Price Ceilings and Floors for Motor Insurance

Pricing Thresholds and impact on Consumer Choices

Welcome to the third and final installment in our Motor Insurance Project Loomis report. We have already touched on the areas of Consumer Switching Patterns here in part 1 and Premium Wars - the Winners and Losers here in part 2.

In this final edition we are going to explore pricing dynamics and investigate how motorists are likely to act, and react, to different pricing scenarios when their next motor insurance renewal rolls around.

Level of saving to motivate switching

We know that 2 in 3 motorists saw premiums rise on their last renewal. We know that over 7 in 10 motorists feel it is easy to switch, and we also know that in the past 5 years each motorist has switched their motor insurance provider just over 2 times. Add in rising premiums to these facts and we would expect that motorists are a motivated group who are very open to switching. We wanted to understand how motivated they actually are to pursue savings, and who are most and least motivated to switch for different levels of saving.

We asked motorists how likely they would be to switch insurance provider if they could secure various levels of saving on the premium they were quoted to renew with their incumbent provider.

Overall, for even securing a 5% saving over half (55%) of the market will switch insurance provider. This increases to almost 3 in 4 (73%) for a 10% saving. There are no notable variations around motivation to switch by gender or region, but we do see that 55+ year olds are less likely to be moved by 5% saving (49%), where as 35-44 year olds are most likely to be motivated to switch for the same 5% saving (62%). This "squeezed middle" 35-44 year old age group are not just motivated to chase down premium savings, in many other studies at Igntie we also see similar high levels of price sensitivities as the financial scars of recession are still slow to heal for many of this age.

Liberty Insurance, AXA and to a lesser extent AIG customers are least likely to be motivated to move for a 5% saving. Having said that, still half of theses brands customer bases will move for 5%. 123.ie, Allianz and AA Insurance customers are most price sensitive and more likely to switch for this same 5% saving - circa 6 in 10.

In reality many consumers have imperfect market knowledge and an imperfect understanding and awareness of the premiums they would be quoted across the market. This imperfect market knowledge combined with high price sensitivity is a key battle line for motor insurance brands. How brands communicate value in the context of an increasing market to maximise both retention and acquisition will be a critical success factor. If customers perceive that there is 5% value to be had elsewhere, the majority of them will switch. 

When Premiums Become too Much

Although motor insurance is a legal requirement, there is a point at which people will start to consider can they afford to be insured and to drive. This pressure will motivate motorists to seek alternative means of securing reduced outgoings, and with almost 9 in 10 motorists insured on a fully comprehensive policy there is clearly a financial saving (from a premium cost perspective) to be made if motorists trade down to Third Party Fire and Theft cover.

We asked motorists who have fully comprehensive policies what level of price increase in the market would lead them to trade down to Third Party Fire and Theft (TPFT) cover to save money.

Almost 1 in 5 (17%) would trade down to TPFT if the market rate for premiums rose by another 5%, and this increases to 1 in 3 fully comprehensive motorists trading down to TPFT at a premium inflation rate of 25% more in the market.

Men are quicker to trade down than women, and older motorists are more reluctant to give up their fully comprehensive cover than younger counterparts.

It says something about our psychology that we are highly motivated to switch provider to secure a saving, but we are much less willing to trade down our level of cover to secure similar monetary savings.

Looking at motor insurance brands customers, we can see that Liberty Insurance and 123.ie customers are the least likely to trade down to TPFT cover (looking at 5% premium increases for fully comprehensive cover). Motorists currently covered with AA Insurance, AXA and Allianz are most likely to trade down to TPFT, with 1 in 5 trading down for a 5% increase in the market on fully comprehensive premiums. 

Project Loomis

We hope you've enjoyed our look at motor insurance through the 3 parts of Project Loomis. We've really enjoyed putting the report together and hopefully helped provide some clarity and insight around the current marketplace dynamics. 

Financial pressures are undoubtedly shaping the industry as we move through 2016 and beyond. Insurers have a need to build a more stable commercial footing and this is resulting in motorists being charged higher premiums. This is a potent mix for tension and conflict between brands and consumers.

In the short term motorists will pay more attention to managing their premium costs, and they will come under increasing pressure to afford these premiums. They are actively moving from being conditioned to seek out reductions in premiums year on year, to having to transition to mitigating against and accepting premium inflation. How insurers soften the blow and are seen to be part of the solution, and not the cause of the problem, will be critical in separating out the brands which will win and lose. The brand narrative and marketing efforts of insurers will be a key lever in winning.... or losing motorists over the next number of renewal cycles on this battle front.

If you would like to get more detail on our report or discuss how insurers can win over the coming years, please get in touch by emailing mark.nolan@ignitemr.com. 

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