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Insurance cancellation is a tricky area. For insurers, brokers and clients, it’s not an ideal situation.
Insurers and brokers lose money, not just from the lost business, but from administration costs and overheads. The clients are in a bad situation as they are not covered for insurance they potentially need and they will be out of pocket if an event happens.
It’s a lose/lose/lose situation, but one that happens often. Unfortunately for everyone in the industry, research by Premium Credit reveals that 38% of people have cancelled one or more insurance policies in the last three years. This is in line with data complied by LexisNexis Risk Solutions, which says that 1.3 million motor policies alone have been cancelled in the last 12 months alone.
Adam Morghem, strategy and marketing director at Premium Credit, said that while some people may think that insurance is something they can afford to cancel, in the long run they are leaving themselves open to huge risks.
“It is shocking to see so many people and UK businesses missing out on vital, sometimes legally necessary cover due to cost or concerns over payments,” he said. “This is leaving millions exposed to unnecessary risks and potentially even greater costs further down the line.”
Martyn Mathews, senior director of motor insurance at LexisNexis, believes that the specific issue of client cancellation is huge for brokers currently, and is costing them large amounts of money when added up.
“We estimate that, depending on which broker you speak to, it costs anywhere from £25 upwards for each person that cancels,” Mathews explained. “It’s also the costs associated with that as well - if an individual cancels, and you haven’t been able to address that, it’s not just the cost associated with that cancellation, it’s the lifetime value of the custom as well. So, it’s not just cost savings that’s important, it’s how you can address a loss of long-term earnings as well.”
LexisNexis research has shown that each cancellation costs an insurance provider between £25 and £75. For a provider with 100,000 policies on their books for example, and a cancellation rate of around the industry average of 5% per year, this equates to a loss of anything from £125,000 to £375,000 each year.
Part of the reason it costs brokers so much is because people who have cancelled an insurance policy before are statistically far more likely to cancel their policy again. From 10-30% of customers on insurers’ and brokers’ books have cancelled a policy before.
But if a client comes to a broker, they had no way of knowing if that client has cancelled previously - until now.
LexisNexis has created new software that gathers data and can show brokers, as well as insurers, if a client has cancelled a policy previously. The data has been compiled from working with 94% of the industry, and brokers are already taking interest.
“This is the first time in market that insurance brokers have had access to this type of information,” Mathews explained. “Traditionally what would happen is a broker would have a client and the first time they know a client has cancelled previously would be when they go to cancel again.
“We’ve created a database that allows brokers to understand in advance that someone has a propensity to cancel so that they can start to price the risk accordingly, or at least work with the specific consumer in such a way that they’re then managing their internal risk as well.”
The database isn’t about punishing clients who have previously cancelled policies, as there are often legitimate reasons a person would cancel. Instead, it is about giving brokers more knowledge so they can understand risks better, Mathews explained.
“People who have a historic cancellation are actually far more likely to go on and cancel again. And actually, the brokers wouldn’t have known,” he said. “Until we created this database you wouldn’t have known that at the point of quote.
“It’s only now that brokers can really get into the deeper understanding of that customer at the quotation stage - so that the price that they put forward to the consumer is in line with them. From a trending perspective, people who cancelled previously will do so again, and that’s what the data shows.”
With some brokers being a little slow to use new technology, Mathews highlights that the software is extremely easy to navigate too, and that you don’t have to be a tech wizard to use it.
“We’ve created this ecosystem, data hub that allows insurance brokers access to this data in quarter-second response times,” he explained. “It’s extremely easy for the broker market to use, which is why they’re interested and why brokers are starting to adopt this technology and data.”
