I have been in a reflective mood recently (more on that next month).
The unremitting pressure on the “value” of insurance and particularly on value within general insurance distribution, has been a particular focus for that reflection.
Whether it be the “Which” super complaint about home and travel markets, or the indirect attention
shone on insurance commissions via the motor finance “scandal”, consumers are receiving the most
negative of impressions of our industry.
It is as if insurance is, or the means of distributing it are, inherently bad?
Surely insurance is an inherently good thing?
For those of us in the industry – of course we think it is a good thing, but what about the customers for insurance?
From their perspective insurance is something that costs money for a protection against something
that probably won’t happen. Accordingly the “benefit” of insurance, to them, is remote or undervalued.
Understanding the Customer Equation
In most cases, unless the equation between:
- the cost of insurance
- the likelihood of an insured event occurring; and
- the loss to a customer if the event does occur
are well explained and understood, it will always be difficult to persuade customers to purchase cover.
How This Worked in the Past
In the “good old days” it was those customers who understood this equation who sought out cover – usually via brokers or intermediaries who would advise them on the best options.
The entire insurance market, when I started my career 50 years ago, was structured on this basis. An exception would be in the housing market when the message from a lender would be clear – insure the house or you won’t get a mortgage. That message was delivered within the wrapper of a legal transaction in which the customer would be receiving exactly the same advice from his/her solicitor. So the benefit of insurance was clear.
Imagine a World Where Customers Don’t Seek Out Insurance
Now imagine a world where customers do not seek out insurance – but nevertheless buy it to the value of billions of pounds a year.
We live in that world!
The Role of the Primary Product Provider
Now imagine a world where, say, a provider of a primary product or service is prohibited from receiving any remuneration related to the arrangement of insurance to protect against risks for that product.
Would the retailer raise the issue of insurance with a customer?
Would a customer raise the issue of insurance with the retailer?
I think that, save in circumstances of high value or risk, the answer is clearly “no”.
Yet we live in that world where UK customers purchase those billions of pounds worth of ancillary or secondary insurance each year.
Logically this is only because the retailer (or other primary product provider) raises the issue with the customer.
Why Do Retailers Raise the Issue of Insurance?
Is it because:
they see a genuine benefit for the customer such that (if there were allowed to) they would advise the customer to take out insurance cover; or
the remuneration available to the primary product provider makes this conversation worth undertaking?
Many of my clients will tell me that the first option is true – but the difficult question is whether, if the second option was not available, the conversation about insurance would still take place?
The Trigger for the Insurance Conversation
It seems pretty clear to me that, for ancillary/secondary insurance to be purchased, there has to be trigger “sales conversation” with the primary product provider.
The next question is what the different outcomes would be between the incentive for that trigger conversation being remuneration to:
raise the awareness of the insurance product with the customer, irrespective of whether an insurance contract was concluded; or
complete the conclusion of a contract of insurance with the customer?
As we all know that distribution of ancillary/secondary insurance is almost totally dependent on the second of these triggers.
It is this reality which has me, not only in reflective mood, but fearful for the mid-term future of our insurance market.
Would Good Products Sell Without Commission?
I perfectly understand that most people would not buy half the stuff they do had it not been brought to their attention. However in most cases, once customers are told about a product, if it is good enough, they will purchase it in sufficient volume to defray the cost of the advertising or other costs of promotion.
If there is a product worth purchasing out there, and its manufacturer is prepared to pay/remunerate sufficiently to ensure that customers are informed about it, why on earth would a business model including sales commission be either necessary, or justifiable?
I just wonder for how long can a market which relies almost totally upon distributors seeking remuneration funded by successful sales can continue within the constraints of, not only the Consumer Duty, but of remorseless exposure of the incentives which deliver a viable market.
Imagine a World Where Commission Is Banned
Imagine a world where commission, basis on sales as opposed to cost, is banned.
Are we confident enough in our products to be sure that they will be still be valued and purchased?
If not are we not proving that sales are driven, not by value, but by commission?
If that is the case, conversations about value under the Consumer Duty become very tricky indeed.
