Facing up to the unkindest cut of all

THE UK economy continues to deteriorate, despite markets soaring earlier this month after the G20 summit pledged more than $1trn to restructure and improve market liquidity.

Research from Ernst & Young shows that in the first quarter of this year, 117 listed companies issued profit warnings – the third quarter in a row that more than 100 warnings have been issued.

The political and media indignation over the perceived excesses of the City also continue, along with calls for significant regulatory change.

Meanwhile, the headlines in the insurance industry have been largely dominated by individual insurers, life assurers and reinsurers whose underwriting or investment strategies have led them to market volatility.

The general insurance industry is preparing for falling claims performance and diminishing new business in household and motor, all driven by the collapse in mortgage advances and short-term vehicle financing.

But the downturn is driving another trend: a significant increase in customers lapsing or reducing cover. In a recent survey, Sainsbury’s Bank showed that in the past 12 months about one million customers have lapsed or reduced premiums under their household insurance policy. A further 300,000 have lapsed or amended life assurance policies.

The specific numbers can always be debated; the direction cannot. The reality is that too many people see insurance as non essential when times are tough.

Naturally, the industry response has been to highlight the folly of such behaviour. While that response may be appropriate, the survey does inevitably raise a broader question: what could and should the industry do to advance the importance and value of insurance – at an individual personal and business level – to encourage an environment where it is seen as one of the last things to be cut?

The industry has improved product design recently, including plain English wordings, value-added services, no-claims discount frameworks and a variety of cover extensions. But personal lines products in particular need to be made simpler and more transparent. Some markets have started this with automatic cover upgrades and endorsements to protect customers from changes in legislation. This reassures and instils a greater sense of consumer confidence – which, in turn, refines the insurance value.

Research suggests that many people see insurance as a distress purchase. The industry therefore must explain the value of different cover options and product features. The rise of the aggregator illustrates the inexorable trend towards commoditisation and the prevalence of price-based competition in mass market personal lines.

Insurance distributors – direct, broker or bancassurer – have a key role in helping customers understand the value of their policies. They are not just a sales channel. Insurance policies are complex and too few people have places they can turn to for advice and support. Fortunately, commercial lines are still dominated by face-to-face distribution so the features and benefits of cover are explained and more readily understood.

The industry must ensure that the inevitable focus on efficiency that accompanies recession is as much on simplifying and reshaping business as on across-the-board cost cutting.

Current pricing strategies and marketing efforts still push for new business rather than try to retain existing customers. Given the embedded profitability of in-force books of business, it’s surprising that more distributors and insurers have not focused on customer retention teams or have pricing strategies that target customer retention.

Historically, insurance centred around a social provision and protection enshrined in the principles of mutuality. However, long before the current credit crisis, the industry suffered from a lack of trust, something which allowed new entrants to make remarkable progress in building business. The industry must recapture some of the empathy and trust it had with customers by demonstrating fairness and value for money.

The optimist might well say that consumers will return once the economy recovers – and at a higher premium! However, insurance is not like other parts of the financial services industry. It doesn’t drive ever higher shareholder returns but instead provides a vital service to society as well as a return to investors. The industry is doing a lot but needs to be doing much more.

Andy Baldwin is Ernst & Young’s EMEIA financial services markets managing partner.