By Ben Johnson, Managing Director of the Insurance practice, Sheffield Haworth
In part one of this article, you saw how the FCA aims to use its pricing remedies to promote Fair Value in insurance and what that means for the industry. In this second part, we talk to James Yerkess of HAL Consulting and Ian Hughes of Consumer Intelligence to explore how the FCA’s proposals are likely to affect the industry. We also discuss practical examples of how insurance businesses should respond to both minimise the potential damage and make the most of the potential opportunities.
How the FCA pricing remedies are likely to affect insurers
- Changing management structures
Insurers are already looking at underwriting, compliance, and product lines. However, the experience of the banking sector suggests that Fair Value will affect everything – including communications, marketing, and branding.
As James Yerkess says: “You can see in banking over time that the management structures and renumeration models changed. Customer value management became a key phrase within the banks. They moved away from seeing Fair Value as a governance team, pricing team, or product team issue. It became about the holistic measurement of customer value management across all parts of the business.”
- Better claims service
Insurers will certainly have to look at their claims services, thinks Ian Hughes. “Claims goes to the heart of Fair Value,” Hughes says.
“The real value you get as an insurance consumer is in the service you get when you make a claim. If insurers do that well, then they’re delivering Fair Value. After all, it doesn’t matter what you charge. If making a claim is a terrible experience then it’s never going to be Fair Value.”
“If making a claim is a terrible experience, then it’s never going to be Fair Value.”
In other words, Fair Value is “a much more holistic concept that goes across the entire organisation”.
- Transparent communication
“One thing that isn’t often being discussed a great deal at the moment is the communication aspect,” Yerkess adds.
“If you look at how the communication piece developed across banking to create a value ecosystem, all the call scripts changed, all the letters to customers changed. All the information changed that went out to customers explaining how value was created. Pricing was only one small component of that. Brand positioning and marketing also changed to reflect and promote these communication and messages shifts.”
Insurers will not only have to look at changing their pricing practices and their products. They also need to communicate more clearly with customers. But this is not just a threat – it also offers potential opportunities for insurers to increase business.
Yerkess cites the example of cross-border payments in banking. “Yes there’s an element of pricing in there. But what made the difference was when banks communicated to customers what they were charging for, and that it cost more to send transfers over the weekend.”
Before the regulator forced banks to communicate their charges more transparently, customers didn’t know. The effect of the regulation in this area was to stimulate the rise of competition and new entrants such as TransferWise – now called Wise. Transfer charges fell, and revenues rose across the board – including for incumbents – as more customers transferred money more frequently.
How this is likely to affect distribution – is this the end for price comparison websites?
Within the industry itself there’s a lot of buzz around what the end of renewal pricing increases might mean for the future of price comparison websites. The insurers we spoke to questioned how price comparison would continue if there was no need to compare prices anymore. Some cited the fact that Admiral sold its price comparison site Confused.com in December 2020 as evidence of an uncertain future for the whole price comparison model.
One industry insider I spoke to thinks the future could be different for price comparison websites, saying: “It will be interesting to see how they change. Why would a consumer continue to use a price comparison website when they know that by law the price of their premium can’t go up beyond what’s reasonable? But it’s been 20 years in getting to this point, so the question now is how quickly they will evolve.”
Some of the smaller insurers we spoke to are worried about a future with less price comparison. On average, they generate around 80% of their business from price comparison websites. Any change that risks this revenue stream is a major concern for them.
Yet Kate Collyer, Chief Economist of the FCA, made clear on a Consumer Intelligence webinar in March that the FCA expected price comparison to continue. For the FCA, comparing prices between providers would still be key for consumers to be able to judge whether they were getting Fair Value.
Collyer was also clear that the FCA expects its remedies to stimulate more competition in the market, including the possibility of new market entrants.
Many in the industry recognise that price comparison is here to stay, since consumers have become used to using them over the last 20 years. Even in the case of the sale of Confused.com, it’s worth remembering that Admiral sold the site to Zoopla. Presumably, Zoopla believes price comparison has a future. Otherwise, why would they have paid £500m to acquire it?
The contacts I spoke to from within price comparison websites think that consumers will continue to use their services. They’ve also been looking into how to alter their algorithms so consumers will be able to compare policies based on other factors, such as service levels or customer reviews.
How should insurers respond?
- See this as an opportunity
From all the industry observers I spoke to, the overarching message is the same: see this change as a potential positive rather than a threat or a technical compliance exercise.
One insurtech thought leader I spoke to is excited to see how the pricing remedies might change the industry for the better. “There’s lots of opportunity here,” he says. “How do we as an industry react to this? What things will we have to go and do in order to make this work for all parties?”
Ian Hughes agrees, saying: If you think customer plus commercial plus compliance, there is a win-win-win. What banking shows us is there is a win-win-win, but you have to think positively about all three.”
“Giving good claims service causes such loyalty that people don’t bother to shop around.”
He gives the example of improving claims service as one area where insurers could see huge benefits moving forward.
“We did an outcomes analysis looking at who are the people who don’t shop around at renewal and who’ve been with their insurer for more than four years. It’s the people who’ve had a good claims experience!” he says.
“People who’ve had a good claim are the ones who don’t even bother to shop around. Giving good claims service causes such loyalty that people don’t shop around – in a market where 85% of people shop around.”
- Look into new customer-centric business models with lower operating costs
James Yerkess points out that the banks’ shift from pricing to Fair Value ended up being advantageous. “Banks have evolved by shifting from price-centric thinking to value-centric thinking, and, in the process of doing so, reducing their operating costs and lowering attrition.”
This should be the same for insurers, he says, pointing to a specific example from banking of how insurers might respond positively.
“It will be interesting to see what insurers do to embrace mobile-centric opportunities to change their operating model to where they can deliver better value to customers while reducing operating costs.”
“It will be interesting to see what insurers do to embrace mobile-centric opportunities to change their operating model to where they can deliver better value to customers while reducing operating costs,” he says.
“Imagine a mobile-centric or mobile-only insurer, with no call centres, no phone calls, no claims lines. Just quality online support to deliver that. Imagine what that would do for the operating base! Revolut and Wise have been successful at doing this in the cross-border payments space, so why would the same development not evolve across the insurance sector?”
- Leverage third party data more effectively
Another example he cites is greater use of open banking. “The amount of information you need to apply for new banking products and services has shrunk considerably because of open banking,” he says.
“When I’m applying for car insurance, why do I have to enter my car registration? Surely my insurer could hook me up on open banking to the DVLA – all they need is my permission upfront for the DVLA to share that,” he adds.
“You know what car I’m driving, how long I’ve driven it, and you can get my MOT information so you’ll know exactly what mileage I’m doing in a year. Why do I need to add that?”
Greater use of open banking and data sharing would make buying and renewing insurance a far simpler and more pleasant experience for consumers, Yerkess argues. This would provide a powerful element of Fair Value beyond pricing, as well as being likely to increase customer retention. This in turn would reduce acquisition costs and boost operating margins.
- Learn from the examples of others
From Yerkess’ comments, it’s clear insurers can model their response on the banking sector, and learn from what they improved:
- Mobile-first services.
- Better communication.
- Use of net promoter scores to gauge customer happiness and boost retention.
- Retiring unpopular or unprofitable products and services.
But there are other models to learn from too. Yerkess suggests looking to examples from other sectors and industries, including:
- How health insurers offer rewards for healthy behaviour to build customer loyalty.
- How insurers in Asia use third party data and mobile-first propositions to offer stellar service.
- How credit card providers across Asia boost loyalty with sophisticated reward schemes.
- How tech companies build loyalty – for example how Amazon uses its Prime service to reward repeat customers with better service in return for consistent, transparent pricing.
“Fair Value is used everywhere outside of insurance. Insurers only have to start thinking differently and creatively to start seeing the possibilities to provide Fair Value and have a positive impact on the bottom line,” he says.
How insurers should respond – the Sheffield Haworth view
From the views shared here, the insurance industry is facing a fundamental shift in approach from pricing to Fair Value. Although not all businesses are aware of it, the fast movers are, and they’re already well underway. From our perspective, the key factors insurers should consider moving forward are
- Focus on business transformation
As Yerkess says, the management structures within banking changed over time to accommodate Fair Value within their business models. Banks’ customer value management teams incorporated elements of:
- Product management
- Risk management
- Digital capability
- Transformational programs
Forward-looking insurance companies would be wise to do the same, and even potentially to model their response on that of the banks. It’s also worth reflecting that most of the Fair Value fines and remediation exercises in banking were a result of poor governance or systemic failures around the ability to evidence Fair Value.
2. Focus on branding
Of the insurers we spoke to, those with the better-known, more established brands were most confident about their ability to win new customers at acquisition – regardless of any future pricing changes. The lesson here is for all insurers, brokers, and other intermediaries to focus on building their brand.
Even for smaller companies, there is opportunity. With the pricing remedies on the horizon, all insurers will be on more of a level playing field in terms of pricing. They will have to focus on providing other elements of value to consumers. New brands – even completely new market entrants – are likely to emerge.
3. Foster an innovative and creative culture
From our research, customer-centricity goes hand in hand with a more innovative and creative culture. As more insurance businesses recognise the scale of the challenge they face over time, creativity and innovation will only become more important to success.
We expect forward-thinking insurers to expand their skillsets around customer-centricity, data science, product design and management, and business strategy.
4. Start sourcing key talent before it becomes scarce
Sheffield Haworth’s global insurance recruitment data for the last six months shows that 10.8% of talent sourced from outside the insurance industry came from consultancies. 8.4% came from the banking sector, and 13.2% came from either software or fintech.
We would expect these numbers to rise going forward, as savvy insurers look to bring in outside expertise to help them plug their current skills gaps around Fair Value. We would particularly expect to see insurers source more talent from insurtech and banking as they devise new pricing models and new products, and look to embed customer value management within their organisations.
Those insurers who move first will have their pick of the talent. Those that leave it too late may struggle. Or find themselves having to pay over the odds for skills they could acquire now at a lower cost.
To sum up all of this, here’s a final quote from Ian Hughes.
“I think a lot of people are approaching the pricing remedies in a negative way, but you should look for the opportunity in this, because it’s there staring you in the face,” he says, adding: “Early adopters who grapple with this now will have a competitive advantage, beyond a shadow of a doubt.”
If you missed it, you can read part one of this article here: “What the FCA’s pricing proposals really mean for the insurance industry”
If you’d like to discuss any of the issues raised in this article and how they could impact your business, please get in touch:
T: +44 (0) 207 213 0786
About the contributors
James Yerkess, Founder & MD at HAL Consulting
With a career spanning executive leadership roles across financial services, global retailers and start-up banks, James Yerkess is the Founder of HAL Consulting. HAL joins highly experienced value and pricing experts with exclusive benchmarking data to deliver long term sustainable growth across global locations.
Ian Hughes, CEO, Consumer Intelligence
Ian Hughes is CEO of Consumer Intelligence, helping companies to better understand their customers through market and consumer benchmarking. A Fellow of the Institute of Direct Marketing and an I Love Claims Member, Ian is also a graduate of Harvard Business School and a regular contributor to the Post and Insurance Times.