The car insurance market is highly competitive with well over 100 brands on offer to UK consumers and tight profit margins. In fact, Consultancy EY said the industry’s combined ratio (claims and costs as a proportion of premiums) was a profitable 95 per cent in 2018, but estimated a lossmaking 104 percent in 2019 and 107 percent in 2020.
A combination of factors are at play, namely falling premiums due to competition and higher expected costs. Cost pressures include a rise in keyless car crime, higher repair costs due to more sophisticated vehicle technology and a change to how high value personal injury compensation awards are calculated.
In the face of fierce competition, falling premiums and rising claims, car insurance brands are using a few strategies to boost revenues, cut costs and drive customer growth. Do they work?
Calculating Cancellation Costs
There are typically two components to the cost of cancelling a car insurance policy: the cancellation fee and the calculation of premium owed for time covered.
Average car insurance cancellation fees in the UK are £24 during the cooling off period and £55 afterwards, with higher fees standard for telematics policies.
On top of the cancellation fees, customers pay for cover until the cancellation date. This affects both customers who pay monthly (determining how much is still owed by the customer) and who pay upfront (determining the refund to the customer).
How does the company calculate the premium for time covered? The straightforward method is a pro-rata calculation, where customers pay just for the days the insurance policy was in force. However, some brands, especially budget options, calculate the premium owed using a scale instead. For example, this could mean customers pay 65% of the annual premium for just six months of cover, or that customers don’t get any refund when cancelling after nine months into the policy year.
Using a scale instead of a pro-rata basis to calculate the premium owed up to the cancellation date is a way to boost revenues, but at what cost? A Look through online customer reviews and it’s clear that customers paying on a scale are well aware of the higher cancellation costs.
Going Online to Cut Costs
Another way that car insurance brands are reducing costs is by doing away with customer call centres and going “online.” Some newer entrants to the market operate online, and some large insurance companies (e.g., Aviva) have developed “budget” brands (e.g., Quotemehappy.com) to compete in the budget space.
Online-only brands don’t offer customer service by telephone. To contact the company without a call centre you typically either send an email, use live chat or send a message via social media (e.g., through Facebook).
While this tactic can save money, companies without a call centre tend to have worse online reviews due to complaints about difficulties sorting out problems when they arise. In particular, complaints arise when customers have to wait a long time to get a response from the company or when they receive generic-sounding or automated email replies to specific enquiries.
Using Online Reviews to Boost Customer Growth
Implementing a system to gather online customer reviews can be key to driving customer growth, especially for a young car insurance brand. Why? Savvy consumers check for online reviews before buying, especially from a brand they haven’t heard of before. And with the dizzying array of UK car insurance brands on the market today, new brands in particular can benefit from a solid online review presence.
Online car insurance reviews in the UK come in two forms: editorial (e.g. Defaqto), customer (e.g., Trustpilot) and a combination of editorial and customer reviews (e.g., Which and NimbleFins). A company won’t be able to impact editorial reviews other than providing a good product. But they can and do play a role in boosting customer reviews from some sources, for instance by using Trustpilot’s Automatic Feedback Service (AFS) to invite their customers to leave a review.
AFS sends review invitations after a customer purchases something, which can be triggered when the company BCC’s Trustpilot on the confirmation email sent to customers. When Trustpilot receives a copy of the email, a review invitation email will be sent to the customer after a certain number of days.
In the car insurance market, companies are generally quite good at selling. As a result, companies that chase post-purchase reviews may be flooded by positive online customer comments. Companies that don’t seek out reviews following purchase may find their online reviews reflect a higher proportion of complaint reviews, which are typically written in response to a claim or renewal process issue.
Tilting the balance of customer reviews towards the positive side can subsequently boost sales as consumers check online customer reviews. From the customer perspective, it’s therefore important to seek out a mix of reviews related to both sales and aftersales care.
While these strategies might help a company’s profitability, they can be detrimental to some policyholders (e.g., those who prefer calling in to get help). Customers would be well served by having an understanding of these strategies when choosing a car insurance brand.
