Motor insurance price increases

joshprend

I've recently noticed that the price of personal motor insurance has begun to rise a little after hitting a very low level following several years of fierce rate cutting.

Could someone please explain to me what factors have contributed to the intense price competition in the personal motor insurance industry, and what, if anything, do you think has been done or could be done to shift the emphasis on price with this product and allow improvements in profitability? :money:

kingstreet

Homework??

weejonnie

Just because it may be homework doesn't mean that an answer shouldn't be given.

The main factors causing the intense competition in the motor insurance market are:

1) the fact that online motor insurance is a perfect market (look up definition) i.e. consumers have got almost free instant access to a large number of suppliers (and vice versa), which means that there is nearly perfect competition and hence only one real supply price.

2) Most motor premium prices are not driven by the actual cost and frequency of claims but by the fact that having the customer on the book means that you can cross-sell additional products which do make money. This not only means add-ons like legal expenses insurance, breakdown insurance, excess insurance but also products such as house insurance, caravan insurance and, most importantly (until April) the ability to make large sums for claim referral fees. (Note that the FSA is investigating the mis-selling of add-ons and the scope for claim referral fees will be much reduced)

3) In the current recession, where motorists are trying to save every penny they can, there is downward pressure on premiums to offer the cheapest product rather than the best. This has had a side effect of motor insurance policies having reduced cover when bought online.

With regard to the second part, I suspect that we may be very close to a tipping point. Many insurance companies have been burning up reserves trying to remain 'last man standing' when the market recovers and several of them will inevitably have to pull out of the market - especially as they have to show adequate solvency margins in the future. This may show up as insurers withdrawing schemes from intermediaries that are non-profitable rather than pulling out of their own operations. (Many intermediaries are buying in business on a 'negative commission' basis i.e. they lose money on every policy they sell)

As to shifting the emphasis on price - this is tricky as motor insurance is regarded as a distress product and the consumer perceives that most car insurance policies are the same. It would take a tremendous amount of product awareness to change people's perception of motor insurance and those advertising campaigns that have tried have obviously been unsuccessful as they haven't lasted very long.

The only truly effective way would be for the FSA to set up minimum levels of cover and service under a motor insurance policy and force insurers to operate to these levels. This will not happen as it is the FSA's belief (rightly or wrongly) that companies have the right to create any financial or insurance product that they want and, providing the consumer has been advised as to the key features and had access to the policy wording, it is up to the consumer to decide whether to buy the product.

On this website you will find a story about someone who took up a policy that had a £3,500 third party excess. he has had an accident and the insurer now want him to pay £3,500 (of course). To the FSA the insurance company had perfect freedom to introduce this policy providing that they made the consumer well aware of the excess (which they do) and as such the consumer has no right of redress.

Until the consumer realises that they are protecting what is probably the second most expensive product they will ever buy we will continue to read loads of items on insurance forums and review websites complaining about the lack of service, unexpected gaps in cover and high administration costs. The truth is, though, that the public are expecting a Rolls-Royce product/ service but only paying a Model-T Ford price to obtain it.

kingstreet

I wasn't advocating not answering. I was merely curious about the reasons for the question as it would provide guidance in how best to frame the answer.

I'm a founding member of a fans'-owned football club and the number of dissertations we've been asked to contribute to over the past few years has made me curious about the perspective being taken on the issue.

The extra question mark had to be added to get the word to fit the ten letter minimum. It wasn't aggressive.

In fact, if I'd used "dissertation" I would have been okay.

InsideInsurance

kingstreet wrote: »

The extra question mark had to be added to get the word to fit the ten letter minimum. It wasn't aggressive.

Just add extra spaces between words, they count towards the minimum letters but dont show once posted

InsideInsurance

You see

joshprend

@kingstreet I am indeed researching for homework. Not anything as serious as a dissertation though!

@weejonnie Thank you for your reply, I really appreciate it. I wasn't expecting any answers anything like that substantial!

dwsjarcmcd

One thing wee jonnie didn't mention was the impact of the Gender Directive which became law in December last year. This will probably mean an increased rate for females but a reduced premium for males