Conduct risk for insurers: what is the right approach?

1. Are consumers getting value for money?

There are simple metrics that insurers can put in place including highlighting products with persistently low loss ratios or ensuring that commission ratios do not exceed a certain threshold.  A low loss ratio can be a sign that customers are struggling to file valid claims, which may suggest terms and conditions are too tight or prices are too high.  Value for money also extends to mid-term adjustments; e.g. the charging of excessive administration fees will reduce the value for money that a consumer perceives.

2. Do insurers understand their distribution networks and, therefore, how much commission is being charged to the customer?

In some cases, the distribution channel includes an insurer as well as, for example, an automotive dealer via a broker, in respect of Guaranteed Asset Protection (GAP) insurance.  The FCA discovered that in one such case, the final commission charged to the end consumer was almost 61% of the price paid. Insurers can no longer claim that such charging structures lie outside of their responsibility as they have an obligation to ensure that customers are treated fairly.  Insurers who charge a net rate should therefore pay attention to this area.

3. How different is an insurer’s renewal price and new business price for the same risk? Is it justifiable?

There have been enough mentions in the press of how renewal prices for insurance tend to be higher than a new business price, resulting in insurers profiteering from the inertia of customers to change providers.  There are very few cases where such a phenomenon is justifiable.  Arguably, the cost of renewal should be lower as the customer has already been acquired.  Some insurers have taken the initiative and started guaranteeing similar prices between renewal and new business and most have now implemented price reminders in their renewal letters.  However, there is still much more to do and lessons can be learnt from the telecommunications and energy industry where price matching at renewal, reminders to switch and price capping are becoming a norm.

4. Are your products complex and therefore sold in an appropriate manner?

Not all insurance products are well understood.  Even for those that are supposedly understood, this may not actually turn out to be the case.  Take travel insurance, as an example, whereby a claim which consumers may assume to have been covered was invalidated or reduced because of an obscure clause that the insurer put in place e.g. a lower limit on theft if a passport was also stolen.  Products with such features could be simplified in the hope that consumers are willing to pay more for peace of mind.  Alternatively, insurers need to ensure that such features are highlighted during the sales process which may then limit the distribution channels.