We think that it is really important that people understand exactly what is going on in the car insurance industry. It means a huge amount to the price you pay for insurance and you should know where your money is going! So, here is our brief summary of what’s going on…
The £13bn UK market for motor insurance is dominated by a fragmented group of players and the name of the game is commoditised product distribution. The market is, in aggregate, unprofitable for underwriters, brokers and, price comparison websites alike who rely on 2nd year price hikes, add-ons and cross-selling respectively to drive profitable business around the core, unprofitable motor insurance product.
Underwriters have (expensively, but unavoidably) sacrificed distribution to the aggregators and the brokers. As a result they are at their mercy. In order to win business they are forced to price at a level that is clearly unprofitable, win a customer and then price them much more profitably in the second year (to cover the losses in the first) hoping they don’t churn. They often rely heavily on premium investment returns to break even or make up for losses. The result of this is an average three year churn for a customer when actuaries calculate the risk of a customer over five to eight years, this invalidates their own risk models.
Brokers are stuck between the underwriters and the aggregators and are left hunting for volume. They will largely make a return only by selling high margin (bad value) premium finance, breakdown cover and legal expenses policies. They are quickly becoming forced out as Underwriters eye up these add-ons and go ‘direct’ to boost their own margins.
Aggregators are able to charge very high introduction fees to brokers and underwriters for bringing them business but have ended up competing their margins away through the endless (and also unavoidable) pursuit of brand awareness. They are left in the position where they are forced to spend millions of pounds on TV adverts and digital marketing campaigns to stay ‘front of mind’ or risk collapsing. It is now the case that they rely on cross selling other products such as Gas and Electricity comparison to remain profitable.
The fourth group are the Software Houses who, along with the search engines (Google), are the current winners in this ecosystem. There are five large players and in order to be an underwriter, broker or aggregator you must rent, at least one, often two or three expensive software packages, pay a proportion of their revenue and pay per electronic message to or from partners or data enrichment services. The entrenched network effects allow them to charge what is is essentially an oligopolistic rent.
As you can probably tell, this is a pretty inefficient system and part of the reason your premiums are so high! Only a fraction of the premium actually reaches the underwriters to pay your claims and the structure of how they are forced to price makes it look like they are out to screw you. What is more, the structure of the distribution network makes it really hard to innovate on what the product looks like. Enter, Cuvva…