Financial Services Industry Responses

Price

Whilst direct operations have reduced administrative costs, they have also made it easy for consumers to ring around for the best quote. They are especially prone to do this where the insurance is compulsory. In other situations, insurance is sold as an add-on to an expensive base product, when consumer's finances are already stretched. Accident, Sickness and Unemployment insurance linked to a loan or mortgage is a classic example. Suppliers use a number of tactics to induce a sale and then to recover any initial discounts:

Discounts

Special offers to reduce the initial payments are common:
 

• Mortgages with an initial low rate fixed period.
• Additional units when purchasing unit trusts.
• Life insurance with increasing premiums.

General products such as home and motor insurance are highly price sensitive. Low premiums mean it can be 2 or 3 years before an insurer makes a profit. However, it is estimated that perhaps 1/3 of customers switch insurer after one year. To counteract these high terminations insurers have introduced annual discounts:
 

• No-claim discounts (e.g. TSB Home insurance)
• Discounts for payment by direct debit (i.e. rely on inertia)
• Discounts for affiliated groups (e.g. Frizzell and Unison members)

Cross Subsidise
 

• Free motor insurance with a new car.

Increase Back-end Loading
 

• Poor early surrender value of life products.
• Penalty fees for unauthorised overdrafts.
• Mortgage early surrender charges.
• Higher variable mortgage after an initial fixed period.

Charge for Optional Extras
 

• Unit Trust management charges which are applied annually, on switching and eventually on selling.
• Building societies and banks charge fees for writing letters, safe deposits, retrieving and inspecting documents, providing references, telephone calls, completing solicitor's questionnaires, duplicate statements, transferring equity, property inspection, and so on.

Next is Distribution (Place)

External Resources

1. Through the Loop - BrandLoop, 1998, Are Premium Prices Justified?, Through the Loop Consulting Ltd, June 1998

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