Profitability can be achieved only if insurers bring in quality controls, says Steve Tidd
The AA's latest British insurance premium index and its prediction of a motor price war makes for gloomy reading.
First quarter average prices for comprehensive motor insurance have fallen by 2%, the most dramatic fall for nine years. Despite the average cost of insuring a car doubling since 1994 and motor insurers making their first - albeit small - profit in nine years, claims costs and leakage are rising. Yet insurers continue to chase market share based on uneconomic rates.
Over the past few years, the policyholder has begun to have a grudging acceptance that like any other household bill the price may have gone up a little. Certainly the industry will be criticised if, like the local authorities, the increases are seen as excessive, but insurers should not send policyholders the message that they have been overcharged in previous years. Price reductions at this time will simply undermine the integrity of our industry.
We have witnessed a market moving away from the basic principles of quality underwriting and favouring a 'pile it high, sell it cheap' mentality. Despite calls for the industry not to slash rates so readily and adopt a sensible approach to underwriting to keep the industry profitable, it appears this attitude is unlikely to change in the near term.
So the question remains, with margins already being squeezed dry, how can underwriters maintain any level of profitability in the face of a price war stimulated by the high volume larger players and new brandassurer entrants to the market?
As an industry we must find innovative ways of reducing claims costs and limit leakage if we are to maintain any sort of profitability.
There are the obvious methods of using software to identify possible fraudulent claims and other tools to reduce claims leakage and control costs. However, I would argue that one of the best control methods is to ensure that the risk is underwritten properly in the first place. What we must not do is to reduce expenses at the cost of watering down our underwriting standards.
Over the years, as insurers have strived to maximise their share of a market that has too much capacity, we have slowly moved away from the underwriting basics. In order to streamline the process for the intermediaries and make life easier for the customer, insurers have made some incredible concessions.
They have agreed to move from a signed proposal to an unsigned (and possibly unread) statement of fact. They will waive copies of driving licences and accept telephoned no claims discount proof. Indeed, many insurers will give discounts based on whatever the customer tells them. What is not discovered at audit, we are told, can be checked at the time of a claim.
It is difficult to accept that, as an industry, we allow several hundreds of pounds discount for a bit of paper but, due to the administrative burden, we fail to check on its validity.
If these trends are allowed to continue, underwriting results will suffer and the genuine client will end up subsidising those who take advantage of the system. Unless insurers start to put quality controls in place now, it will be too late to stop the rot.
