Encouraging customers to act at renewal

• Description of the programme
• The study
• Key findings
• Points to consider

Description of the programme

The two largest retail insurance markets are motor insurance and home insurance, with a combined annual premium income of £16.4 billion. The majority of UK home and motor insurance policies automatically renew annually, at a price set by the insurance provider, unless consumers are proactive and switch to a new provider or negotiate a better price with their existing provider. While auto-renewal ensures that the insurance cover will continue uninterrupted, this default and automatic choice may dissuade consumers from looking elsewhere for cheaper insurance products. If high numbers of consumers allow their policies to renew automatically without considering other offers, firms may discount prices for new customers but offer higher prices at renewal.

This 2015 evaluation from the Financial Conduct Authority, collaborating with two motor insurers and one home insurer, conducts ‘field trials’ to test the potential for improved renewal notices that may encourage customers to switch or renegotiate their policy when it comes up for renewal.

The study

Four main groups were included in the study, including the home insurance firm (Firm A), the two motor insurance firms (Firm B and Firm C), and the control group. The randomised control trials (RCTs) were ran with a combined sample of over 300,000 customers. Follow-up surveys were also administered to 4,000 customers across firms A and B.
The paper measured the four following types of disclosures (or renewal notices):

1. Including last year’s premium next to this year’s premium in renewal notices;
2. Sending a leaflet with renewal notices e.g. a guide to shopping around;
3. Simplifying renewal notices by using bullet points and simpler language;
4. Sending reminders two weeks after renewal notices.

The control groups received the standard renewal letter sent to all customers.

Administrative data on consumer choices was linked to the survey data on consumer beliefs to study the drivers of consumer inertia (reluctance to switch) and their shopping around behaviour. Finally, data on price levels from three home and three motor insurance providers was aggregated to understand whether or not there was any evidence of price increases at renewal.

The RCTs took place between July 2014 and February 2015. The follow-up surveys were conducted by telephone, with 2,000 customers from Firm A and 2,000 customers from Firm B.

Key findings

• Aggregated data from three home insurance providers suggests that average premiums increase for five years before levelling off. These averages include the premiums of both those customers who pay lower premiums through negotiating prices and those who do not.
• Only a small percentage of customers renew their insurance product numerous times at these firms.
• Data from another home insurer shows that the expected costs of claims do not increase with length of enrolment, showing this is unlikely to be the reason for increasing premiums.
• The aggregated data for motor insurance providers showed that the average premiums at two of the firms showed little evidence of increases at renewal.
• The survey data suggests that a significant proportion of motor and home insurance customers (28% in Firm A and 36% in Firm B) either did not recall receiving their renewal notice or did not read them.
• The report found that for home insurance customers, disclosing last year’s premium resulted in between 11%-18% more customers switching or renegotiating their policy.
• There were no statistically significant differences for the motor insurance companies between disclosing last year’s premium and the standard letter.
• Sending reminder letters, text messages and emails two weeks after sending renewal notices had no statistically significant impact on switching or renegotiating a premium.
• Similarly, using bullet points, simpler language, or issuing guidance in the form of leaflets had no statistically significant impact on switching or renegotiating insurance premiums.

Points to consider

• Methodological strengths/weaknesses: Findings are tested for statistical significance, adding more robustness to the analysis.
• Control groups are used, allowing findings from the intervention group to be compared with a group not receiving the same intervention for benchmarking purposes.
• Generalisability/ transferability: The evaluation is of significant interest to those looking to commission or authorise interventions designed to increase the number of consumers switching to more suitable insurance products.
• Relevance: The findings are based on customers from three UK insurance providers, and should not necessarily be seen as representative of the entire market.