Last month I cancelled my online short-term insurance policy when an insurance broker was able to beat the quote by R100. As I was selling my old car and buying a new one, I took the time to do some quote comparisons of direct insurers via the comparative website Hippo.co.za. Across all of those quotes, the insurance broker quote was still around R100 cheaper, had better cover and a lower excess.
This seems counter-intuitive. Surely if you go direct and don’t incur commission costs, then you are saving money? Apparently not, according to Andrew Coutts, head of intermediated distribution at Santam. I specifically approached Santam for this question because they happen to be the underwriters for both the direct insurance policy and the policy through the insurance broker. So I am ultimately insured by the same company but paying a very different premium.
As Coutts explains, direct insurance has as many costs to incur as a broker insurance model. Instead of commissions, they have to pay for marketing and on-going service such as a call-centre and website –costs that are normally borne by an insurance broker and paid for by the commission earned.
This was confirmed when I studied the FSB short-term insurance report for 2014. When it came to acquisition costs, insurance companies that sell through insurance brokers had higher commissions but low expenses, while direct insurers had low commission but high expenses. The overall costs were very similar.
Risks determine premiums
While some direct insurance marketing may suggest that you are saving by cutting out the “middle-man” the numbers just don’t support it. A comparison survey by online money site Moneybags has also found that direct insurers were not really cheaper.
The real driver of premium pricing is how your insurer views your risk profile and the extent to which they apply risk rating. That was the success behind direct insurer OUTsurance who used very sophisticated risk rating data and analysis to provide lower-cost insurance to low-risk customers and is today the largest direct insurance company in South Africa. While certainly ahead of the curve in terms of risk analysis, many large insurers have now caught up and are offering equally competitive quotes via their broker force.
Number of policies affects premiums
Having more than one product with your insurance company will also lower your premiums. In my case, only my car was insured through the direct insurance provider while my house and household contents are insured through the insurance broker, hence a further discount on premiums. Coutts explained that insurance companies reward you for having more insurance with them as it lowers the overall risk and increases the levels of retention.
So if the real pricing difference has less to do with the channel I am purchasing through and more to do with my risk profile and number of policies, which distribution channel works best? For individuals who just want to be able to go online and insure their car and really have no need for a broker relationship, online insurance definitely fills a space. For me at this stage of my life, where I have household insurance, a two-car family which will soon become a three-car family when my son starts driving, all things being equal I prefer the broker model, especially when it comes to the claims process. One of the advantages of a commission-based structure is that the broker is paid on an ongoing basis to service the client. It is in their vested interest to ensure that if I have a claim that the company pays out, because an unhappy client moves. A large insurance brokerage has a lot more clout with an insurer than I would as a single client, so it is more likely that my claim would be processed and best of all, it means I don’t have to deal with a call-centre anymore.
Check the complaints ratio
When selecting a short-term insurer, cheaper is not necessarily better. When comparing quotes I discovered quite a discrepancy in cover between insurance companies. Some insurance providers had a very high excess while others automatically included 30-day car hire in the case of an accident. When it comes to household insurance, all-risk cover (which covers items inside the home as well as outside, like a watch or laptop), can be treated differently. Some insurers cover all risks, while others require that you specify the items. So you need to make sure you are comparing like with like.
You also need to know that when you claim you will be paid out – that’s after all why we take out insurance! Before signing with an insurer, study the Ombudsman for Short-Term Insurance report to find out how many complaints were received by them about your insurance company. The average number of complaints received about an insurance company is around three for every 1 000 claims. So insurers like OUTsurance and Santam have a good ratio, at only two complaints per 1 000 claims. A complaints ratio of 13/1 000 claims for King Price Insurance, for example, would be a red flag. Even though many of those complaints were resolved in favour of the insurance company, it does suggest that there may be a lot of fine print that customers are not aware of.
This article first appeared in City Press.