Insurance automatic renewal is a con

[Wulfyn]

There is a lot of good information here about auto-renewals (and about renewals in general), but there is also a lot of misconceptions. Overall it's a pretty balanced affair - there are some benefits to policyholders but there also some benefits to insurance companies. However even though overall it may be balanced that doesn't mean that there are not lots of winners and losers. What is a con is that not enough people really understand how the process works, because sadly companies don't like to reveal things like the truth.

 

Here's how it works:

 

Full Cycle

This is the term that is used to describe auto-renewing insurance. If you are purchasing a product from a high street broker you may see the letters FC in the insurance product, and that's what FC stands for. Back before computer technology became good (and for the insurance industry that means about 15 years later than you'd think) people who got their insurance had to go through the hassle of making a trip to their high street broker or calling up a number of insurance companies and restating all of their information to get a new quote. It wasn't possible to just say "hey, can I just run my existing details through the system again please?" because once the year (cycle) was up on that policy that was it.

 

So the insurance companies had a bright idea. They said "hey you know all these people that cannot understand why they have to restate all of their information for their next year, why don't we keep their details and rerun it again?". The advantages were plain and simple on both sides. Customers got a better level of service, and the existing insurer got the first crack at the whip. Also in those times there wasn't a lot of insurance products on the market, and the pricing was pretty stable, which meant that the cheapest insurer one year was very likely to be the cheapest the next year.

 

 

Broker led vs Insurer led renewals

There are actually 2 types of renewing. If you purchase your insurance directly from an insurer then you are technically that insurer's customer. That means that when it comes around to renewal time the insurer can rerun your risk and provide you with a quote. If you call them up to say you want it then they can (maybe) get it processed on their system. All well and good!

 

However if you went through certain brokers (usually national insurers such as banks and supermarkets etc) then that broker would consider you as one of their customers. They would run your risk against a panel of insurance products, find the one that they can earn the most commission on - I mean cheapest, and sell it to you. But when it came time to renew the broker didn't want to risk losing the customer by having the insurer you insured with have the only bite at the apple, so they re-ran it against their panel and sent you that one through the door. The problem is that even if you, the customer, responded promptly, the broker would still have to tell the insurer.

 

Now when a policy runs out it 'lapses'. A policy that has lapsed cannot be reinstated. Also insurance cannot be backdated - that is you cannot purchase it on the 7th of the month for cover that started on the first. In fact if your broker told an insurer that you had cover that started on the first on the 7th then it would be illegal for the insurer to start cover from that date. So the problem is this - if the broker did not get the information to the insurer in time then the customer would be without cover for a certain period, and that is bad news for everyone involved. In fact even now if an insurer is not told that a policy has been cancelled they will auto-renew it for a few days (for free) on the off chance that it may be a broker system problem in getting the message across that it has been renewed.

 

 

 

Renew if you don't reply

Of course there is also the added 'bonus' to the insurer / broker that you might simply be too lazy to look elsewhere, so by putting in a function saying "all you have to do is nothing" then they will make more sales. After all if the price looks about right to you the customer then you may not be bothered to shop around. Originally shopping around tended not to be much good anyway due to the low volatility of prices, but these days with new products hitting the markets all the time and the prevalence of aggregators and panels there can be quite a lot of fluctuation from year to year. Additionally the range of products on the market is much wider, so you tend to find very low quality products undercutting renewal premiums by offering less.

 

 

Anti-Loyalty

Insurance companies have learnt long ago that generally customers that stick with you tend to make you more money, and are thus more desirable. For that reason commission rates tend to be much lower after the first year, and often insurers will give loyalty discounts in order to try and retain the business. However this has been under attack in the past few years due to 2 (flawed, in my opinion) beliefs. The first is that as a renewal customer is better than a new business customer the best thing to do is to target the customers that would be loyal to another company by promising to match their premium in the first year ("we will match your renewal") - this is flawed because they then go onto their own rating system in the second year where they lose the business as the premium goes mental. The second is that if you retain half your customers then the best way to increase the number of people that remain is to increase the number you start with, by heavily discounting the new business premium - effectively selling at a loss in the first year. This is flawed because again premiums go mental in the renewal period.

 

All this means that the sector as a whole becomes profitless. Customers jump around getting those deals that are only available to new business customers. Many will even offer a new business premium at a lower amount than their renewal, encoraging people to hop to the new business price even though they stick with the same company. Falling premiums reduces profitability which results in expense cuts (as you cannot raise prices or you lose volumes) which results in people getting shafted when they come to claim.

 

 

Capping, and moderation

To help combat the price differences between your old premium and your new one insurance companies put a mechanism in place called capping. This prevents your premium moving too much away from the previous year. This has advantages and disadvantages to both side. For the insurer an advantage is that premiums that are roughly the same tend to result in a high retention rate, so if you don't put the price up too much you can keep the business that you may have lost. A disadvantage is that you may end up underpricing the risk and making a loss. For the customer an advantage is that your premium may increase, but usually it won't increase by a lot (not always true, for example if you have had a claim).

 

However there are also some disadvantages for a customer. If your premium has gone up by, say, 100%, but there is a cap of 20% per year then you will be guaranteed a 20% price increase every year for the next 5 years. You may wish to change to a different insurer sooner. The second is that capping works with reductions as well as increases - providing a floor. This means that you may again get cheaper insurance elsewhere.

 

Moderation is a fancy word to describe the above process but rather than providing hard limits it does something cleverer based upon how much money the insurer think they can get you to pay - like how a clothing company works out how much extra it can charge you on top of a £5 shirt because it bears their brand name.

 

 

Inflation

One thing that rarely gets mentioned is inflation. Prices go up. The majority of insurance customers don't notice this as the premium decrease they get for getting older (to a point) and increases in NCD bonuses tend to offset this by a large factor, and for younger drivers will even mean that the premium is reduced drastically. However inflation does kick in - let's say you took a policy out for £450.00 last year. Remember that VAT rise a couple months ago? Well insurance tax rose from 5% to 6%, so that's an extra 1% you have to pay (£454.50). Also inflation is running at around 3.5%, according to the Consumer Price Index. Sadly however that takes into account a lot of things that are not insurance related (like food), so claims inflation (the amount of extra money required to pay for a claim) has grown by about 8% in the last year alone (£490.86). However because the insurance industry is not making a profit, average premium inflation (the amount your insurance goes up) has been greater, at around 12%!!! (£509.04). But then of course these things also affect the expenses of the company, because electricity has gone up, and suppliers are increasing their fees (things like paying aggs, commission on brokers). It's quite easy to see from this how prices can spiral out of control. But you may not notice quite so much if your NCD has gone up (maybe 10% reduction), or if your premium has been capped (at 20%, then your NCD reduction kicks in) etc.

 

 

Hope that's given everyone a bit of food for thought. Not saying insurance companies are angels - they're corporate entities just like Tescos and Barclays and Levis, and your local chippy. But hopefully this information will help some people to understand the system better so that they can find an insurance product and price that is right for them.

[Wulfyn]

I don't think it's the terminology, it's that you "agreed" to it when you took out the policy in the first place - even though it was probably never explained to you that this was so.

 

Inertia selling would be when the policy came up for renewal and your insurer decided to remove one of the drivers and offer a price based on that, which i have sadly seen done and is completely illegal in my opinion as the nature of the contract has changed.

 

 

For me the problem is not that insurers do this, but that the customer is not told about it beforehand and so it comes as a nasty surprise. If customers were told, and therefore had the information to decide that such a product was not suitable for you, then I think that would be treating customers fairly because then it is your choice.

[Wulfyn]

Auto-renewal is absolutely covered by TCF.