Briefing: More insurers need to think outside the box to mitigate cost of living crisis

By Editor Katie Scott

Mike Miskelly, insights manager at market research firm Consumer Intelligence, said during the company’s webinar this month (June 2022) that the cost of living crisis is not a myth.

Although headlines bemoaning living costs have been bandied around various media outlets in recent weeks, figures from the Office for National Statistics (ONS) clearly support Miskelly’s stance.

Its The rising cost of living and its impact on individuals in Great Britain: November 2021 to March 2022 report, published in April 2022, found that 87% of UK adults reported a month-on-month increase in their cost of living as at March 2022 – this is a 25% uptick on the 62% of adults that felt this way back in November 2021.

A further 23% said that it was very difficult or difficult to pay their usual household bills this year, compared to 2021, with the price of food shopping, gas or electricity bills and fuel costs being identified as particular pinch points.

Escalating living costs is having a direct impact on the world of insurance, according to Consumer Intelligence. Its April 2022 data, based on a sample size of 1,038 respondents, found that 6% of respondents have cut back on their insurance spending in the last three months in order to make financial savings.

For 66% of respondents, this meant switching to a cheaper policy, while 43% opted to cancel their cover altogether.

Consumers have also reduced spending on holidays (36%), drove less (40%) or have even sold their car (3%) to try and control costs. More than a quarter (27%) of respondents have also delayed a purchase to save money, which could include buying a new or secondhand car.

These thrifty shopping habits will have a knock-on effect on the travel and motor insurance markets.

Miskelly said: “We’re talking about people literally worried about not being able to pay for certain things that really, as it stands at the moment, are regular parts of their day to day expenditure. Insurance falls into that pot really.

“Certain things are mandatory, like car insurance, but things that are less mandatory, they are a little bit at risk of being on the table for the chop, so to speak.”

One such ‘at risk’ cover here is pet insurance, which Consumer Intelligence identified as the most cancelled policy type among its research respondents. Although pet insurance is a discretionary purchase, claims are often costly due to expensive vet bills, added Catherine Carey, Consumer Intelligence’s interim marketing director.

Pet insurance has also taken a hit following the unravelling of the home-based pandemic lifestyle – one webinar attendee shared that increasing numbers of pets bought during the pandemic’s homeworking boom were now being returned to rescue centres as Brits swapped their home offices and daily walks for pre-pandemic commuting and holiday jet-setting.

But what are some creative ways that insurance businesses can support these cash-strapped consumers to avoid underinsurance?

Installment advantages

For Miskelly, one tool insurers can use to ease cost constraints for financially distressed customers is installment plans – or more specifically, removing the premium uplift that is typically added to monthly installment payments versus the cost of an annual policy paid in a lump sum.

Currently, “the average uplift above and beyond an annual policy to pay in monthly installments in motor is an additional 12.3% and in home, it’s a flat 10% on average”, he noted, which is “quite a substantial uplift for a consumer that is already financially squeezed”.

Miskelly continued: “Of the consumers we surveyed [around] the cost of living crisis, nearly one third of financially squeezed consumers suggested that they’d be more inclined now to pay by installments.

“When it comes to what the industry can do, there is [the] potential to seize a competitive advantage in this arena.

“For those providers that don’t charge at all for installment plans, we see a significant uplift in their top of screen ranking share on the price comparison websites, so they’re already getting a competitive advantage.

“There’s a big gap between charging nothing and charging 10% or 12% and I think that’s where the industry can do something on installment plans and think about how to mitigate risk - because there is a risk involved in offering someone installments - but also seeking that opportunity to get an advantage over competitors [that] are charging double digit rates over the annual premium.”

He added that at the end of 2021 and into early 2022, there have been a number of new market entrants that have taken this approach and have not charged for installment plans – this includes eight home insurance providers and two motor insurers.

However, Ian Hughes, chief executive of Consumer Intelligence, added that there is fair value question here, if consumers switch providers only to find differing premium uplifts on installment amounts.

“If some companies are providing installments at 0% and you’re charging 30%, explain how that’s fair value?” he said.

“We need to think about installments and what part installments play within the business model – is that how we make our money, through installments, and if it is, then is that fair? That’s a really big challenge, that’s the regulatory challenge.

“It’s a big warning that’s going off – if consumers are getting stretched and they are being pushed to do things in installments, is it going to be fair because it’s super low hanging fruit.”

There are other steps insurance firms can take to support customers though, Hughes added.

This includes the use of embedded insurance – such as offering pet insurance alongside pet food purchases – as well as signposting offers and discounts that may be relevant for consumers, for example – signposting an electricity energy deal to electric vehicle drivers.

Hughes noted that now is a “great time to think about consumers”.

Helping hand

Miskelly believes the cost of living crisis could remain in the UK for at least the next year.

This means that consumers are going to need some more long-term help from the insurance industry if they are going to weather the storm of increasing costs that is battered them from every angle.

Customers cancelling their cover doesn’t do insurers any favours either – except maybe those offering pay-per-mile policies and the like, which may be scooping up more custom as they are often viewed as a cheaper alternative to traditional insurance.

Insurance firms must think of new and inventive ways to help consumers manage their costs, otherwise their pool of potential policyholders will dwindle as Brits looks to scrap as many additional costs as possible.

What will be interesting is whether any more motor insurers will eliminate monthly installment premium uplifts. This is probably the one area that will really benefit consumers – if insurers are brave enough to take the plunge.