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Broker Toolbox: Work the angles – Paterson

by: Kevin Paterson
  • 03/11/2014
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The household sector is on the verge of sinking into unprofitability. It seems that flood risk, opportunistic fraud and the inexorable rise in popularity of aggregators are all taking their toll on insurers' bottom lines.

Despite the fact that this sector made a profit in 2012 for the fifth consecutive year, its combined operating ratio worsened to 94% last year. That’s as close to being unprofitable as insurers are likely to want to come.

So why not just increase their pricing?

Easier said than done in a market that has become commoditised. It’s harder to differentiate on any attribute that would support a higher price were an insurer to act alone. Look at the way the comparison sites present policies that vary hugely in terms of the quality of cover offered, as if they were equivalents. Consequently, customers mostly choose on price alone.

You might say that it’s the insurance industry’s own fault for having got into bed with aggregators in the first place without making a few more demands about how their product features were to be displayed. But that was then. Now the leverage is all on the side of the aggregators and the insurers are paying the price of being trapped in a model that offers low-cost acquisition of customers, but at the expense of the virtual inability to compete on any vector other than price. And the price comparison sites are here to stay.

And that is their Achilles Heel…and an opportunity for our industry.

In the case of the aggregators, the one-size-fits-all nature of the data-capture and quotation mechanisms does mean that they have a weakness in the area of non-standard home cover. It is more difficult for them to cope with because the information required simply doesn’t work in a standardised question set.

I believe that the non-standard end of household is the area where insurers are going to aim to drive profitability. I also think it presents intermediaries with a great opportunity to generate solid business volumes, as they are far better equipped to garner the information necessary for a non-standard quote from their clients than any comparison site can be. (…or than any comparison site for now at least… but we’ll leave the rise of the machines aside for the moment).

The classic example:

House in a flood postcode but at the top of a hill.

Take properties in flood  risk areas as an example. If a town or village is prone to flooding and its outer sector postcode is all that is used to price a risk, then homes on a high elevation or in a street that has always avoided water inundation will still be put in the same bracket as homes more vulnerable to flood damage.

An intermediary can drill down on their client’s behalf and provide adequate information to enable the insurer to get the underwriting correct and genuinely charge according to risk. This means that a homeowner who is at less risk should get more affordable cover without losing out on quality of cover – an unlikely outcome had they used an aggregator.

Non-standard cover

The definition of ‘non-standard’ is wide ranging as you might expect. Insurers may look at timber or steel frame houses or even state-of-the-art eco homes as being non-standard, as well as flood risk properties and thatched cottages. If you have clients and potential clients whose homes deviate from traditional bricks and mortar and tiled roofs, it may well be worth considering a marketing campaign to target their home insurance explicitly. Highlight the benefits of using your services to get the right level of cover at an affordable premium. Insurers won’t turn down profitable qualified business.
But the best part is – you won’t be competing with a meerkat for the business.

Kevin Paterson is MD of Source Insurance

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