Barry's blog: It’s a numbers game

Throughout my career as an insurance broker, customer loyalty has been paramount to the business success. The cost of gaining a new customer is very difficult to calculate, but we know, don’t we, that an existing customer is better for the business. Renewal is cheaper in administration costs than the new business process, and loyal customers do, quite often, generate referrals.

That ethos of gaining a customer and looking after them longer term doesn’t seem too foreign a business concept today – with fancy ‘management speak’ like ‘lifetime customer value’ or ‘customer worth to you’ – but we know it makes sense.

So why do some insurers spend more time and money acquiring new customers, particularly in the personal lines arena, to the detriment of their existing portfolio? Is it the bean counters who only count premium income and units written?

I am not daft enough to think that dual pricing is all bad. It has to exist and indeed has done so for many years, despite some bleating from the insurance broking fraternity when certain insurers ran direct accounts while also claiming to be the brokers’ best friend.

The weird thing, however, is that insurers use dual pricing (multiple pricing would be more accurate) where they compete against themselves.

You, and I, know that when an insurer offers ‘12 months for the price of 10’ or huge discounts for online purchase, or whatever special deal is flavour of the month, then someone has to pay (assuming its actuaries are up to scratch).

There seem to be two methodologies. The first is where the gross price has been increased and then reduced by the ‘sale’ discount (happens in retailing too) and the organisation gains happy customers – everyone likes to think they got a bargain. (That was one of the many avant-garde philosophies of Barry Hulbert of Hill House Hammond: taking retail ideas and introducing them into what was then a staid insurance market.) Any cost to the organisation of such discounting is the marketing or distribution cost. And the loyal customer at renewal is not disenfranchised.

The second, more mysterious way of insurer thinking is to penalise existing customers in favour of gaining new policyholders. Now this one really does have me scratching my head. This is when the insurer cuts the price of new business and balances the books by increasing the price for the existing customer, and therefore risks the higher probability of losing them to a competitor or worse.

Or worse? Yes, the best way for the customer to win is to lapse and take out a new policy with the same insurer. What kind of business logic is that?

Illogical it may be, but quite legitimate. However, when insurance brokers adopt that approach in the interest of their customers, and in accord with their role to secure the best deal, there are a good few insurers who throw their rattle out of their pram.

Could this be a new chapter in the TCF Handbook of ‘dos and don’ts’? Where is the FSA in all this? Clearly charging an existing customer more than they would be charged as a new customer is treading on the TCF ethos. Perhaps the FSA (or its successor) should spend some of its time on issues that affect customers directly, rather than the persecution of the smaller broker who may, or may not, put a tiny foot wrong in the ever more complex procedures set by the powers that be.

As an insurance intermediary or broker, re-broking is often a necessity to retain some 80%-plus of your customers. Interesting, then, that insurers get quite boisterous when they reach the dizzy heights of 50% retention! Aggregator sites (or to use the posh descriptor ‘price comparison sites’) are ecstatic when they get to 65% (and that includes rampant churning). It doesn’t seem to add up to me …

This is the last in my series of blogs, for the time being at least. I hope they have given you some food for thought. They certainly have enabled me to vent my spleen against banks, the FSA, the apathy of some insurance brokers, the insurers, the politicians – all sorts!

Barry Fehler is a director of the IIB and deputy chairman of South Essex Insurance Brokers.