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How the energy crisis has impacted the insurance industry

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The cost of energy has increased significantly since the pandemic. The energy price cap, set by Ofgem every 3 months, was over £4,000 from January to March 2023. Since then, it's more than halved, but it's still almost double what it was in winter 2018/2019.

In practical terms, the effects of this energy crisis have been widespread. In July 2023, average monthly energy payments reached £193, nearly double what they were in May 2020. Moreover, research published in the Guardian shows that a quarter of consumers are still in fuel poverty.

The energy crisis is having an impact on nearly every aspect of a consumer's life. But how is it affecting how consumers buy insurance? And how are insurers coping?

The increased price of energy means that consumers have less money to spend, including on their insurance. And at the same time, it's pushing up prices for insurers, leading to increased premiums.

Here's how it's impacting them both:

1. Insurers are making record losses

The energy crisis has increased the price of operation in most industries. Energy costs have been one of the main drivers of the UK's inflation, which peaked at 10.5% in December 2022, according to the Office for National Statistics (ONS).

It's not just consumers that have been affected. Insurers are affected by higher energy prices, as the additional costs of materials, manufacturing, labour and maintenance have all increased. These additional costs have contributed to record losses for insurers in recent years.

According to Ernst & Young (EY), home insurers registered a net combined ratio (NCR) of 122% in 2022, meaning that for every £1 they made, insurers spent £1.22 in expenses. It's the highest NCR ever recorded.

2. Increased energy prices have led to higher home insurance premiums

Additional costs for insurers have led to higher premiums as insurers try to cover the increased expenditure caused by higher energy prices.

According to Consumer Intelligence's data, home insurance prices are up 25.7% from July 2022 to 2023.

While insurers have little choice but to increase prices to achieve profitability, higher premiums are another cost pressure for consumers already facing much larger energy bills.

Unfortunately, as home insurers are likely to continue to feel the squeeze caused by energy prices, premiums are unlikely to go down in the coming years.

3. Many customers are opting for cheaper cover

Price has always been an important consideration in insurance purchases. But recently, we've seen that consumers are now far more motivated by price than a more comprehensive insurance policy. When customers select deals on our platform, more people choose the cheapest deals rather than the most coverage. The problem here is that the customer might be selecting an insurance product just because it's the cheapest - even if it might not be enough coverage for their circumstances.

Of course, it's hardly surprising that consumers are looking for cheaper options. Research published in the Guardian shows that over 1 million people are facing the prospect of their mortgage rising by over £500 in the next few years. That's due to the interest rate increases designed to tackle inflation.

At the same time, food prices as of October 2023 were 30% higher than prices in October 2021, according to the ONS.

In this context, insurance may feel like one expense where consumers can reduce their costs - even if it means they have less coverage than they need.

The energy crisis is heavily impacting both insurers and consumers. What can insurers do to adapt to this economic climate?

1. Insurers can offer tiered products to provide a budget option for consumers

Something that we're increasingly seeing is insurers who are diversifying their product offering. This is designed to cater to those hit hardest by the energy crisis.

For example, Admiral now offers 3 tiers in their home insurance - Admiral, Gold and Platinum - each with a different price point and level of cover.

By tiering products like this, an insurer can be clear with the consumer on what the most affordable option is. This can help to make the decision-making process easier for the customer.

And while the level of coverage is lower on the cheaper options than the most expensive, it's still at a level that will suit many consumers. At Confused.com, we work hard to find the customers the right level of cover for their needs. Customers simply choose the cover they need, and we'll find them competitive prices.

2. Insurers can offer more flexible products

Another strategy insurers could take to help those hit by the energy crisis is to offer greater flexibility to make insurance products more affordable.

For instance, rather than offering contents insurance on all items in a consumer's home, some insurers are offering more customised cover. This involves consumers selecting the items they want insured in their home - such as laptops, appliances, or particular pieces of jewellery. Policies like this mean that customers don't have to pay for cover they don't need.

Insurers could add further flexibility to how policies are managed and paid for. For example, some insurers have scrapped additional monthly payment interest charges to help customers make smaller payments more regularly.

3. Better communicate the value of insurance

A final way insurers can get through the energy crisis and encourage customers to keep their cover is to remind consumers why they need insurance.

For many consumers, it might seem like they can go without certain insurance coverage - such as contents cover - for a short time to save money. But insurers can better communicate the risks of that approach.

The potential expense associated with a contents claim can be enormous. We've found that the average home contains £51,000 of contents. And without insurance, customers would be left to face those costs alone.

Insurers can communicate this message through marketing campaigns and social media, or by offering home contents calculators.

As a PCW, we work for the benefit of both insurers and consumers at Confused.com. Here are some ways we're helping them get through the energy crisis:

  • We make sure all insurers, their products, and business practices are vetted and fit for purpose, so that consumers are getting the quality they deserve. For example, there have been instances where prices shown on Confused.com were different to those charged by the insurer when customers reached their page.
  • We clarify what type of cover is included in each policy, so customers know what they're buying. For example, if insurers offer tiered products, we make sure that customers know how each deal is distinct, what's covered, and what isn't.
  • We work to get more money into the pockets of consumers, through app rewards and deals. For instance, we give customers money off fuel and food - commodities that have been particularly hit by the energy crisis.
  • At the same time, we get insurers' deals in front of new customers. As one of the largest PCWs in the UK, we help insurers get new business.

Everyone is struggling with the effects of the energy crisis. Consumers are facing higher costs in every aspect of their lives, while insurers are experiencing some of the most difficult years on record.

But there are ways for insurers to manage the pressures for themselves and for their customers. Innovative, flexible insurance products, for instance, could help customers only spend what they need while maintaining customer loyalty. It could be a win-win.

Discover more insurance trends and how we're helping the industry at Confused.com.

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