Rory Yates, Global Strategic Lead, EIS, takes a look at price inflation, public perception of insurance brands and how technology can help the industry keep cover affordable.
In insurance, there’s always been a fine line between generating profit and building a sustainable business.
On the one hand, you have an industry created to drive society forward. By sharing risk, we all get to drive cars, go on holidays, and live our lives knowing that, should the worst happen, we and our loved ones will be well looked after.
On the other, insurance companies are businesses with overheads to pay, objectives to fulfill, and shareholders to satisfy. They have to make the economic model work for the liability they carry, balance the books, and invest significantly. The result is an underlying model driven by ratios, regardless of the organisation’s purpose. It’s a balancing act that, for the most part, insurers have deftly handled…until now.
Are price rises driven by profiteering insurers?
Recently, questions about the fairness of price hikes have hit me with increasing frequency, and from all angles. The sense from partners, journalists, friends, and family, is that it all seems incredibly unfair. A conversation I had with a builder the other day summed up the general customer view. He said, “I’ve been paying into my policy for years, never claimed, and yet at a time when I could do with some financial relief, these guys hike their prices.”
Of course, I offered my complete sympathies. After all, I’m in the same boat. But, as I explained, it’s a complex issue and there’s a lot that’s out of an insurer’s control. Brexit in the UK, the pandemic, regulatory changes, economic and environmental shifts coupled with massive changes in customer expectations are all acting on insurance at once.
Overall, though, I’m increasingly concerned that this isn’t being viewed as a long-term issue. Once it’s accepted that this problem isn’t going away, there’s a lot that can be done to solve many of these problems collectively. So let’s break it down.
Putting the customer first.
In the UK, unprecedented claims inflation has resulted in a range of reactions. A few insurers have passed the entire cost onto customers. Others marginally so. However, some have appeared to price customers off their books with ‘extreme’ pricing.
>There has to be something fundamentally broken when the only option is to ‘exit’ the customer. What other industry would be willing to do that? The short-term profit increase may please shareholders, but surely pricing customers out is unsustainable.
>Despite some exceptions where this is genuinely about carrying less risk to better support and price a wider book of business, you’ve got to ask what’s driving such extreme behaviour. For me, at least, the answer is the lack of customer-centricity in insurance.
The typical policy-centricism taken by insurance businesses has left them unable to value a customer. Without a holistic view of what a customer is worth, and more importantly, what their lifetime value could be, ‘pricing the risk’ becomes the only consideration.
When you’re unable to analyse customer behaviour, cross or up-selling products like breakdown cover, cyber, or public liability policies, is impossible. However, the economics suggest it’s undoubtedly worth pursuing. With cost-per-acquisition costs skyrocketing, it makes sense to focus on selling more products to a customer. Or at the very least, making sure they stay so you can find ways to do so.
Either way, if a person held multiple products with an insurer, then insurers would be far better placed to value that relationship. Especially when their business models and systems are built around this idea. In turn, it’d massively reduce the cost per customer and the acquisition costs / per product.
When data is done well, we’ll also see entirely new products to support vulnerable customer groups, where the risk scope is changed further
The ability to leverage consumer data could also revolutionise multi-cover insurance, or increase the flexibility of options on offer across the board. Whether that’s Hiscox removing escape of water risk by partnering with Leakbot, or the recently acquired By Miles with their usage-based offering.
Taking vulnerable customers into account, more needs to be done to provide services that identify these individuals and provide services that allow them to explore the choices they have.
In addition, options like ‘household’ or ‘umbrella’ propositions that price multiple risks or value other costs can be introduced. Far more popular in the US with the likes of Chubb and Geico, these will increasingly reflect ever-changing lifestyles, providing adaptive propositions that really put the customer and their data at the heart of the policy.
For example, what if you could offset your car insurance price by adopting travel insurance? Households typically buy both each year, and the insurer could probably price this to a healthy margin. The industry could also restructure the offer for multi-vehicle and multi-driver real-world scenarios.
Some are already providing better value, like LV=, which allows you to add six cars and 12 drivers on one car insurance policy with the same renewal date. These shouldn’t be complicated adaptations to offer customers.
Then there’s services like usage-based, or multi-differential services that allow you to switch between risk profiles. For example, say you’re a Lyft driver by night and a school drop-off driver by day. Having your policy adapt to this and the associated liability would likely create far fairer pricing. Either way, adapting to these changes with the products offered will be increasingly essential, and a new competitive paradigm is already emerging.
When all of this happens, the process becomes a true relationship and exchange of value in a continuous virtual circle.
Again, for these kinds of services to become a reality requires a huge shift away from policy-centric businesses to insurers that are customer-centric and can leverage holistic data in all areas of the organisation.
Make ecosystems count.
We are at a wonderful tipping point. There has never been a better time for insurers to orchestrate their repair networks intelligently, reduce costs, and improve claims experiences in the process. Like the extensive work our clients do integrating with CAPS. This is vital in motor insurance, where the garage network is under increasing pressure, and the benefits of getting the best fix first time for the customer is also likely to reduce costs and premiums.
This is especially vital as we see EV’s starting to force up repair costs, and in some cases the removal of policies completely. This is happening in parallel to cars becoming capable of self-diagnosing and reporting a claim or fault. The ability to efficiently integrate and monetise the value of insurtechs like RightIndem, or better use of data services like WeatherNetUK are becoming vital. And this should happen in weeks, not months.
Ditch the 1980s cost base.
It’s one of my favourite decades, but a 1980s IT and Operations cost base built on ailing architecture and designed to scale by maximising distribution and minimising costs is hurting insurance businesses unnecessarily. It needs to give way to ecosystem business models, where the ability to change is massively increased while simultaneously reducing the cost of change.
The sheer proliferation of distribution, the amount of pricing changes, and the need to adapt products have all driven up the frequency of change. Equally important is that digital transformation across multiple industries has meant customers have ever-increasing unmet needs by insurers. Their expectations are now set to increase further as IoT, AI, and Data capabilities accelerate. I’m all for retro, but not at the expense of my insurance, thanks.
Meet your Consumer Duty.
As is stipulated in the Consumer Duty regulation that came into force this summer, insurers can and should provide more transparent pricing. It’s a wonderful model where we all club together to pool our risks and pay accordingly. However, many consumers don’t understand how their policy is priced or what triggers price increases. So, when prices go up, trust goes down and gives way to the perception of profiteering insurers.
Greater pricing transparency would help consumers understand the value of their policy, both in terms of how it’s calculated and why, even at an elevated cost, they’re getting a good deal. It’d help confront concerns that one age group or social demographic was subsidising the poor behaviour of another.
Shareholders need to cut insurers a break.
Lastly, I think shareholder attitudes towards insurers need to change. There’s a big call for dividends and shareholder value still taking place, and this will stifle investment and force cynical shorter-term decisions by insurers. There must be far better consideration and support for longer-term investments in solving these problems. Insurers have a lot of potential, but most need a business model and technology transformation to unlock it. It’s time to invest in this potential.
Price hikes only hurt the people insurance is meant to help. We all need insurance, and we all need it to thrive.