With home insurance prices expected to rise by 30% this year as a result of claims costs, price will be at the forefront of everyone’s mind when it comes to their renewal.
But this is not a new phenomenon, and to some extent the industry has focused on price for too long. Whilst it is an important factor, especially with price increases, we should not forget the reason we buy home insurance in the first place, which is to protect us in case of a loss.
With new regulation in the form of Consumer Duty coming into force this month, is it all going to change. In this post we’ll take a look at:
- How consumers buy home insurance
- What impact does behavioural economics have on the decision
- What are the opportunities Consumer Duty allows for insurance providers
Why do we make the decisions we do?
On this topic, in my view there is no better book to read than Dan Arierly’s “Predictably Irrational” on how behavioural economics impacts our decisions.
At the end of this month, on the 31 July, one of the biggest changes of regulatory reform in the UK retail financial industry is introduced, Consumer Duty.
It will introduce a new level of consumer protection that will require firms to act to deliver good outcomes for retail customers.
At the heart of this is ensuring products and services are well designed to meet consumer needs, and perform as expected.
Figures from the regulator, Financial Conduct Authority (FCA), state that 23% of home insurance claims are rejected. The figures also highlighted that with some insurers it is almost 50% of all claims.
Whilst insurers have disputed this number, it nevertheless raises the question: did customers know what they were buying, and did it meet their expected outcome?
On those numbers – it’s unlikely.
In simple terms, home insurance is provided to cover losses on the buildings and contents that make up our home against insured perils.
On the face of it the decision appears simple, however a home insurance policy is a legal document and is written in such a way. It’s likely to include clauses, restrictions, warranties and exclusions, so all of a sudden it becomes a much more complicated buying decision.
When exploring how we make decisions Dan Ariely highlights the concept of relativity. As consumers when making decisions, we focus on the relative advantage one thing has over another, and estimate value accordingly.
However there is an aspect of relativity that often trips us up. That is we tend to focus on things that are easily comparable – and avoid things that cannot be easily compared.
This fits with the classical theory of consumer behaviour, in which individuals search for information about a product to purchase until the marginal costs of additional search efforts exceed the marginal benefits of finding a cheaper or better product.
To understand how this may impact the home insurance purchase decision, you first need to consider how much consumers currently understand about their home insurance. Here are a couple of insights from recent research and reports:
- YouGov research showed 49% of UK consumers believe that price is the only differentiator between different home insurance products
- An ABI report suggests only 3 in 10 consumers feel confident that they understand how their insurer calculates their premiums
- The Financial Ombudsman highlights in many disputes they see, consumers complain that insurer’s haven’t asked the right questions, with underinsurance being a common complaint.
Based on this the majority of consumers believe price is the main difference between insurance policies, and most of them don’t believe the price is correct.
This is not surprising, and over the years insurance has been ever more commoditised, with price being used as the key differentiator.
Similarly, consumers by nature prioritise information on when it is provided to them, so when making purchase decisions, if the first piece of information they see is about price, then it is not surprising the majority of consumers are making decisions on that basis.
But the cheapest does not necessarily mean fair value, or that it meets the needs and expectations of the consumer.
As part of Consumer Duty, the FCA requires a consumer to understand the fundamentals of the product, and places a responsibility on firms to demonstrate that.
A study in 2021 by Compare the Market discovered that 37% of people with a home insurance policy admitted to being unable to answer all the questions regarding their home accurately during the quote process.
So, what is the consumer’s decision-making process?
Consumers will search for information by the most effective and efficient means possible.
Mintel’s UK Price Comparison Sites in the Financial Services Market Report 2022, highlights some very important trends, namely:
- 63% of consumers have used a price comparison website to research their insurance
- 90% of UK adults who use comparison sites to get the cheapest deal possible
- 93% of UK consumers believe that price comparison websites are easy to use
Does this mean that consumers use them because they’re easy to use and display all the necessary information needed to make an informed decision, or is it as a result of them providing the cheapest deal?
On a quick look at the main PCWs homepages, all prominently display words such as “price”, “savings”, “rewards”, and it could be argued that these create behaviour biases that impact what consumers should be viewing as important when making a purchase decision.
That is fine, if a consumer’s expected outcome of purchasing a home insurance policy is to get the cheapest. However, if we assume the consumers’ decision to purchase insurance involves the desire to insure against the risk of incurring a loss, then it raises more questions about what information is important.
Underlying this is the expected utility theory, that assumes individuals are rational and display a reasonable degree of risk aversion and are able to consider events in the future and make decisions accordingly, so information around the correct cover, claims processes and speeds etc are going to be the primary concerns for consumers.
Another pricing element of Consumer Duty that creates challenges for insurers is fair value. If you’ve used a comparison site before you may have found when the results are displayed to you a wide range of pricing from the various insurance providers.
Being the cheapest does not create fair value for consumers. Equally the price of a product must be priced accordingly to the market, and the target customer. As a consequence if your product is priced too high compared to the rest of the market that is also an issue.
Are we likely therefore to see pricing becoming more generic? As a result how will that impact consumers’ decisions? Will it be harder as currently the easiest way to differentiate is price, and without that it starts to become more complicated?
This should require insurance providers to work more on their propositions value to a consumer. How can they support consumers in delivering their needs?
There are some common themes that have come out in recent reports and research, to highlight a couple of these:
Mintel Global Consumer Trends 2023 report, identifies consumers demand for services that help them to become “more resilient to change and prepare for the uncertainties of the future” together with “services that can be incorporated into their daily lives”
With a similar sentiment, published earlier this year by Bain and Company in their Customer Behaviour and Loyalty in Insurance report, concluded that consumers want to reduce risks in their lives and are looking for help from insurers.
This offers such a huge opportunity for insurers, to meet customer needs and drive retention.
Consumer Duty, has significant implications beyond buying insurance, and the regulation is clear that firms should be focused on retention and not acquisition.
In 2021, research by Go Compare found that 67% of UK consumers let their home insurance automatically renew.
The suggestion here is that a consumer either was happy with the renewal terms, or forgot about their policy renewal.
Under Consumer Duty this creates a new challenge for insurers, as they will need evidence that the consumer was aware of the terms and happy to auto-renew.
In addition, they will need to ensure that the customer’s life circumstances have not changed, that may result in them being defined as a vulnerable person, in which case how they communicate and support that consumer will be different.
Some of the examples of vulnerability that can frequently change are poor health, going through a life event that may impact their ability to make rational decisions, or having low financial resilience.
For consumers to engage with insurers, especially around such personal matters, there needs to be trust, and with the Association of British Insurers report on Consumers Attitudes To Data and Insurance report in 2022 highlighting that only 13% of consumers trust their current provider, there’s a significant amount of work required by insurers to get that up to a position where consumers have an open and active relationship with their provider.
Without that, it feels this could be an area of the Consumer Duty that firms could easily fall down on, as the emphasis is on them to support and facilitate such communications.
Consumer Duty needs to be embraced, and not just complied with. There is no denying it is a huge challenge, but one in which there are significant benefits both for consumers, but also insurers, who aside from needing to adapt to the evolving nature of consumers, can also benefit from better retention and higher customer lifetime value.
It is an ideal opportunity for providers to look at their value proposition and how they really can not only meet the needs and expected outcomes from a policy but go beyond that and add value to consumers in their everyday lives.
