"This isn’t about just presenting numbers more clearly – it’s about doing the maths for people."
Retaining customer trust will be the main challenge for insurers, particularly as these customers start to see their premiums rising year-on-year.
PMI is a long-term relationship
Private medical insurance has always struck me as odd. It’s an annual contract, where the price can rise every year. But consumers expect their relationship with their insurer to last for the long-term.
In fact, a great way to annoy your customers would be to treat their PMI policy as if it were only an annual thing.
Pricing perfectly to risk at the end of each year would devalue the product immeasurably for customers who have long term health conditions. (Note: that’s pretty much all of us, eventually.)
You just got ill…
You just got ill, and the first thing that your insurer’s pricing algorithm realises is that you are now higher risk.
If you develop a health condition, you might require medical treatment for weeks, months, or even years. More generally, once you have a health condition, your future risk of making a claim rises – even if your health improves in the short term.
The second thing that your insurer’s pricing algorithm realises is that your willingness to pay just rose.
You can’t switch without losing coverage for your pre-existing medical conditions, meaning the insurer has market power over you.
So, your insurer has a choice; how much to increase your price by?
No claims discounts are transparent
All of which to say – it’s a good thing that most PMI providers commit themselves to limiting renewal price increases through pre-defined no claims discount mechanisms.
This transparency is valuable. It means that consumers can hold their insurer to account. A transparent no claims discount is much better than vague statements about what affects your premium.
A transparent no claims discount also means that consumers should be able to predict exactly how a claim will affect their premium.
Unfortunately, the word ‘should’ is doing a lot of the heavy lifting in that sentence.
No claims discounts are a maths test
I once ran a maths test on 50 employees of a PMI insurer. Presented with the same information as their own consumers, none of them correctly answered how a small claim would affect next year’s premium.
I’ve since repeated this maths test on other groups of insurance professionals – none of whom have ever thanked me for making them get out their calculators – and very few of whom ever got the answer right first time.
I’m not saying insurance professionals are slow on the uptake. Quite the opposite – if even clever, experienced, knowledgeable insurance professionals struggle to compute the effect of a no claims discount, then maybe, just maybe, consumers might struggle too.
(I also ran the test on the Fairer Finance team – where the only people to get it right were PMI market specialists and a colleague who literally held a PhD in maths).
After all, calculating the impact of the no claims discount involves algebra.
One in three people in the UK suffer from maths anxiety. One in two only have the numeracy expected of a primary school child.
We need to do the maths for consumers.
The alternative is that some PMI customers don’t make informed decisions about whether to claim on their policy. Even worse, some PMI customers may delay seeking vital treatment out of confusion or anxiety about the impact on their premium.
Interactive tools and simplification
At the very least, insurers should provide easy-to-use, interactive tools to help consumers work out how their PMI premiums will change. This isn’t about just presenting numbers more clearly – it’s about doing the maths for people.
But even with the best interactive tool, designed by the best behavioural scientist – some people might not engage or grasp the implications of the no claims discount.
In which case, PMI providers should also explore whether their pricing mechanisms can be simplified. This isn’t about dumbing down customer communications while leaving the underlying mechanisms unchanged, as this would reduce transparency and drive confusion. This is about innovating PMI products to meet consumer needs for the long-term in a simpler way, while successfully managing adverse selection and moral hazard.
It can be hard to be the first firm to deviate from the status quo. But the first mover might just reap the rewards of higher trust and more loyal customers.
