Why insurers need to embrace life after price walking
Price walking [common in the insurance industry] a form of price discrimination whereby existing customers, especially long-standing customers, incur a loyalty penalty over new customers.
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On 1st January this year, the UK insurance industry faced its biggest shakeup for decades. Insurers were banned from quoting policyholders a higher price to renew their home or motor insurance than they would offer a new customer. The Financial Conduct Authority (FCA) stated: “Insurers can no longer penalise consumers who stay with them. You can still shop around and negotiate a better deal, but you won’t have to switch just to avoid being charged a loyalty premium”.
No wonder the insurance industry is so unpopular. But is it just insurers? No. In September 2018, Citizens Advice submitted a super-complaint to the Competition and Markets Authority (CMA), that long-standing customers were paying more than new ones (a 'loyalty penalty') in five essential markets - mobile, broadband, cash savings, home insurance and mortgages.
‘I never liked insurers’
Well that’s an easy pill to swallow, but I’m going to stand up for them, just a little bit…
Price comparison websites have created a race to the bottom, i.e. the ‘cheapest wins’ mentality. So if insurers tried to address the problems on their own, and not heavily discount the new business price, they wouldn’t sell much. Plus joining forces with other companies would break anti-competitive law. Damned if they do, damned if they don’t.
The Association of British Insurers (ABI) tried to coordinate action with Guiding Principles and Action Points (GPAP), but it wasn’t enough to drive the changes needed. Ultimately, the FCA stepped in for insurance and set the new regulations. They say the insurance market will be fairer and work better, and consumers are expected to save £4.2bn over the next 10 years.
So, will customers actually be better off?
It’s probably a little too early to tell, but on the whole, it depends what type of customer you are.
It’s a matter of public record that firms won’t just cut renewal prices to match those for newbies. The FCA estimates new business policies might go up by 10% for motor and 20% for home, as supported by Oxbow Partners’ recent home review - many have experienced around 7% increases, with niches reaching over 60%.
So if you actively switch to find the best prices, I’ve got bad news for you. But what about everybody else? For many, buying and renewing insurance over the last decade has been a painful experience. I like to call it the ‘despairing waltz’. The price hike, the price comparison websites (PCWs), the same old questions and now cheaper quotes. It leads me to a woeful dance back and forth with my insurer, the pain of haggling, the T&C overload to ultimately come away with a competitor’s quote and save a nominal fee. But at what cost? It doesn’t feel like a win.
And there’s the rub. It’s an exploitative process. No wonder it was called a grudge purchase. Oh, and did I mention you have to do it every year?!
Customers have been conditioned to search for the best prices or stick with what they have and avoid the despairing waltz. Or maybe apathy wins over. The rule changes won’t fix your insurance price so it always stays the same, despite what some customers think. Many are unaware of the regulation changes, and it can actually go up or down. But it does mean insurers will have to treat their existing customers as fairly as new ones.
An opportunity to build loyalty for the right reasons - a new, healthier relationship between customers and insurers?
To date, insurers have invested in sophisticated processes to attract customers deemed less likely to switch, and some have even invested in you not knowing you can get a cheaper ‘new customer’ price on the PCW. And it doesn’t stop there. At every new IT system, product or customer experience launch I hear the same phrase - ‘don’t wake them up’. It means migrate old profitable ‘price-walked’ customers onto new bespoke products with minimal fuss. Keep them ignorant and stop them shopping around.
What if you changed the narrative and your investment choices and rewarded customer loyalty? Rather than fearing the changes, what if you celebrated them?
What if you changed the narrative and your investment choices and rewarded customer loyalty? Rather than fearing the changes, what if you celebrated them?
This is a great opportunity to follow the example of the neobanks - tell your customers about your great new digital services and what you’re creating in the future. Yes, there is a risk they’ll leave, but by focusing solely on the customer you might actually start to build a level of trust. Who knows, you might even retain customers for the right reasons and build brand ambassadors and better lifetime value.
One of the most common complaints in insurance is there are limited opportunities to interact with your customers. The average number of touchpoints is 2.7 or less - a grudge purchase, a change, or claim maybe, followed by a grudge renewal. Telematics and Internet of Things (IoT) sensors are starting to change things, but many products are still limited in this respect. Use it differently, use it wisely.
Will insurers be forced to innovate in the future?
It’s still early days. Following the regulation changes, insurers will be watching each other closely, reacting to price changes as quickly as their IT systems allow. The regulators will also be watching, and early signals indicate new business prices going up and switching going down. So is it a win?
According to the Oxbow Partners hypothesis, if insurers continue to find ways to compete on price for new customers (the appetite for underwriting risk changes all the time), then customers might not see any real difference in their ability to get good deals. So behaviour wouldn’t change at all.
In my eyes, this would be an epic fail. I expect and hope insurers will use this as an opportunity to create and operate more efficient, customer-centric businesses and offerings, with the help of digital technology. For example, Defaqto three star products for the price conscious. Telematics, sensor-driven and novel data sets for those willing to share for more accurate pricing. Bundled offerings for (multi) car and home - but with a focus on customer needs of today. Environmental, social and corporate governance (ESG) bolt-ons for those with a strong social conscience. In other words, use this as an opportunity to get closer to your customers, provide more tailored offerings and begin to change the narrative and mindsets.
My unfiltered opinion
We can’t ignore that multiple key elements of insurance business models still rely on profit from bad customer outcomes. Choosing to ignore this, or even actively pursuing this business model to look for ways around the regulation will bring trouble - it will bite in the future.
A lot of people think that regulation is bad for business, but it can also be incredibly powerful. It can be a catalyst for change and it’s there to protect the customer - the values this industry was built upon that have gotten lost somewhere along the way.
A lot of people think that regulation is bad for business, but it can also be incredibly powerful.
It’s time to show them that you do really care and stand by your core values. No more live action role-playing (LARPing) for corporate executives that want to feel like they’re doing right by the customer.
This might be a big ask for some, but what I’m talking about is no longer a differentiator - it’s table stakes. Insurtechs have proven there is value in the margins, and they’ve elevated the experience.
So accept the challenge. Use this as an opportunity to create commercially viable end-to-end offerings that help customers save time, reduce stress and increase efficiency.
