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Insurance companies competing on price and value

Insurance companies operating in an increasingly competitive market must innovate and be proactive to prosper

It took the head of one of the UK’s biggest insurers to say what many had been thinking for a long time – much of the industry is broken and neither companies nor customers like it.

According to Aviva chief executive Mark Wilson: “The dysfunctional market is a problem for the whole industry that requires an industry-wide solution.”

Mr Wilson was responding to the deep structural changes that have been weighing on profitability for a number of years, particularly the commoditisation of products which have been subjected to unrelenting pressure from aggregator and price comparison websites. His response would be a yet-to-be-specified product that rewards customer loyalty.

Analysts say that too many parts of the general insurance industry run as high-volume, low-value commodity markets where price, and pretty much only price, determines what policy consumers ultimately choose.

Professional services firm EY predict that home insurers will lose money in 2017, with a net combined ratio (NCR) – an industry measure in which a reading above 100 per cent denotes a loss – of 101 per cent. Premiums will drop by 1.7 per cent, EY says.

Similarly, car insurers will also slip into the red for the second year in a row, with a 103 per cent NCR in 2017, even though premiums will have risen for the third year running or by some £46 on average since 2015, EY adds.

For Nitesh Palana, a financial services regulatory expert at PA Consulting Group, the “three-year model” – when the policy makes a loss in the first year, breaks even in the second and only becomes profitable in the third year – underpinned the industry long before the likes of GoCompare and Money Supermarket turbo-charged price sensitivity in the industry.

More than any other industry, Mr Palana argues, insurance companies will have to innovate if they are to return to profitability and remain profitable in years to come. Insurance products will have to become both more user friendly and better tailored to individual circumstances.

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