Insurance: The Scale of the Crisis

Trust is the foundation stone of insurance. If providers can not address the crisis in trust, they will continue to fail consumers, and risk being replaced by rivals who can.

Insurance is vital for a happy society. Trust is the foundation stone of insurance. If providers can not address the crisis in trust, they will continue to fail consumers, and risk being replaced by rivals who can. In a previous article on this topic, we showed why there is a crisis of trust in insurance.

Today, we will show what are the three consequences of low trust in insurance.

Fidentia, or utmost good faith

In 1906 an earthquake devastated San Francisco. The city collapsed, and then a firestorm raged for four days. More than 3,000 people died and half the population was left homeless.

Many insurers struggled with claims. Fourteen went bust. Claims totalled 100 times the amount paid in premiums that year. Insurers resorted to demanding proof as to whether buildings were destroyed by the earthquake or fire, and withholding payment if the exact cause could not be determined.

One firm stood tall. A Lloyds under-writer named Cuthbert Heath cabled his agent in San Francisco from London and said, “Pay all of our policy holders in full irrespective of their claims.” This bold act cemented Lloyds reputation, encapsulated in its motto: fidentia, or utmost good faith.

Today the industry is struggling to find this magic touch. The metrics point to a deep crisis of trust in insurance.

A Geneva Association survey points to low trust across generations. The survey covered 7 major economies, and found only quarter to a fifth of respondents were prepared to say they trusted their insurer. Worryingly, the trend slopes downward – the more consumers experience and learn about insurers the lower their trust.

This lack of trust may be attributed in part to a wider dissatisfaction with financial services. The Edelman Trust Barometer 2020 places financial services bottom of the league table of economic sectors, trusted by 57% of consumers, compared to 75% who trust technology brands at the top of the table. This may be surprising: Apple, Google, Intel, and Amazon, are struggling with clearly documented concerns over their attitude to data security and privacy; yet their reliability and perceived value to consumers clearly outweighs these anxieties.

Naturally, financial services have improved trust levels since the 2008 crisis – the data shows steady year-on-year increases in trust since the nadir, up +12 over the last eight years alone.

Edelman also drills down into the composition of trust. It’s clear there is a distinction: between competency and ethics. A brand delivering on what it promises is important. But more important is the sense that the consumer is dealing with a moral and altruistic counterparty.

There are three consequences of low trust in insurance.

1        Under-insurance

Confusion over policies, lack of faith that insurers will act as they claim, and uncertainty over pricing and payouts all lead to lower than optimal coverage. In the UK only 12% have mobile phone insurance, 3% income protection, and 14% pet insurance despite 50% owning a pet. Laura Hughes, ABI’s Senior Policy Adviser, General Insurance, commented on the under-insurance prevalent in the UK: “While the average cost of home contents insurance is at an all-time low, too many households are still playing Russian roulette with their possessions.”

The protection gap runs industry wide. Swiss Re estimates only half of catastrophic losses in 2018 were covered by insurance – the rest was paid by individuals, firms, and the government. Capgemini found only a quarter of businesses believes their coverage is adequate.

2          Lack of Brand Loyalty

Low trust means brands compete on price. When there’s a better deal consumers leave. IBM runs regular surveys on trust in insurance. IBM data shows that dissatisfied insurance customers are six times more likely to switch insurers. Across sub-sectors of insurance there is conclusive evidence that low trust leads to insurers reduced to competing on price. Loyalty is rare, and falling.

For example, in car insurance, JD Power found the number of consumers who will “definitely renew” their policy with their existing carrier has fallen from 59% in 2006 to 48%.

Price is the primary driver: 64% of car insurance buyers say price is their main reason for looking for a new insurer – clear evidence that policy quality, customer service, and engagement is not delivering. In the UK, the numbers of switchers are even higher. Consumer Intelligence says 85.1% of car insurance customers compare prices before renewal, up 300,000 on on the year before. For home insurance, 77.6% compare prices, up three percentage points in a year.

The demand by the FCA for insurers to state the previous year’s premium on quotes may be driving this increase.

3          Resistance to innovation

The insurance industry employs intelligent and talented people who are constantly thinking of new ways to improve protection, prevention, and the customer experience. However, low trust may inhibit the take-up of innovations with the potential to help consumers. For example, Vitality in the UK and John Hancock in the US sell so-called interactive policies, whereby discounts are offered in exchange for fitness data from wearable devices. But there is evidence that many consumers avoid policies linked to wearable devices due to privacy concerns. In the UK, just 6% of Britons would contemplate wearing a fitness tracker for insurance purposes. Only 8% would use telematic for car insurance.

Sceptics argue their doubts are well founded. For example, Victoria Palmer, senior research fellow at the University of Melbourne, warns, “An insurance discount for your fitness data is a bad deal in the long run… Consider if a fitness tracking program offered by an insurer was linked with an employer. If data about who adopted the fitness tracking program and who didn’t was made public, employers might offer additional rewards and benefits to those who take part. One consequence of this could be that people who choose not to participate in the program are stigmatised, or portrayed as social deviants through non-compliance.”

Research by the RAC found 40 per cent of businesses faced staff concerns about the possible privacy intrusions of telematic tracking systems. The insurance industry has been slow to rebut these objections, leading to low trust, and low adoption of innovation.

(to be continued)

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This article is part of a series of FintechOS articles on the insurance industry:

The greatest challenge facing insurance

What’s in store for insurance – three take-aways

For more findings on insurance, ➡️download our whitepaper: https://bit.ly/34slCM9.

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