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Loyalty unrewarded: why the personal lines merry-go-round is unsustainable

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We’ve all been there. The home and contents renewal notice drops into your inbox and the premium has gone through the roof.

Time is precious, so often we just live with it. But the rise, helpfully displayed on my notice, is 21.3%, and that seems a bit much.

I haven’t made a claim, and my details haven’t changed. So, I make the call.

“Well sir, last year you benefited from a 20% discount as a new customer and that doesn’t apply anymore.”

OK. Fair enough.

Or is it?

I don’t buy into consumer advocate Allan Fels’ loyalty tax argument – I’m prepared to take in good faith the fact that I received a genuine “new customer discount” the previous year.

But it wasn’t made clear when I signed up that the price quoted was strictly limited to one year. If it had been, I would have been prepared for the larger figure exiting my bank account this time around.

My renewal notice could also have clarified the situation, but didn’t. No explanation of how the premium is calculated, or the removal of last year’s discount, appears. In fact, the notice only confuses matters.

According to the figures provided, my annual contents premium has risen from $240.25 to $418.98 – a staggering increase of almost 75%.

“There must have been a lot of claims in your area, sir.”

This is an assumption – no statistical, or even anecdotal, evidence is offered to back it up – and I find it hard to believe.

I’m offered a 5% discount, presumably for having taken the time to grumble, but the only way to access a price close to the previous year is to switch to another insurer, and I’m almost encouraged to do so. “You are very welcome to do that, sir”.

The “cancellability” of insurance means customers can change provider at any time, at no cost, but it can nevertheless be an irritating and unsettling process to go through.

Large Australian insurers oppose comparison websites for personal lines products because they risk encouraging a purely price-focused purchase. So none of the major insurers feature on comparison sites. But from a consumer point of view they can save a lot of time. Without one, customers need to directly contact every single insurer they want to compare, either by telephone or online.

Why are insurers so happy to perpetuate this endless merry-go-round? The administration costs must be significant. The answer is simple enough: Figures show the vast majority of consumers don’t switch, despite the potential savings on offer.

The previous year’s premium being included on the renewal notice is a step forward, but it doesn’t solve the key issue – that switching insurers takes the sort of time most people can’t easily find.

And there are other concerns, too.

Will the new policy cover everything the old one did? Comparing the new product disclosure statement (PDS) with the old one can be another onerous process.

Will a new insurer be as willing to pay a claim as one to which I’ve been paying premiums for years? If you’re unlucky enough to be hit by an immediate natural disaster, then the answer is almost certainly no.

The exclusion in my PDS – “We do not insure you for bushfire, storm, flood or tsunami in the first 72 hours of your policy” – is fairly standard, so needless switching could have catastrophic consequences.

It’s a fact of life that insurers pay more to acquire the customer than they do retaining them. But after all the recent commentary from critics about new customer discounts, it’s surely time to end this outdated model.

It might not be a loyalty tax, but it certainly sees loyalty go unrewarded.

Insurers may think the system is working, as most customers renew their policy. But many stick with their current provider through gritted teeth. They’re well aware there’s a better deal out there, but they are often too time-poor or lack the confidence to track it down. Is that what insurers are relying on?

New customer discounts should be cut out – or at the very least detailed clearly when customers sign up and renew – and more effort should go into explaining the reasons behind large premium increases. Suggestions that there has been an upsurge of crime in the customer’s neighbourhood really don’t cut it.

Insurers play a vital role in helping individuals and communities recover after a significant loss or catastrophe.

But the way pricing is currently calculated and communicated lacks transparency, and does nothing at all to enhance the industry’s reputation.

Managing Editor John Deex