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How is the cost of living crisis impacting insurance?

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The cost of living crisis has seen prices of many essential goods and services increasing to record levels. Inflation hit a peak of 9.6% in October 2022, but remained as high as 3.9% in November 2023. As a result, almost everything has become more expensive.

For example, average monthly energy payments have nearly doubled in 3 years, from £108 in May 2020 to £193 in July 2023.

As consumers have seen their incomes squeezed, insurers have been affected, too. According to a study of 2,500 consumers by Deloitte, 31% of customers have cancelled or paused insurance products between 2022 and 2023.

It's clear that consumers are changing their behaviour in response to the cost of living crisis. But how is this affecting insurers? And how are insurers responding? I explore these questions in this article.

In January 2022, the Financial Conduct Authority (FCA) brought in new General Insurance Pricing Practices (GIPP) rules. These rules made it illegal for insurers to charge new customers less than existing customers for the same policy.

The expectation was that the number of people switching would fall. But as costs have risen, the opposite has happened. People are shopping around for their insurance more often.

By December 2023, home insurance policies are expected to be 30% higher than in 2022. It's easy to see why. Materials and labour costs for modern homes have increased considerably due to inflation.

This price rise isn't just limited to home insurance. Car insurance prices are the highest on record, having increased by 58% in 12 months from 2022 to 2023.

This significant increase in prices is changing the way consumers are buying policies in 3 key ways:

1. Consumers are cutting back in insurance

Nearly a third of consumers cut back on insurance in the past year, according to the 2023 Deloitte study. But not all types of insurance policies have been equally affected. Unsurprisingly, UK consumers have no choice but to pay the costs for car insurance if they want to remain on the road.

Life insurance was the most commonly cancelled product among survey participants, with 8% cancelling. Meanwhile, 7% cancelled their mobile insurance, and 7% cancelled their pet coverage.

Car and home insurance have been much more resilient. This is because car insurance is a legal requirement, and buildings insurance is typically mandatory for mortgage holders.

Still, while consumers are insuring their homes, they may be reducing their level of cover. The FCA found in January 2023 that 7% of consumers had recently reduced the level of coverage on their insurance plans. In some cases, they switched to 'basic' or 'essentials' plans, or opted to remove contents cover altogether.

2. Consumers are shopping around more but saving less when switching

The cost of living crisis has meant that consumers shop around much more. According to Consumer Intelligence data from 2022, 66% of customers who wanted to reduce their premiums switched to a cheaper policy.

But even if most consumers can save money by switching, the savings aren't as significant as they were a couple of years ago. That's in part thanks to new GIPP rules around price walking. Now, insurers can't charge consumers more year after year for the same insurance product without a good reason.

These rules have meant that there are fewer discounts available for new customers. So while a customer can switch to a cheaper insurance deal at the end of their policy, it may not significantly change their renewal price.

Instead, we're seeing insurers focus on building a loyal customer base rather than prioritising new business. For example, some insurers offer better deals to new customers who reduce their car mileage.

For a consumer, getting the cheapest deal is no longer as straightforward as simply switching. Instead, they might talk directly to their existing insurer to see if they can secure a better deal.

3. Consumers are trusting bigger brands (although they're still interested in new product offerings)

Inflation and the cost of living crisis have seen larger brands consolidate their dominance of the industry. According to Consumer Intelligence, the largest home insurers grew their market share the most in 2022.

But a study by Ernst & Young (EY) found that 2022 was the worst-performing year in a decade for insurers, with many operating at a loss.

With insurers facing historically slim profit margins, it's not an enticing time for new insurers to enter the market. As a result, the big insurers are dominating.

Consumers are likely to choose the bigger brands, not just due to decisions on price, but because they're perceived as more stable. This was more evident in recent years when about 30 new energy providers collapsed. Those companies moved their customers to new suppliers.

Insurance customers probably want to avoid this happening with their insurance and might feel safer with a big brand.

That said, there's evidence that changing circumstances may mean consumers are interested in new forms of insurance, which established players may not always offer.

For example, the cost of living crisis has changed how many of us work. GlobalData found that demand for gig economy insurance has boomed, as over a quarter of UK employees took up a second job in 2022.

As consumers struggle with rising costs, there's a clear demand for cheaper deals. Yet insurers have to pay out more than ever for claims due to increased costs of parts, labour, and materials.

So, how can insurers offer more competitive prices when their costs are going up? Let's look at 4 ways the insurance industry can respond to the crisis to help consumers and maintain profitability.

1. Insurers can offer innovative payment plans to help consumers

In July 2023, Consumer Intelligence conducted a study into how consumers were managing during the cost of living crisis. As part of the study, 31% of respondents said they'd be more inclined to pay for insurance in instalments, up 6% on February 2023.

Paying in instalments is standard for most insurers. However, there might be an opportunity to introduce different payment options to help those who need it most.

During the pandemic, some insurers made time-limited changes to the payment terms of insurance plans.

AIG's 'financial hardship policy flex' allowed customers to request to reduce their protection insurance premium, sum assured, or benefit for 6 months. According to the insurer, this helped more than 500 customers between April 2020 and early 2022. AIG is now extending the initiative through the cost of living crisis.

Aviva has announced a similar policy specifically to help this crisis. This lets policyholders maintain their level of coverage by reducing the policy's sum assured. It's expected that this could make premiums more affordable.

Ultimately, it's a strategy that helps both the consumer and the insurer. By introducing these innovative payment plans to help consumers, insurers can also strengthen their relationships with their customer base.

Research such as the ABI's 2020 study has shown customers have lost trust in the industry. Only 43% of respondents felt they would trust their insurer to help them in a crisis. But policies like those offered by AIG and Aviva could let consumers know that insurers are on their side.

2. Insurers can offer a more extensive range of products

Insurers can adapt to the cost of living crisis by offering more tiered products. For example, Admiral offers 'Basic', 'Gold' and 'Platinum' deals on their home insurance. This lets them provide essential cover for those who want a cheaper policy while still appealing to customers who want more comprehensive coverage.

Other insurers are offering a range of perks and benefits. For example, some are cutting admin fees or offering rewards and benefits if customers join a club.

At the same time, the appetite for lower premiums could drive a renewed interest in vehicle telematics. While 'black box' devices may soon be completely replaced by connected car technology, driving data can still bring insurance prices down. And this may be useful for the likes of drivers who may otherwise face very high costs.

Find out more about the future of vehicle telematics.

3. Insurers can focus on retention and upsell to existing customers

As consumers increasingly shop around, insurers are making more effort to convince them to stay. One way they're doing this is by upselling or cross-selling their existing customers. For instance, insurers are offering discounts if customers buy multiple insurance policies with them. Admiral offers existing home insurance customers 5% off if they also buy a car insurance policy.

Incentives like this help to prevent customer churn in the immediate term. But it also has the potential to boost loyalty in the long term. That's because customers may be less likely to switch in the future if they have all their policies with a single insurer.

4. Insurers could offer more flexible policies

We're seeing a shift towards flexible policies across the insurance industry. It's another kind of product insurers can offer to appeal to new or existing customers.

One type of customer that could particularly benefit is renters. Research suggests that renters are one of the demographics that have been hit hardest by the cost of living crisis. But they're also a group that's mostly likely to be uninsured. That's often because of cost issues, but also because they may not know how long they intend to stay in a property.

Flexible insurance policies offered by challengers like Urban Jungle can help by letting renters insure their homes for shorter periods, or insure only particular items. This way, they can avoid being tied into long-term plans that are a poor fit for their flexible lifestyle.

Established insurers could offer similar products designed for renters who'd prefer a shorter-term policy. This gives insurers access to new customers who have historically resisted becoming insured, while renters themselves can gain extra protection.

Find out more about how insurers can better serve renters.

At Confused.com, we're helping consumers and insurers get through the cost of living crisis. Here's how:

We're working with insurers to ensure fairer pricing

Sometimes, customers find that quotes on our platform don't match the prices offered when they go through to the insurers' payment page. We work continually to ensure pricing consistency throughout the customer journey.

We're educating customers on why their premiums are increasing

Customers often aren't aware that costs are rising for insurers, too. We let them know the other side of the story through media appearances and social media.

We're showing customers where they can make savings

On the Confused.com app, we provide tools to help people make savings. Such as tools to find the cheapest petrol near you, MOTs and services, or our breakdown cover calculator. We also offer customer rewards, like petrol gift cards or free subscriptions.

We automatically quote customers for renewals

According to our data, the best time for a consumer to renew for car insurance is 18 days before their renewal date. When a customer has a policy reaching renewal, we'll automatically run quotes for them and lock in their prices.

We ask customers more questions than other price comparison websites

This allows insurers to provide the most accurate quote. By doing so, insurers can better assess risk and should be able to offer more accurate premiums for consumers. When customers have checked a box saying they're open to policies involving telematics, we include these, too.

We provide daily data to insurers on our pricing

This way, insurers on our panel know that we're offering customers prices that align with the rest of the market.

Overall, we're doing all we can to ensure fairness and transparency on pricing. This way consumers can get the best deals possible while insurers remain profitable.

The cost of living crisis is hitting consumers hard. And with rising manufacturing, labour and energy costs, it's hitting insurers too. But there are ways for insurers and consumers to get through this crisis together. We can do this by using more innovative payment plans, a wider range of products, a focus on retention and more flexible policies.

Stay up-to-date about key insurance trends during the ongoing cost of living crisis with Confused.com.

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