Home under fire

With the ongoing financial squeeze of the credit crunch, consumers are increasingly turning to the internet to find the cheapest quotes for their household insurance.

But as new research from Defaqto reveals, the majority of price comparison sites are failing consumers in their quest for home insurance, often leaving them with inadequate cover.

Of the 28 comparison sites investigated by Defaqto in its UK Home Insurance 2008 report, only five – Comparethemarket, Confused.com, GoCompare, Moneysupermarket and Tesco Compare – were classified as true home insurance aggregators. It found that most sites have a long way to go before they are able to reach the level of penetration that has been achieved in the motor insurance market.

The research says certain sites are failing to provide customers with accurate information about levels of excess, encouraging them to choose policies on price alone, and failing to provide options to include personal and possessions cover.

“Following the FSA review into aggregators, we believe there are a number of issues that need to be addressed urgently within the home insurance aggregation market,” the report says. “Providing customers with quotations based on premium alone and not providing details of cover features as the sole basis of comparison will no doubt be seen by the FSA as an example of poor practice.”

Defaqto acknowledges that the internet and price comparison sites will become an increasingly popular way for consumers to purchase insurance, particularly with the credit crunch wreaking havoc on individuals’ finances

But this recognition comes with a warning by the report’s authors. “The home insurance aggregation market needs to develop more to ensure that the consumer can make an informed decision to purchase their home insurance cover.”

So why, when one-third of UK motor insurance is being distributed through price comparison sites, is home insurance struggling to catch up?

Household insurance has become the second largest product area in the UK after motor insurance (see fig 4) and yet gross premiums have increased by only 4% per year for the past five years. Deduct inflation from this total and it’s clear that the market has not achieved any significant growth since 2002 (see fig 1).

This, according to Defaqto, is due to the increased competition along with the decline of new homes being built in the UK. The home building market has grown by only 1% a year, it says.

“The government has set a target of around 240,000 new home builds by 2016 but even this number would not have a major impact on the overall value of the home insurance market.”

The capital squeeze brought on by the credit crunch is partly blamed for the decline of new home builds in the UK and it’s also a reason people are increasingly turning to the internet to seek out cheaper options

for home insurance. Insurers and price comparison sites have noticed this trend

and as such are beginning to offer more home insurance products online. Currently 68% of standard home insurance policies are available online, with 47% purchased online within the UK, says Defaqto (see fig 3).

And yet, despite an increased interest, the report found the aggregation system when it comes to home insurance is extremely flawed and, in many instances, certain sites are not treating customers fairly.

“The home insurance aggregation model is nowhere near as developed as the car insurance model,” says the report. “Because some of the underwriting features don’t sit neatly into a standard question set, aggregators use a lot of assumptions.”

Out of the 28 sites analysed, Defaqto says only Confused.com, GoCompare and Tesco Compare provided the comparison tools with which the consumer can compare the different providers’ cover offerings (see fig 5).

Some sites are criticised for not making clear the levels of compulsory and voluntary excess a policyholder is expected to pay. While others fail to properly inform consumers of what is included in, or excluded from, their policies. Some consumers may believe they are purchasing a policy which includes personal possession cover when in fact it doesn’t.

“Consumers should be aware of the major covers in today’s typical household policy,” says Defaqto. “Not giving the homeowner the option to include them , or not making them aware that these options are available could be construed as not treating customers fairly.”

Similar concerns were raised by Biba in January when it called on the FSA to invest-gate aggregators.

Clear explanations

“The home insurance aggregation market needs to develop more to ensure that the consumer can make an informed decision to purchase their home insurance cover.

Defaqto report

In May, the government came out with a similar list of concerns to Biba and advised aggregator sites to start offering guaranteed premiums, an approach based on facts and not assumptions and clear explanations of the policy.

“Hopefully these sites will follow the FSA’s advice,” says Graham Trudgill, technical and corporate affairs executive at Biba. “It’s not just about price, the sites need to be clear about the cover offered.”

That is something that has been acknowledged within the insurance aggregation market.

“Home insurance is a little less commoditised than motor,” says Simon Lamble, product director for Confused.com. “There’s a lot more variation within policies. One of the challenges we have is to make decisions clearer for customers. We’ve always been concerned with showing the customer as much as possible.

“The industry is good at painting a round picture but it’s very price driven.”

Price aside, most agree it will be some time before home insurance enjoys the same degree of popularity on price comparison sites that motor insurance does.

“Motor insurance was commonly sold through high street brokers and over the phone. When aggregators came along it was an easy model to adopt,” says David Tyres, director of Norwich Union Direct.

“Home is sold in a moment of truth by mortgage brokers, banks and building societies. Renewal rates are higher and people switch providers less often. The annual premium is also a lot lower than it is for motor.”

Consumers, it seems, are not as knowledgeable about shopping around for cheaper home insurance quotes as they are with motor.

Hayley Parsons, managing director of GoCompare says there are a lot more challenges for aggregators on the home insurance side.

One of the main complexities is the fact that most of the brokers that work with comparison sites don’t have a common policy wording for all their insurance partners. It makes forming adequate question sets tricky, says Parsons.

“It’s difficult to bring in all the levels of detail we would like. It’s something we are working on,” she says.“We likely won’t get a full consistency, but we are looking to work with partners to bring back better policy wording.”

Defaqto’s research acknowledges that aggregators are here to stay but says these sites may also be fueling some of the difficulties experienced by the home insurance market.

“Pricing in the industry has been a problem for many years and the rise of aggregators is doing little to help move the customer away from this approach,” says the report.

And the inevitable consequence of distribution based solely on price will be that insurers attract customers who do not value the product and have little brand loyalty.

“Brokers using the sites will notice a new type of customer – one much more focused on price and more likely to move on at renewal,” says Defaqto.

It predicts that consumer will soon segment: a price focused group will continue to use aggregators while those more concerned with the features of their policies will stick with the brand they trust.

Insurers may also adopt a multi-policy approach which will use different brands for the cheaper aggregator policies and keep their own brands for better quality products.

Regardless, insurers will have to play a more active role in making the home insurance market profitable.

“The industry needs to do more to educate the customer that home insurance is not a commoditised product and increased benefits can only be achieved at the expense of increased premiums,” concludes the report.