In this latest piece, Jess Hurley, P&C Market Lead, EIS, takes a look at how insurers can adapt to the new loyalty penalty rules.
Out With The Loyalty Penalty and In With New Customer Strategies
Home and motor insurance is experiencing a major overhaul, thanks to new measures from the Financial Conduct Authority, which bans renewal quotes from being more expensive than they would be for new customers. This practice often referred to as a ‘loyalty penalty’ or ‘price walking’ is widespread among insurers, with existing customers paying £1.2bn extra per year.
The FCA’s decision forces UK insurers to end discounting for new policyholders which results in a loyalty penalty for long-term policyholders. This is a win for policyholders, and ultimately a win for insurers. However, with the ban coming into effect on January 1st 2022, insurers need to consider new strategies for building loyalty and ultimately provide value to policyholders.
Price isn’t king in a consumer-centric market
Previously, insurers have been lazy in improving retention rates, relying on attractive new customer deals and autorenewal policies to mask the high churn rate of customers who shop around and switch each year to avoid loyalty penalties. A poor way to build customer loyalty in a consumer-centric age.
Price remains and always will be the biggest factor for purchasing but insurers should consider building customer loyalty in other ways. Consumers are increasingly attuned to the value of other factors such as dynamic pricing, one-stop shopping, simpler buying journeys and insurance propositions that reflect their lifestyles. Insurers that capture this zeitgeist will capture wallet share, though they need the right technology to meet customer needs and support the level of functionality to build loyalty.
Swap customer switches to one-stop-shopping
A sound way to build customer loyalty and even drive desirability among consumers is to offer multiple products in line with consumer needs. Recent research shows that over half, 57% of home and over one third, 39% of auto policyholders are more likely to switch insurers if they have different providers, rather than a single provider.
While consumers are willing to do their research and shop around for the best policy, there will always be a desire for convenient solutions. Being able to offer a combination of auto and home insurance on a single customer record within the same system, shows a real understanding of the current consumer experience in demand. Today, customers have a wealth of options which meet their basic needs, so advantages are only possible when insurers can add real value to consumers’ lives.
Insurers often want to be able to create meaningful customer experiences but are held back by legacy or modern legacy systems – which can be technology installed as recently as five years ago. In a bid to be more consumer-centric, layers of complexity are added, from customer relationship management systems, to data lakes and intricate integrations to third-party systems and data. A major effort to have a comprehensive view of customer needs which leaves insurers worse off.
These dense layers of technology also pose a long-term headache for insurers, as developing, delivering, supporting and maintaining that functionality, given the inherent limitation of their legacy core systems, will prove difficult and highly expensive.
Opening up to APIs to foster loyalty
The advent of open platforms and connected devices is key to combating insurers’ legacy tech problem, which can enable a new range of sales and services opportunities to customers, fundamentally redefine insurers relationships with policyholders. Open platforms such as Application Programming Interfaces (APIs) have pioneered the innovative packaging of insurance and non-insurance products to drive retention. For example, offering a housing bundle which includes home insurance, financing, essential home repairs, and all home utilities is of interest among 51% of UK consumers.
Putting the customer first also starts with putting the customer record number at the centre of insurance operations. This empowers insurers to consolidate a whole host of useful information, from contact information, history and demographics, real-time integrations to third-party systems which enhance customer experience quickly become simplified. This allows insurers to focus on the customer experience rather than the technology needed to provide that experience.
The FCA’s ruling on the loyalty penalty provides a major opportunity for Insurers. Those who can adapt their organisations and technology to simplify the customer journey, create products that better meet lifestyle and life cycle needs can become the one-stop shop consumers crave. These insurers will build consumer confidence, foster loyalty and grow their business.