The key findings of the FCA in its interim report were:
- ‘price walking’ practices, which allow firms to raise prices for loyal customers who renew with them each year;
- policies sold at a discount to new customers, with premium increases on renewal commonly targeting those less likely to switch provider;
- pricing includes expectations of whether customers will switch;
- consumers paying higher prices often had characteristics of vulnerability;
- pricing practices led to overall higher prices; and
- certain practices, such as a lack of transparency or disclosure of reasons for changes of price and auto renewals, made it more difficult for customers to make informed decisions and switch.
These can broadly be categorised into two areas:
- unfair pricing at renewal; and
- a lack of pricing transparency.
In this article, we consider whether the retail insurtech market can offer alternative solutions addressing these issues, focusing on three types of insurtech products in particular:
- Peer-to-peer insurance;
- Pay-as-you-use insurance; and
- Parametric insurance.
Many insurtechs suffer (at least initially) from a lack of brand and product awareness and consumer trust, which can result in slower uptake of their products and services. However, the structure of their products is often significantly differentiated from those offered by traditional insurers. In particular, by their very nature their pricing is often inherently clearer and easier for consumers to understand and there is often less pressure on the annual renewal process. As a consequence they are, arguably, well placed to take market share and help alleviate some of the problems in the market identified in the FCA’s interim report.
What solutions can insurtech offer?
Peer-to-peer (“P2P”) insurance comes in a variety of forms, but commonly, products pool the premiums of customers to insure against risks and the insurtech who provides the pooling system charges an administration fee for providing the service. For example, certain home insurance products charge consumers a flat fee which is pooled and shared between those who are insured, and any leftover unclaimed premium is given to a non-profit of the consumer’s choice. Other products have also attempted to return leftover premiums back to customers (although often coming across regulatory hurdles when attempting to do so).
As a result, premiums are usually priced on the basis of actual claims made, therefore customers can benefit as prices ought not to rise unless claims frequency or cost also increases, and so prices ought to be less likely to rise at renewals. With respect to transparency of fees, in P2P insurance, the insurtech commonly acts as an intermediary creating a type of “mutual fund” for its customers and charging a fixed fee or percentage of the premium. Therefore customers should be able to understand exactly where premium is going and how the insurance product operates.
Pay-as-you-use insurance allows insureds to only pay for their usage rather than signing a traditional annual insurance policy. For example, motor insurance policies can provide insurance cover based on the miles driven, or occasional short-term coverage for half an hour or an hour. Other examples also include bike insurance or insurance for food delivery drivers which can be switched on and off whenever a journey is made.
As with P2P insurance above, renewals are not price sensitive because pay-as-you-use insurance is based primarily on usage rather than a fixed fee. In addition, fees become more transparent as customers understand the “price per hour” of insurance which can provide greater transparency than a one-off annual price, and any increase to that hourly price can be more easily recognised as customers will have greater visibility of the price per use of an insured item.
Parametric insurance products are insurance products which make a payment based following the occurrence of a pre-determined event or series of events. For example, parametric agribusiness products consider soil type, temperature, and types of crops planted to estimate whether there has been a loss and, after certain thresholds which determine that a loss ought to have occurred have been met, an automatic payment based on the likely loss following those triggers is paid.
Claims are paid under parametric insurance products after an objective pre-determined event has occurred, such as whether a flight is cancelled with respect to flight insurance. As claims payment can be automated and is usually based on objective information, the claims process and claims administration are usually significantly cheaper. As a result, insurers can price premiums more closely to a risk and insurers also can be more transparent with their pricing.
Insurtech products can provide customers with solutions which are more transparent and less reliant on renewals. This is often due to the nature of new insurtech products which can be priced in a way which can more accurately and clearly display the link between claims and premiums. In addition, as many commonly involve a tech-enabled user experience for purchasing the product, automated underwriting and pricing, and automated or AI-based claims processes, customers may also benefit from lower premiums as the whole insurance lifecycle can be made cheaper. As the market for, and diversity of, these solutions evolves we can expect to see more innovation and greater disruption of the market – but this will take time. In the meantime, as the interim report shows, there is clearly work to be done to address the inequities in general insurance pricing practices the FCA has identified.
Co-authored by Janice Pang