analysis model examining five service dimensions, thus it is more important and practical than others. Many service quality works of research have widely accepted SERVQUAL as a framework and instrument for measuring service quality. Due to its popularity, the SERVQUAL scale was actually developed by Parasurama et al. twice, in 1988 and 1991. The SERVQUAL 22-item scale is used by different scientists to examine the quality of service in various sectors. For instance, Gounaris (2003) and Arasli, Mehtap-Smadi and Katircioglu (2005) used this scale in their research to measure service quality in the Banking Industry, while Tsoukatos, Marwa and Rand (2004) have used this scale in the Insurance Industry. SERVQUAL has been designed for a variety of service segments. According to Parasuraman et al. (1988):

5

It provides a basic skeleton through its expectations and perceptions format, encompassing statements for each of the five service-quality dimensions. The skeleton, when necessary, can be adapted or supplemented to fit the characteristics of specific research needs of a particular organization.

Actually, this gap analysis model scale evaluates quality of service by giving two scores for each of the 22 service characteristics, provided by customers. One score is customers expectation of service provided by a company, and the other is consumer perceptions of service performance. Finally, the service quality for each feature is calculated from the difference between these two scores. Regarding research by Parasuraman, Zeithaml and Berry (1988), five principal attributes affect customer service quality judgment, including:

Reliability: the ability to perform the promised services both dependably and accurately.

Responsiveness: Willingness to help customers and provide prompt service.

Assurance: employee knowledge and courtesy to enable them to convey trust and confidence.

Empathy: the provision of caring, or giving customers individualized attention.

Tangibles: the presence of physical facilities, equipment, personnel, and communication materials.

Although after the establishment of the SERVQUAL Scale, different research areas were recognized by scientists on conceptual and methodological grounds (Bebko, 2000; Yoon & Ekinci, 2003) SERVQUAL has been applied to measure service quality in several settings all over the world (Tsoukatos , et al., 2004; Tahir & Wan Ismail, 2005).

2.3. The Australian Insurance Industry

Nowadays, insurance is becoming an inseparable part of life. According to Swiss Res World insurance in 2010, the latest sigma study, world insurance premium volume improved by 2.7% on an inflation-adjusted basis. Moreover, the industrys capital and solvency progressed, while low interest rates weighed on investment income. Thus, the insurance industry is now in a fine developmental position according to Swiss Re's annual assessment report of global insurance markets for 2010.

The Australian insurance industry is one of the most sophisticated and highly developed insurance markets in the world. According to Swiss Re, World Insurance, Australia is now ranked 12th globally in terms of premiums and 4th in the Asia-Pacific region. With respect to Australian Insurance Industry structure, the Insurance Council of Australia (ICA) is positioned at the top of the structure and ICA members supply 37.8 million insurance policies and handle three and a half million claims annually. In Australia, car insurance types include:

6

Comprehensive - covers damage to own car and others property Compulsory Third Party (CTP) - covers damage up to others property.

As other types of insurance, car insurance requires quality as a key role in achieving profitability. Moreover, research has demonstrated that quality of service is significant and essential for the survival of insurers. In addition, service quality has become the most important factor for both maintaining existing portfolios and acquiring new business (Tsoukatos , et al., 2004).

3. Research Methodology

According to the Martin Shuttleworth (2008) research includes any collecting of data, information and facts for the advancement of knowledge. In the other word, research is a process of three steps used to gather and analyze information to increase understanding on a specific topic or issue. These three steps include posing a question, collecting data to answer the question, and presenting an answer to the question (Creswell, 2009). This research focuses on the relationship among variables and the research design for this study refers to a quantitative form.

3.1. Research Population and Sample Size A population is a group of individuals who have the same characteristics (Creswell, 2005). Population in this research comprises of customers who used car insurance in Melbourne, Australia. According to the Australian Bureau of Statistics there are 49 active car insurance companies in Melbourne. The target population in this research consists of all customers who used various services in car insurance companies. Therefore, the population is very large thus; small-size samples were needed for data collection. In this study, we used random sampling among a great deal of insurance companies in Melbourne, Australia, out of which 40 were chosen according to the Morgan Table (Morgan, et al., 1970). In the next step, we used cluster sampling among the chosen car insurance companies. Cluster sampling gives the same opportunity for car insurance companies and finally, we used simple random sampling in each company for distributing the questionnaire. For research sample size, we refer to the Morgan table again. According to this table research sample size is 384 persons due to the population of people who have car insurance contract in Melbourne are more than 100,000, certainly (Figure1).

7

Figure1. A conceptual model for understanding population sample

3.2. Research Instrument In this research, we used an online questionnaire with a five-point Likert scale for gathering data. In order to get information about the questionnaire, an email was sent to Dr. Evangelos Tsoukatos, author of the Path analysis of perceived service quality, satisfaction and loyalty in Greek insurance in 2006. Dr Evangelos Tsoukatos had replied with his sample of questionnaire. This research paper has adopted the questionnaire with some adjustments to match its objectives and the selected local of study which is in Australia. The questionnaire used in the current study includes 2 major parts. The first part comprises 8 questions on demography elements like gender, age, level, income, occupation and education. The second part focuses on service quality, which is measured by 5 dimensions of tangibles (4 questions), reliability (9 questions), responsibility (4 questions), assurance (4 questions), and empathy (5 questions).

3.3. Instrument Reliability and Validity Reliability concerns the extent to which a research instrument such as a test gives the same results in different circumstances. In the current study, we used Cronbach's Alpha for reliability and utilized a pilot study and distributed 30 questionnaires among 30 customers. Results show that Cronbach's Alpha for 26 questions was 0.912 (Table1). So, there is an excellent correlation between all questions in this questionnaire (Cronbach & Shavelson, 2004).

Target population (all car insurances

in Melbourne, 49 companies)

Car insurance chose

random sampling

(according to

Morgan table - 40

companies)

Target population in

sample size chose random

sampling

Population in

sample size

chose random

sampling (384

samples)

Analyze data on

sample size and

get a result

(384)

Distribute questionnaire for

car insurance

8

Table2. Cronbachs Alpha for the current questionnaire Cronbach's Alpha N of Items

0.912

26

Furthermore, we used internal validity which includes the lecturers points of view, as well as the specialists and statistics experts. This questionnaire is confirmed by four academicians and specialists who commented on a few questionnaire sections and recommended corrections. After error amendment, the current questionnaire is considered valid to be used.

4. Data Analysis

4.1. Description Statistics When data was collected through an online questionnaire distributed to 384 respondents who are individuals living in Melbourne, Australia we apply description statistic to find more information about the respondents. Based on analysis of the collected data and using description statistics for demography, it was found that most respondents were male at 60.4% and 39.6% were female. Also, collected data shows that most research participants (49.7%) are aged between 25 and 40. Additionally, most people (48.2%) have some undergraduate education level. Furthermore, 58.9% of respondents are married or 24.7% are single. Results also demonstrate that 10.2% participants have an income higher than AUS$100,000, annually whereas 43.5% of respondents in this investigation have an income between AUD 50,000 AUD 75,000. To gain better insight into respondent occupations, 9 groups of jobs were identified, including civil servant, educator, private employee, self-employed, businessman or woman, pensioner or retired, business executive, student, and other jobs. According to the gathered data, 21.4% of participants in this research selected Other jobs as their occupation and 19.8% chose private employees in following. Furthermore, it was found that among all respondents 75.5% do not have any problems with their insurance providers because of high service quality and 24.5% of customers had some problem with their car insurance company and are dissatisfied with their insurers.

4.2. Inferential Statistics

To response to the research question, service quality is measured with the SERVQUAL Scale. Service quality consists of five dimensions, namely tangibility, reliability, responsiveness, assurance, and empathy. Actually, the SERVQUAL Scale is gap analysis model scale. We comprised the customers expectation of service provided by a superior company with consumers perceptions of service performance and calculated the mean of each question. Then, the mean of each question was compared to the population mean. According to questionnaire analysis, the minimum mark in each

9

question is 1 and the maximum is 5. Thus, the average mean is 3. Consequently, participant results higher than 3 are good. The following table (Table2) demonstrates the average population mean and overall service quality results measured by the SERVQUAL scale. According to the collected responses, car insurance industry service quality for the investigated area, Melbourne, Australia, is high because the resulting mean (4.27) is higher than the populations mean (3.00).

Table2. Service Quality Statistics

N Minimum Maximum Mean

population Mean

participant Std.

Deviation

Service quality

384 1.00 5.00 3.00 4.2794 1.47481

Valid N 384

The following table shows the five service quality dimensions and also, the comparison between the mean of participant responses with the population mean for each question is presented.

Table3. Items in Service Quality Statistics

Service quality

Item

Question Mean of participants

Mean of population

Tangibility

Q1 4.46 3

Q2 4.53 3

Q3 4.61 3

Q4 4.49 3

Reliability

Q5 4.70 3

Q6 4.27 3

Q7 4.19 3

Q8 4.19 3

Q9 3.96 3

Q10 4.10 3

Q11 4.05 3

Q12 4.02 3

Q13 3.99 3

Responsiveness

Q14 4.09 3

Q15 4.09 3

Q16 4.20 3

Q17 3.11 3

Assurance

Q18 3.13 3

Q19 3.09 3

Q20 4.28 3

Q21 4.22 3

Empathy

Q22 3.98 3

Q23 3.95 3

Q24 3.92 3

Q25 3.92 3

Q26 3.26 3

10

5. Conclusion

Recently, the number of individuals worldwide in need of support from different insurance types has been dramatically increasing. Car insurance is one of the fastest growing kinds of insurance and is in high demand since it is mandatory for car owners and drivers in most states to buy this particular insurance. In addition, customers are clearly more pleased and satisfied with high quality service. Moreover, service quality guarantees profitability consequently and plays pivotal role for companies within this industry as well as other industries.

5.1. Discussion on Research Objective

To achieve the research objective, we measured service quality by using the SERVQUAL Scale. With respect to the findings, service quality in the car insurance industry for the investigated state of Australia is high because the mean (4.27) is higher than the mean of population (3.00). As we know, the SERVQUAL is based on the gap analysis model, so regarding the findings there is a small gap between customer expectation and perception and they are receiving high quality service in this region and most customers receiving service is exactly as expected or close to expectation. The five-dimension structure of service quality was based on research mostly done in the USA. Although this scale proposed by Parasuraman et al. (1988) was validated in some difference areas such as banking industry and educational organizations (Wan Azmi, et al., 2004; Yunus, et al., 2009) and was not confirmed in some areas such as Greek insurance (Tsoukatos & Rand, 2006) due to economic and cultural differences, this scale is established for the car insurance industry in Melbourne. The result indicates that SERVQUAL Scale relates better with service quality in advanced economy of Australia compared to the less advanced economy of Greek as indicated in the earlier research (Tsoukatos & Rand, 2006). The possible reason for this difference is diversity in economic and culture but to generalize, we need more study in different states with different economic level and industries.

5.2. Research Implications Recently, the number of people applying for car insurance has been dramatically growing. With respect to this issue, company management bodies should further investigate these findings to better understand how their clients think and respond because they are seeking to improve their customers satisfaction levels to increase retention rate. This research was carried out for Melbourne, Australia, and could help draw beneficial conclusions valuable for both customers and insurers.

11

5.3. Limitations and Direction for Further Research

Population in this research comprises car insurance customers in Melbourne, Australia. It does not cover other type of insurance or other major cities of Australia. Other limitation is that it only relies on SERVQUAL as a measurement tool to service quality and not covering other possible tools. Relative to the total customer population particularly if considering all other type of insurance, the number of respondents should be higher to obtain more accurate data. Therefore, broader sampling can be used for future studies. In addition, the comparison between current study and earlier studies result indicates that SERVQUAL Scale relates better with service quality in advanced economy of Australia compared to the less advanced economy of Greek as indicated in the earlier research. Although, this scale have accepted widely in Australia, an advanced economy country and have not confirmed in less advanced economy country of Greek (Tsoukatos & Rand, 2006) but to generalize, we need to more study. It was utilized in financial service, educational organization, airlines, and insurance industries (Tahir & Wan Ismail, 2005; Tsoukatos & Rand, 2006; Olorunniwo & Hsu, 2006; Rizan , 2010) in the earlier studies. For future studies, work can be done on other financial service sectors, other industries or even different insurance types such as life, property, and health insurance in different countries and state with various economic levels.

References

Babakus , E. & Boller, G., 1992. An empirical assessment of the SERVQUAL scale. Journal of Business Research, Volume 24, pp. 253-268.

Bebko, . C., 2000. Service intangibility and its impact on consumer expectations of service quality. Journal of Services Marketing, 14(1), pp. 9-26.

Creswell, J., 2005. Educational research : Planning, conducting, and evaluating quantitative and qualitative research. 2ed ed. s.l.:s.n.

Creswell, J., 2009. Educational research : Planning , conducting , and evaluating quantitative and qualitative research. 3ed ed. s.l.:s.n.

Cronbach, . L. J. & Shavelson, . R. J., 2004. My Current Thoughts on Coefficient Alpha and Successor Procedures. Educational and Psychological Measurement 64, Volume 3, pp. 391-418.

Gupta , A., McDaniel, J. & Herath, S., 2005. Quality management in service firms: sustaining structures of total quality service. Managing Service Quality, Volume 15, pp. 389-402.

James, J. & Kang, G., 2004. Service quality dimensions: an examination of Gronrooss service quality model.

12

Lenskold, J., 2003. Retention Marketing Profitability: ROI Challenges Influencing the Retention versus Acquisition Debate. Marketing Profitability White Pages Series.

Morgan, Krejcie, Robert , V. & Daryle, W., 1970. ,Determining Sample Size for Research Activities. Educational and Psychological Measurement.

Olorunniwo, F. & Hsu, M., 2006. A typology analysis of service quality, customer satisfaction and behavioral intention in mass services. managing service quality, 16(2).

Ooi , K., Abdul Rahman, T., Lin , B. T. B.-I. & Yee-Loong , C. A., 2011. Are TQM practices supporting customer satisfaction and service quality?. Journal of Services Marketing, pp. 410-419.

Parasuraman , A., Zeithaml , V. & Berry, L., 1988. SERVQUAL: a multiple-item scale for measuring consumer perceptions of service quality. jouranl of retailing, Volume 64b, pp. 12-40.

Parasuraman, A., Zeithmal, V. & Berry , L., 1991. Perceived Service Quality as a Customer-based Performance Measure: An Empirical Examination of Organizational Barriers Using an Extended Service Quality Model. Human Resource Management, 30(3), pp. 335-364.

Rizan , M., 2010. Analysis Of Service Quality And Customer Satisfaction, And Its Influence On Customer Loyalty.

Sureshchandar, G., Rajendran, C. & Anantharaman, R., 2002. The relationship between service quality and customer satisfaction- a factor specific approach. Journal of service Marketing, Volume 16.

Tahir , . I. & Wan Ismail, W., 2005. Service quality in the financial services industry in Malaysia: the case of Islamic banks and insurance. International Review of Business Research Papers, 1(2), pp. 10-21.

Tsoukatos , E., Marwa, S. & Rand , G., 2004. Quality improvement in the Greek and Kenyan insurance industries. Archives of Economic History, 16(2), pp. 93-116.

Tsoukatos , E. & Rand, G. K., 2006. Path analysis of perceived service quality, satisfaction and loyalty in the Greek insurance. Managing Service Quality, Volume 16.

Wan Azmi, W. N., Shafie, S. & Haron, S., 2004. Adopting And Measuring Customer Service Quality In Islamic Banks:A Case Study Of Bank Islam Malaysia Berhad. Journal of Muamalat and Islamic Finance Research , Volume Vol. 1, No.1.

Yoon, T.-H. & Ekinci, Y., 2003. An examination of the servqual dimensions using the Guttman scaling procedure. Journal of Hospitality and Tourism Research, 27(1), pp. 3-23.

Yunus, N. K. Y., Ismail, A., Juga, Z. R. & Ishak, S., 2009. service quality Dimensions, perceive value and customer satisfaction: abc relationship model testing. International Business and Economic Journal, 2(1).

Zeithaml , V. & Bitner , M., 2003. Services Marketing: Integrating Customer Focus across the Firm.