26 January 2017
Is it OK for insurers to charge as much as they can get away with?
What's a fair price for an insurance policy? It's a question that few people are able to answer. While we might buy our car and home insurance once a year - and have a vague idea of what ballpark price we should be expecting to pay - it's much harder when it comes to insurances that we buy rarely or even purchase just once in our lives.
To my mind, a fair price is the cost of providing the insurance, plus a small profit margin. But if insurers are selling products to customers who have no idea what the cost of the insurance really is, it's easy for them to charge well over the odds - carving out a much bigger slice for themselves in the process.
In car and home insurance - which many of us now buy through comparison sites - price competition is fierce, so this isn't such a problem. If insurers want to write new business, they need to offer rock bottom, even loss leading, prices - in the hope of recouping some of their revenue when the customer renews.
Lack of price competition
But there are dozens of smaller insurances that are sold in ways which eliminate any proper price competition. Take for example, concert ticket insurance, or train ticket cover.
These are relatively cheap insurances that cost you a few extra pounds when you're buying a gig or train ticket. They're designed to cover you if you can't make your train or the expensive concert you've booked. But because you buy them on a ticket site - with just one option offered to you - there's no competitive pressure on price.
You might think £5 isn't much for the peace of mind that the insurance provides. But if the cost of providing it is £1 - and you could have picked it up elsewhere for a couple of quid - you've not really got a fair deal.
Some people might say this is simply a competition problem - and the answer is to simply find ways of giving customers the chance to compare prices. That's what happened in the extended warranty market, where customers were getting ripped off by retailers flogging over priced insurance to protect them if their TV broke.
To try and stop this happening, the regulator banned retailers from selling insurance at the same time as they sold the goods in their store. They can give customers some literature to take away, but they can't sell them insurance there and then - giving the customer the chance to go away and shop around.
Baby out with the bathwater
This has greatly reduced the number of extended warranties being sold and reduced prices. But it's not a perfect solution. These kind of measures can kill an insurance altogether - which might leave customers without protection that they need.
The Financial Conduct Authority has been looking at the murky world of add-on insurances for the last few years - and decided to take a different approach to improving outcomes for customers. Instead of banning add-ons from being sold at the same time as another product, they are experimenting with the impact of a bit more transparency.
Earlier this week, the regulator published new data showing the average number of claims per policy, and the average size of claim, for a few key insurances. And the results were revealing.
For personal accident insurance - which is often available as an add-on to car insurance - the FCA found that the claims rates were often as little as 1 in 50,000 or even 1 in 100,000 policies per year. And the average claim was around £20,000. Yet these policies are often being sold to customers for £20 or £30.
Standing outside of the pack
Even more revealing were the stats on how often claims were paid. In the case of Personal Accident claims, most insurers paid out between 90% and 100%. But esure stood out from the pack - with a claims acceptance rate of just 60% to 70%. This doesn't look great for a product as binary as personal accident - which pays out if you sustain a serious injury.
In home insurance, Zenith and UIA also stood out, rejecting more than 20% of claims.
I know the industry hate these kind of figures being published - and complain that they lack context. But I think it can only be a good thing if insurers are under pressure to pay more claims and price fairly.
The boards of esure and Markerstudy (which owns Zenith) will inevitably be having conversations this week about why they are represented unfavourably in a league table on the FCA's website. And hopefully that will lead to some action.
Having said all that, I still think that the key to ensuring add-ons are more competitively priced is to work with the comparison sites to help customers compare prices for packages that include all the insurances they need. Leaving people to add the extras once they have left the comparison site and moved onto the insurer's own site, is always going to leave customers vulnerable.
The Competition & Markets Authority is in the early stages of a new study into comparison sites. Let's hope it builds on the work the FCA has started.