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Ten things that have gone badly wrong in the British insurance industry

30 March 2014

UK insurers have been under fire since George Osborne’s Budget, and many must be reeling from the shock of it all.  Suddenly the landscape seems to have changed.  No longer will people be forced to buy annuities, and suddenly people have a lot more options. As an observer who has for so long campaigned on behalf of customers, it has been heartening to witness such regulatory action at long last, yet nevertheless astonishing to see how long it has taken for meaningful intervention from the Regulator on behalf of customers.  The time for change has arrived. Here are ten things that have gone wrong in the UK insurance sector.

1. Failure to understand end-customers and flawed profit models:  It seems to me there are two fundamental issues.  Firstly, insurance companies have failed to recognise who their customers are and secondly, their profit models are flawed as they rely on consumer inertia and high initial selling costs being recouped over many years with often unfair charges.

2. Insurance companies considered intermediaries as their customers:  The standard mantra is that UK financial products are ‘sold’, not ‘bought’.  Whether it was ‘the man from the Pru’ or the commission-driven salesmen, insurance companies considered the intermdiaries who actually brought in the funds to their products as the customers.  Salesmen, financial advisers and even employers were the ‘gatekeepers’ who collected and directed the money, so products were designed to be attractive to them.  The insurance sales force was handsomely rewarded, while the end-customer was all-too-often forgotten.

3. Flawed profit model relied on high initial sales commissions and customer inertia to recoup costs: The long-term savings profit model of the insurance sector was based on paying huge up-front fees to salesmen and then recouping those outlays over many years from the unsuspecting end-customer who had trusted others to look after their money.  Exit penalties were often levied because the initial commissions paid to sales staff would not be recouped if customers did not keep paying fees for many years.

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4. Commission bias led to successive mis-selling scandals:  Commission-based sales have already spawned a succession of mis-selling scandals in the pensions and bancassurance industry, with perhaps more yet to come.  Designing products with an intermediary’s interests in mind is hardly likely to result in an industry that understands the end-user and treating customers fairly is quite a challenge if you do not know who your customer actually is.

5. The last shake-up did NOT  stop commission bias: The so-called Retail Distribution Review ended commission-driven ‘independent’ advice, but the insurance industry continues to by-pass advisers and slip commission to others who can sell their products without any advice or quality checks.  It can be workplace auto-enrolment schemes that force workers to pay the costs of setting up their employer’s scheme through ‘adviser charges’ . It can be annuity sales where ‘non-advice’ brokers were rewarded with handsome commissions (or tied deals to sell potentially unsuitable annuities to pensioners). But the flawed commission model has been kept in place – to the detriment of ordinary customers, in too many cases.

6. The annuity market is a classic example:  Even the most basic of concern for end-customers would have required at least cursory suitability checks, including health and marital status, before selling a standard annuity.  Yet, the insurance industry has fought for years to protect its right to foist annuities on unsuspecting end-customers at continually worsening rates without any attempt to understand their needs.  Insurers even offered annuity ‘brokers’ a significant percentage of customers’ pension savings just for making the sale – without worrying about whether it was an appropriate sale – even though this product is completely irreversible. Osborne’s Budget will bring many of the annuity scams to an end. But its such a shame that it happened at all.

7. Dodgy deals have shattered trust in financial services The insurance industry can provide vital products to enhance people’s lives, yet the ongoing exposure of poor practice has shattered trust in financial services.  Customers need protection against events they hope will not happen – with insurance at fair price.  They also need savings for events they hope will happen, managed by experts who are on their side and can offer them honesty, transparency and risk control.

8. Too often, insurers rely on customer inertia and abuse people’s trust.  Insurance is meant to offer both protection and future growth at a reasonable price, yet all too often its product pricing relies on customer inertia to recoup costs from captive customers.  Even on basic house insurance, let alone complex financial products, the best deals are reserved for new customers, while existing loyalty is penalised with higher premiums.  How many of us have called our insurer at renewal time to tell them we have a better quote elsewhere, only to be immediately offered a discount?  Does that not suggest the price was too high in the first place?  The industry does not reward loyalty, quite the reverse.  Hardly a sustainable model for long-term success.

9. Financial products are about people – not just about money.  In order to serve customers properly insurers need to understand their lives.  They are not all the same.  They need flexibility and value for money.  That means fundamentally reappraising insurance company profit models, modernising operations and delivering more flexible products and services that individuals can relate to, without jargon and reams of confusing paperwork.

10. The annuity market is a good place to start:  As the  investigation into the annuity market continues, this would be an excellent place to look for hidden charges that have hurt consumers. To force the insurance industry to reappraise its profit models.  Nobody should be paid commission for selling an annuity –  and fees should only be paid to those who have made some checks on whether that product is suitable or not.  These problems are much more recent than policies from the 1970s.

The new  Financial Conduct Authority (FCA) is shining lights into the dark recesses of industry practice to force modernisation.  Customers are crying out for new solutions, on-line information, apps that engage them and far more flexibility.  I believe the insurance industry can – and will – rise to this challenge.

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Show comments
  • Frank

    Yet another business sector taken over by the spivs.

  • David Booth.

    The rot, and I do mean rot, set in when the financial service sector started selling “products” instead of providing a service. The clue as to what business they should be in is in the name.

  • Jackthesmilingblack

    No sympathy for those white-collar criminals also known as private pension providers. My main concern is that that they will declare insolvency before they finish paying out.

  • anyfool

    Why has he not allowed people who have already signed up for annuities scrap them and start again.
    That really would put a cat among the pigeons and probably lead to a landslide election victory next year.

    • Tony_E

      Because while that might be an attractive idea, it goes against the principle that law should not be retrospective. Those contracts are already made.

      Also, it would risk collapsing the pensions of those who chose not to withdraw from the annuity arrangement through fund depletion. This is largely what happened when Brown changed the rules on witholding tax in the 90’s, thereby raiding pension funds which were temporarily flush on the back of the first Greenspan ‘money bubble’.

      As it is, while popular and overdue, the change in the budget has taken significant risk with the stability of some funds as they may find in lean investment years there is little money coming in the way of fresh investors. .

      • David Booth.

        There is always a very simple solution to every complicated problem that is invariably wrong.
        Contract Law is the bedrock of commerce, we mess with it at our peril.

  • Q46

    So deregulation is making the change, so once again we see that if Government were to keep its nose out if things we would all be better off.

    Insurance companies are basically investment businesses using premiums as a huge cash float for those investments from which they make most of their money, so you may wish to revisit your flawed model theory.

    And companies exist for the benefit of their shareholders, not customers.

  • Alexsandr

    most insurances are a scam. MLP on motor is a complete scam. cost is under £1, sold for £15 -£25. and its useless. There is always an insurer of last resort if you are hit by an uninsured driver.
    I now have 2 products. car insurance and home insurance. nothing else. I save for my pension using stuff that gives a decent return.
    I say to everyone, look at the stuff you are paying each month, think -do I really need this’ and of not cancel them.

  • Mynydd

    As I understand company law, directors must manage the company for the benefit of the share holders which it seems the directors of the Insurance have been doing. So what’s the problem.

    • Terrier

      There’s a real problem with statutory commodities such as motor insurance – that’s why the Competition Commission has been asked by the OFT to investigate the car insurance market.

      • Alexsandr

        I would have thought the car insurance market has true competition, now we have the price comparison websites. One can now find the cheapest policy online -in the old days you would have to trail round loads of brokers.

        • Tony_E

          No. Only truly can there be total competition when the option to not insure is legal. Then the true cost of being uninsured (i.e covering the cost of an accident yourself) is factored into the price of insurance, because the industry has to compete with that risk, but without the force of law to back it.

          That can be viewed as a social good or a harm, (and I make no comment as to which it is) – but it is the only way to ensure absolute and total competition in the market as it removes the distortion of compulsion.

          • Alexsandr

            I would agree. You are not compelled to have comprehensive insurance, just third party. (As an aside, its often cheaper to have fully comp with an excess larger than the value of your car than TPFT)
            Trouble is third party car insurance cannot have an upper limit of liability. So you would have to have resources to pay for the accident like when gary hart drove off the M62 onto the east coast main line railway and caused a train crash and killed 8 people, injured many, and caused many millions of pounds worth of damage. Who would have the resources to pay for that?

            • Tony_E

              And that is the point. When you choose to buy or not to buy insurance, you factor in your own values as to how you view risk. If you are only likely to drive to the shops at the end of the road because your shopping is too heavy to carry, you might view the hundreds of pounds in insurance an unnecessary cost.

              If insurance companies wanted to get those low risk customers into the market, they would have to compete with the driver’s assessment of cost/benefit. At present, they have no need to do this.

              In effect, there might be single day pass insurances for long journeys, or an insurer who you only pay when you use the car, or by mileage. Or specific motorway insurance – there is likely to be much more choice if the compulsion to be insured 365 days a year just to own a car is removed.

              • Alexsandr

                but you can SORN your car and take out 1 day insurance for the days you want to use it. You would have to do the sums as to whether it was worth it cos 1 day insurance is expensive if you use it a lot.
                You state your mileage on your proposal. The mileage you state affects your premium. If you lie on your proposal you may find yourself uninsured if you claim.
                a restricted area policy might be an idea for some drivers. Dunno.
                motorways have the least accidents. Single carriageway A roads are the most dangerous. I know motorways are scary, but they are safest roads. probably cos there are no right turns.

                but most people just buy annual insurance cos its easiest.

                (Odd that -annual travel insurance is rarely taken up -people just buy it for a single trip)

      • Mynydd

        Are you saying that the right wing, free market model is not working.

        • Terrier


    • Rhoda Klapp8

      It never has been a free market, too many regs, too little competition because the regs constrain the range of offerings. Most of the problem with the savings/pension industry has been the rules which made saving tax liability the main selling point to the detriment of what savings and pensions ought to achieve.

      • Mynydd

        Too many regs, that’s what Mr John Redwood said in a Conservative policy document before the world wide banking collapse.

    • HookesLaw

      A Company is managed within the approval of the shareholders

      • Tom Tom

        Shareholders ? You mean a few fund managers ?

        • Q46

          Who manage funds for millions of pensioners and other investors who pay them to do what is best for their funds.

    • Tom Tom

      They must also obey the Fraud Act 2006 and have a Duty of care to Customers. The fact that regulation has been lax has caused standards to drop

      • Q46

        Was fraud not a crime before 2006?

    • gareth

      Absolutely right! When will people and politicians realise, we have a free market economy, the ONLY repeat ONLY reason for a company’s existence is to maximise profits for its owners (shareholders). This includes insurance companies, energy companies, banks, nursing homes, etc, etc. They MAY pay lip service to politicians when under scrutiny (like the oligopolistic) energy companies at the moment, but only if it is their long term interest to do so – their long term interest being SOLEY to maximise profits.

      • Tony_E

        It’s not a free market. That is in some ways the problem.

        For example, you don’t have a choice when it comes to car insurance – you have to have it. In a free market you would have the choice whether to insure or take the risk of personally covering your own risk with your assets. So the market is rigged by the fact that you must have it or face prosecution.

        When government steps in to bolster a particular market, it creates a distortion in what would be normal behaviour – choice is eroded and the companies in that market respond to the new environment created.

        Generally, much of government regulatory action in markets is a response to the distortions it has itself created, not to create a free market in goods and services.

        • Alexsandr

          you can choose not to insure. I think you need to provide a bond of a sack of cash.

          • Tony_E

            You cannot legally choose not to insure. You will be fined by the database of insurers if you do not SORN your vehicle.

            • Alexsandr

              I think you can have a surety bond which will pay for damage and then you don’t need TPFT. That will obviously be registered with the DVLA.

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