“Listen, here’s the thing. If you can’t spot the sucker at the first hour of the table, you ARE the sucker,” says young poker player Mike McDermott in the hit film Rounders.
If motor and home insurance is a game of poker, with intermediaries, service providers and insurers - then the loser at the table is the insurer.
They have the lowest profit margins, struggle to make underwriting profits and face ever-increasing pressures to give away even more of the premium to distribution.
Saxon East Insurance Times 14 October 2020
East uses FCA analysis to show the low profitability of insurers compared to that of the aggregators. On the other hand the aggregators offered a very cost effective means of acquiring new customers.
When price comparison started in earnest, it gave an incredibly simple way for small insurers and big insurers to compete on price and only pay for every success. Also the payment was fixed, usually £50 per policy. In the television advertising days cost per acquisition was often in the £100-£200 region.
Aggregators introduced transparency into a market where the opacity favoured the large brands and the brokers, not the customers. Once Confused.com started back in 2005 a whole new distribution dynamic was introduced, that lead to savings for millions of people but also predictability for carriers when it came to their cost per acquisition.
The other factor that no one discusses, is that many large composite insurers in the UK run their car insurance books at a loss because it’s the only product that gives them regular opportunities to cross sell to customers. Several times a year a customer has to open car insurance envelope or email on account of renewal or mid term policy changes. Within those communications there will always be cross sell activity for much more profitable products.
So as the FCA stops price optimisation in 2021 and insurers can no longer compete on price what are their options when the profitability is so low?
How can they transform customer interaction and engagement without breaking the bank?
It puts more emphasis on product differentiation and as consumers move more to rental for homes and vehicles, the emergence of 'mobility-as-a-service for auto, gig working and UBI and parametric insurance gain bigger footholds there are many opportunities for innovation.
Insurers big and small have the opportunity to win customers if they they have and can analyse the data to offer the right products at the right time in personalised portals. To see what I mean look at HUGHUB. The user interaction and engagement is so much more complete and useful for consumers. If insurers are to establish ecosystems this is the front-end research and buying quality they must offer.
Unable to compete of price for new customers they must compete on product and the ease of buying and servicing these products.
Even so the matter of cost still rises it head and as acquisition costs will rise, margins be squeezed then insurers must look where the opportunities to reduce costs lie.
70% of so of an insurers cash flows throw claims operations this this is the area they should focus on. Not just claims operations themselves but the supply chain which is an area of significant waste time and materials.
New claims management platforms like 360SiteView do reduce Opex by the 40% factor , increase NPS to the high 70s and mid 80s and deliver Customer Satisfaction scores of 90% plus. Combining better service and lower cost will increase lifetime GWP and improve margins offsetting the higher customer acquisition costs that insurers will face come what may.
Better still, combining platforms like HUGHUB and 360SiteVew will make the dramatic innovation impact that insurers must achieve now that the FCA is forcing their hands.
Remember, the FCA estimates up to £11bn in lost revenue across all insurance firms in the next ten years. Resisting the price comparison websites is difficult for insurers: the aggregator market is dominated by several players. Insurers do not have many other places they can turn to. Insurers could follow the route of Saga, trying to push customers direct to their websites, but this will mean increased advertising and marketing costs. The aggregators are not necessarily the villains at work: they are profit-making enterprises highly adept at maximising their revenues from partners. It is up to the insurers to find another way if they don’t like dealing with them. In fact, the FCA in the latest consultation praises aggregators as providing an important and helpful service to customers.