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The Timing For Discount Rate Changes Couldn't Be Tougher

[fa icon="calendar"] 08/02/17 14:27 / by Ian Hughes

Ian Hughes


The Insurance industry is in a flap.  It looks like the cost of insurance claims is about to jump up dramatically and the industry is running around trying to work out who to blame.  APIL, Insurers, the ABI, the MOJ, the Treasury or random passers-by.

In all the head scratching, actuarial crunching and finger pointing something substantial has been lost. Any customer.

In my predictions for 2017 I had already said that this year was going to be one of the most dramatic years ever within the industry and that was BEFORE any discount rate decision.

Here’s a quick catch-up for those of you who aren’t familiar with the issue, others can skip to the next paragraph, where the double whammy hits.

When an insurer pays out compensation for claims to cover on-going care they pay out a lump sum to cover the period of injury, which can be the whole of a person’s life.  They can reduce the amount of the claim by 2.5% a year for each year the person is expected to live.  So a £1m claim can be a substantially lower amount of cash paid out (ask an actuary for the maths, that’s not the purpose of this piece).  The 2.5% is based on the investment returns a person can get by putting the money in safe investments.  The problem is that this hasn’t been adjusted for 16 years.  Over that time interest rates have collapsed.  So the view is that the amount should be lower perhaps even a negative number (which means that more than the amount would need to be paid out).  Direct Line have already told the City that each reduction of 1% will cost them £195m in cash!

OK, so that money must be factored in to premiums.  If you follow the Direct Line maths through then the entire industry could be looking at £2bn extra in cash.  Assuming 30million drivers on the road, that’s £66 per driver.  Or about a 10% change on premiums.

But it’s so much worse than that through the eyes of the consumer. 


Consumers won't get that this isn’t the fault of the insurer

This is the first year that you are going to have to be upfront about premium changes.  From April, you are required to show last year’s premium on the renewal notice.  That means that at a time when premiums are going to go up (possibly at the highest rate they have done for quite a while) this is the first year that you are going to be required to really show it to customers.  You will have nowhere to hide.

And consumers don’t get it.  They aren’t going to get that this isn’t the fault of the insurer, they aren’t going to understand that a change to the discount rate for claims means a big hike in their renewal premium.  I barely get it.

This is going to cause a massive jump in shopping around, for sure.  That may or may not be good news but there are some unintended consequences that you need to plan for.  One such thing is your contact centre.


Expect a massive spike of calls to your contact centres

Our research shows that one of the first things that consumers do when they see a jump in premium (after they have checked a price comparison site) is contact their insurer.  This could mean a massive spike in the number of calls that your contact centres get in Q2.  Are you ready for that?  Consumers are going to be armed with a load of new information about last year’s premium and this year’s premium.  They are going to ask “Why did my price go up?” and blaming APIL or MOJ or Claimants, well that just isn’t going to wash.

Call lengths are likely to increase and scripts will need to change, contact centres could become quickly clogged.  And the costs of running them will also quickly rise as call lengths increase.  Satisfaction levels for both customers and staff will go down.


Take early, preventative action

At Consumer Intelligence, we recommend you take early, preventative action, build a plan for how you will deal with the change.   A plan that goes beyond price.  You need to look at the whole organisational impact.  We are working with customers to build models for this Double Discount Whammy and as with all these things a stitch in time saves 9!

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Topics: insurance calls, insurance pricing

Ian Hughes

Written by Ian Hughes

Ian has made it his life’s work to help companies understand how to improve their world by helping them better understand their customers. In 2003, he launched Consumer Intelligence, a market and consumer benchmarking specialist, which now operates in 9 countries globally. Ian is a Fellow of the Institute of Direct Marketing, a Best Business Awards judge and an I Love Claims Board member. He is a graduate of Harvard Business School and regular contributor to the Post and Insurance Times.

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