EXCLUSIVE: UK inflation hits a 40-year high – Are insurers taking the cost of living crisis seriously?

It is now May and UK inflation has hit a 40-year high. The National Board of Statistics released in their latest report, that the Consumer Price Inflation (CPI) has risen by 9.0% in the last 12 months to April 2022, soaring up from 7.0% in March. In turn, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 7.8%.

In an economy where every penny counts, to say people are ‘feeling the squeeze’ in this recession is a grievous understatement. Coupled with the macroeconomic issues of the Ukraine conflict, COVID-19, and climate change, the insurance industry has entered a tumultuous era, one which will be informed by whether insurers cause more to aggravate or mitigate the nation’s financial hardship.

The relationship between insurers and UK customers is ambivalent at best. Due to the optional precedent of most insurance products – e.g. contents, breakdown cover – they are the first to be questioned and challenged. A hostile environment such as this feeds into the already bloated national protection gap, where according to the FCA’s Financial Lives 2020 survey, 53% of respondents have no protection products.

This begs the question of how insurers will respond to a customer base who are more money-cautious than ever before.

One recent development which may alleviate the stress of customers right now is the current – albeit fleeting – drop in the cost of home and motor insurance. ABI revealed last week in their latest Household Insurance Premium Tracker, that the average price for home insurance has dropped by 7%, whilst the average cost of content-related insurance has dropped by 11%. In the same breath, ABI’s Motor Insurance Premium Tracker found that the average price paid for motor insurance has dropped by 5%, the lowest in 7 years. Though this relief does not extend to the rise in premiums and home/car maintenance, it does show that insurers are vigilant in staying competitive in the market.

Laura Hughes, ABI’s Manager of General Insurance said, “Many households struggling to cope with the cost-of-living crisis, will be reassured that the cost of protecting their home and their possessions have remained competitive, despite the increasing costs of construction materials and labour. The recent storms in February, which it is estimated will lead to insurers paying out £500 million to affected customers, is a dramatic reminder of the vital financial protection home insurance provides against unexpected and costly events.”

For the insurance industry to remain relevant, products must stay competitive, with insurers allowing customers the space to shop around and make personalised financial decisions. This approach does more to bolster the sale of products as insurers are fundamentally dealing with a target audience who knows what they are looking for.

In late April, new developments in Solvency II reform laid out the government’s Post-Brexit plan to give access to billions of pounds worth of investment to insurers, both to mitigate further loss and to give customers more choice.

John Glen, Economic Secretary to the Treasury said, “Our reforms will unlock tens of billions of pounds of investment in the UK economy, spur innovation in the market while protecting policyholders – and will cement the UK’s position as a global hub for financial services.”

With government-backed investment, insurers and insurtechs have the agency to tailor their products to the needs of policyholders.

With this shift in priorities, customers are looking for a new type of insurance product, not just because of the change in buying habits, but because financial constraints demand a stringent balance sheet. Beyond insurtechs, insurers at large are developing subscription-based or micro products which can cater to people who are not looking for lifelong commitments. This move is above all consequential.

Insurance companies are investing more in the development of new products because customers are more concerned about what their money is going towards. Annual policies bank on loyalty, and loyalty is not an option for the modern consumer, and it should be expected of them.

Actualising personalised insurance products and services is where insurtechs play the biggest role. A 2020 consumer trends report from Deloitte found that 62% of consumers mentioned that they preferred insurers who included non-insurance products as add-ons to their core product. A further 61% said that this is what their insurer performs best at. This parallel shows that insurance companies are aware that customers want more from their policies, features which not only ensure cover but make them feel protected.

A trend that signifies the introduction of non-insurance products into insurance is most present in L&H. The UK’s biggest insurers Aviva and Vitality excel in customer experience because of their focus on personal wellness as well as cover. Both companies offer customers health-related apps and services, from gym memberships to Apple watches. It is no wonder why Aviva is one of the few companies to make a 2% rise in life insurance sales last quarter.

In the motor insurance space, insurers are finding ways to better diversify the range of cover they can provide. Admiral, which currently has the largest market share (15.7%) for car insurance in the UK, offers temporary car insurance. Veygo, an extension of Admiral for new customers, provides short-term usage-based cover for drivers with temporary needs like borrowing a friend’s car or driving home from just buying one. From the moment of payment, customers can take off.

UK insurers are succeeding in attracting new customers because they are finally catching on to the changing current customer needs. A study from DWF found that 9 out of 10 UK consumers are satisfied with the service of their current insurers. 66% however, maintained that improvements can be made, a belief held mostly among young buyers.

Claire Bowler, the Global Head of the Insurance Sector at DWF said “Younger customers, in particular, seem willing to pay for more innovative, personalised and customised products which give insurers the perfect opportunity to refine their offering, develop new solutions and forge enhanced relationships with their customers.”

In a recession, it’s going to get worse before it gets better. The rise of inflation will mean that no matter how low insurance costs will drop, customers will still feel the financial blow. However, the crisis has highlighted for many insurers that products need to evolve, as the archaic centre of annual/loss-orientated cover will not hold in the current market.