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The latest thinking and expert insights into the insurance industry.
29 February 2016
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Insurer and insured pay a high price for a low premium

Websites that compare insurance premiums made the market more transparent for consumers. These so called aggregators enabled the majority of car insurers to attract clients solely with low premiums. This may sound like good news for the consumer, but there is a dark side to paying premiums that are too low.

The end of free-will decisions
The long-term consequences of premiums that are too low are easy to predict: returns shrink and insurers respond by cutting costs. Introducing the compulsory use of recommended or required insurance repair shops is an example of this in The Netherlands. After having suffered car damage, the insured is no longer allowed to go to a repair shop of his own choice. Instead, the insured is obliged to visit a repair shop or chain of repair shops that have been pre-selected by the insurance company. Such arrangements are usually the outcome of purchasing benefits or pricing agreements between the insurer and the repair shop.

This raises the question: does compulsory shopping benefit the customer? Especially when it leads to additional time and effort? Pricing agreements between an insurance company and a repair shop (chain) may also mean that repair work and parts used become of inferior quality. Policy terms and conditions sometimes give the insured the option to choose a repair shop freely, but in most cases this results in a mandatory “additional own-risk fee”.

Expensive car window
Let me give you a real life example. A person with damage to his car window is having it replaced at his own garage. He claims the bill of € 640 at his insurance company, but the insurer only pays out € 65. On top of the standard € 75 own-risk, the insurer withheld an additional amount of € 500 because the garage was not part of a chain connected to the insurance company’s network. An associated repair shop would have charged the insurance company only € 520.

Only after extensive complaining the insurer paid its customer an extra amount of € 380, purely out of courtesy. The insured was not impressed by the customer service he experienced and switched to another insurance company that allowed him to choose his own repair shop.

Quantity before quality
It is necessary and totally explainable that insurance companies find a way to cope with poor financial results. I think it is important that insurers take a discerning look at the acquisition costs of a customer. Online comparison sites create a group of consumers that select insurance companies merely on price considerations. This enables consumers to hop from low premium to low premium, not allowing the insurer to earn back the acquisition costs. The urgent need to attract new customers often supersedes a critical determination of the yield that a customer will contribute to the portfolio. This could prevent customer unfriendly measures at claim handling.

Time will tell
It is about time that insurers show their innovative side. Dutch insurers Allsecur, ANWB and Inshared already understand how to keep their customers happy, by offering them a fair proposition. To these companies customer satisfaction is the result of careful risk assessment at the gate, the right pricing, and fair policy terms and conditions. Customers stay longer with these insurers than with others, generating a car portfolio with a positive yield.

It seems inevitable that other insurers are going to follow this practice. Time will tell.

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