Usage-based insurance has been around for a while – the idea that you pay only for insurance that you need.
Insurance brokers have been around almost as long as modern insurance itself. Their function is to use specialist knowledge of the insurance market, or a particular sector of it, to help buyers to get the best deal for their insurances.
Bear in mind that in insurance, “best” may not always mean “cheapest”. That policy from Cheapo.com might be cheap because it has lots of excesses or exclusions. It might even be sneakier than that. Exclusions and excesses have to be set out in the policy, even if you need a magnifying glass to read the “small print”, and a prudent buyer has a chance of spotting them.
However, what if the Cheapo.com policy simply doesn’t cover things that other policies do, or that a buyer might reasonably expect? Without knowing what “normal” market cover is, or what to look out for in a particular policy, the average unaided buyer would have no warning of these “black holes”, even if he was careful to read the policy before buying.
Insurance brokers act solely for their clients. They have a duty of care to ensure their clients’ insurance needs are met, but also to ensure that the clients understand their own important role in providing complete, true and accurate information during the proposal process.
According to Business Wire in January 2020, 46% of SME business insurance was placed through insurance brokers.
Insurance is available from many sources, besides directly from insurance companies. Banks, solicitors, accountants or garages may all have links with insurers and offer to place business with them. This may be a trap for the unwary, as most will be agents of the insurance company, owing no duty to the client other than a duty to disclose commissions and remuneration. Such agents may also lack the depth of knowledge of even the policy they promote, let alone other cover available in the market.
In November 2020, McKinsey & Company, global provider of financial services, reported that, in the UK, small & medium-sized enterprises (SMEs) account for over 99% of companies and 77% of the workforce. Over 60% of gross insurance premiums are accounted for by SMEs.
Since the start of lockdown in the UK, over 70% of SMEs experienced reduced revenues, and were scrutinising cover for “value”. From a reputational viewpoint, insurers rather shot themselves in the foot over their mass declinature of business interruption cover arising from the pandemic. Although the majority of claims were eventually overturned largely in favour of policyholders, it was a stressful period for insured businesses (probably for insurers also!) and it has led to SMEs looking more closely at cover, value and flexibility.
In the 6 months prior to the report, the use of digital channels increased 5%. There’s plenty of scope for growth, as digital represented well under half of the interactions of SMEs.
Although usage-based insurance is growing, McKinsey reported that there was less flexibility in commercial lines covers.
At the intersection of these factors lies usage-based broking. Usage-based brings clarity to the client’s concerns over cost. In a recent survey carried out for Hubb, cost transparency scored highly as a key feature of a relationship with a broker. A surprising finding was that 23% of respondents thought brokers didn’t charge commission or fees.
42% of respondents said they would change brokers for cost savings, whilst 26% said they would move for better quality service.
InsurTech, offspring of fintech, is defined by leading global identification service European ID as “the result of the convergence between digitization, disruptive innovation strategies and the insurance sector”. Insuretech has reduced barriers to entry to the market faced by startups and innovators, and given them advantages over their less technically-agile traditional competitors.
In addition to enabling better transparency, InsurTech can automate many mundane aspects in the life-cycle of a policy, thereby reducing the service cost.
The insurance market and the insurance broking market are both crowded fields, but at the moment, hubb is almost unique in offering usage-based broking. Their charging structure is laid out at the outset for customers to choose the broker services they need and to see the value of them directly, compared to a traditional retainer or commission-based model.
The key is to provide SME clients with the reassurance that they have insurance cover that meets their needs at a fair price, but also that the broker is providing a quality service. Ease of access and ease of use are increasingly important in a world where more and more business transactions are available online.
Already providing clients with a 360° view of their insurance policies on a 24/7 basis, in December 2021 Hubb acquired Digital Fineprint to further improve its customer experience. hubb co-founder and CEO, Mark Costello, told Scottish Business News that the acquisition “enables us to significantly expedite our plans to be the world’s most transparent, technologically-advanced and customer-centric insurance business.”
Providing a quality service with a usage-based pricing model has proved popular with clients. Using smart technologies to handle routine tasks frees up expert staff to spend more time adding value to the customer experience.
Insurance operates in an ever-changing landscape, with shelves of statutes and regulations dealing with different aspects. Insurance disputes also keep our courts very busy. Despite this, until recently, the principal legislation was well over 100 years old – The Marine Insurance Act 1906 (MIA). Although heavily based on practices that grew up around marine insurance – one of the oldest classes of insurance – the principles set out in the MIA applied to most insurance policies. The keystone was the mutual duty of “utmost good faith”, established by the case of Carter v Boehm away back in 1766.
In recent years more cases were being litigated over non-disclosure or warranty issues and it began to look as if insurers had an unfair advantage. The Insurance Act 2015 came into force in August 2016 with the intention of levelling the playing field.
However, in doing so it made the proposal process much more of a mutual exercise, with more expected from buyers. For many SMEs, this may have changed the playing field into a minefield, and this is where usage-based broking may find particular appeal to value-oriented businesses. For a simple renewal of an existing policy, there may be little need for advice. However, when considering buying a complex new policy, there may be a need for considerable “hand-holding”, advice and explanations of the cover and of the information required by the underwriters.
In the world of consumer policies, there has been a tendency towards commoditisation and ease of purchase. In commercial policies, the opposite is true, as revenue-strapped enterprises seek cost-effective cover, tailored to their specific needs. Usage-based broking is likely to emphasise this trend and make insurers aware of the demand for flexibility. There’s no reason to think that usage-based broking won’t be as popular as its cousin, usage-based insurance.