Household: can no claims discounts be applied to household insurance?

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With Axa set to offer no claims discounts to household customers, Amy Ellis reports on market reaction and whether others will follow suit.

No claims discounts for motor insurance policyholders have long been offered as a standard device to help keep premiums in check and provide an incentive for safer driving, but in the household insurance sector they are relatively unheard of.

Axa is one insurer looking to change this, as its finance director Jean Drouffe, told Post in February: "We aim to offer no claims bonuses to [household] customers in 2011 — we do it in motor so why not household?"

The revelation that Axa is working to offer NCDs to its household customers followed a range of recent musings by those in the general insurance market as to how to counteract the growth in household claims stemming from events linked to bad weather.

Craig Staniland, managing director of products at Axa, reaffirms the insurer's intent but recognises there could be problems with launching NCD in household. "For example, if you have a building and contents policy with one insurer and you make a building claim, would it affect both elements?" he says. "These are issues that we are looking at and clearly we have to talk to our partners as well."

Questions over practicality
Despite the question marks that may hang over the practicalities of how such a concept would work, it is undeniable — following the flooding events of recent years and the 'big freeze' of 2010, which precipitated problems with escape of water claims — that finding a way to boost householder risk management is taxing the minds of insurers.

Mr Staniland continues: "We've had a big freeze event and escape of water claims have increased; the question is how we manage these claims costs going forward and appropriately charge people the right prices. We know that there could be some definite advantages to offering an NCD. We need to dot the i's and cross the t's, but we are hoping to start offering it this year."

Sceptical as to the advantages an NCD on household insurance could provide, Steve Gilbert, technical underwriting manager for UK personal lines at Zurich, suggests that home premiums tend to be lower than motor, making the margin to offer significant discounts narrow. In addition, the knock-on effect of losing only a small discount when making a claim may not be enough of an incentive to dissuade customers from claiming.

Highlighting deficiencies
In fact, Hiscox's head art & private client business, Austyn Tusler, says the weather events from last year have merely highlighted the pricing deficiencies of many insurers, who are now looking to re-balance their books.

"We take a different view, which is to try and attract clients at the right price first time and price them on a long-term consistent basis, for the very reason that consumers don't like change," he says. "I don't see NCDs as a solution, as our starting point is that we are not trying to recoup money. What insurers are trying to do is balance their books retrospectively rather than getting the pricing right first time. If they quoted adequately initially then a lot of insurers in the market would not have to be changing their pricing."

And a spokeswoman for LV adds that it currently has no plans to introduce a formal NCD on its home insurance product: "With us, customers who haven't made a claim get a cheaper policy than those who have, so they are effectively rewarded already. It could be argued introducing an NCD would be more of a marketing message than a change in pricing strategy. Furthermore, home insurance claims are not as easy to categorise as motor claims, so it is possible that it will lead to confusion among consumers as to when it is applicable and when not."

Matt Pernet, head of home product for More Than, adds: "We encourage our home customers to remain claim-free through both proactive advice and incentives. For instance, during the snow and bad weather we issued advice and tips on precautions to take to mitigate risks such as frozen pipes. We also currently offer free contents cover that customers retain for as long as they remain claim free."

But not all insurers have ruled out NCD as an idea and Jenny Trueman, product manager for Direct Line home insurance, admits that introducing this on household is certainly something it is considering, although she admits it is all about "how you make it work".

Ms Trueman says: "One of things we recognise is that you need to find a way to reward customers that don't claim and to price people that have made claims appropriately; we are looking at ways in which we can build that into our systems and processes. Home isn't as clear cut as motor and we recognise that, so what we don't want to do is penalise customers who have unavoidable claims."

And some insurers are already effectively offering such discounts. Gareth McChesney, head of motor and home portfolio management for Allianz Retail, argues NCD on household is not a new idea and, similar to LV, is something the insurer has been offering on its Cornhill Direct policies for a number of years.

"We don't publicise it as NCD, but we do take into account the number of years an individual has been claims free when calculating premiums," he says. "What Axa is saying is that it is going to go down the route of having an explicit NCD that the customer fully understands as part of the policy."

Rating structure
As part of its NCD strategy, Mr Staniland explains that Axa will be looking to utilise the Claims & Underwriting Exchange — a central database of motor, home and personal injury and industrial illness incidents reported to insurance companies — at the quote stage. Cue data is "straightforward" and is already yielding great results on its motor book, according to Mr Staniland. However, Mr McChesney believes all Cue does is check against a disclosure that the policyholder has given at inception date.

"What we use is the number of claims-free years and take that into account within our rating structure," he says. "We will ask the question, 'have you had any claims in the last five to 10 years?' and if somebody says they haven't, then obviously we will reflect that in our pricing. Cue always sits in the background as a tool for people to be able to check that somebody has basically told the truth."

NCD might not be the only option available to insurers to counteract the rising claims from weather-related losses. According to Groupama Insurances personal lines director Kevin Kiernan, writing in Post the same week as Axa's announcement, policy wordings have already become tougher in an attempt to make consumers assume some responsibility.

One alternative is to increase policy excesses but Mr Staniland considers that large excesses could become an issue in this area: "Having excesses is a tool, but my concern is that as they get too big you can end up not fixing a problem. On a car it is slightly different, because either it is roadworthy or not; it is quite straightforward as to whether you are going to pass the MOT or not.

"There is a concern that if excesses get too substantial with a house, if customers can't afford to pay [for repairs that fall beneath that level] you could end up in the position where they are living in a property that is unsafe and unsound. We have got to consider that in terms of building in very large excesses."

Policies precluding payment for damage caused if taps are left running are another current consideration and, in his article, Mr Kiernan proposed there might be a requirement to leave heating on for shorter absences from a property than has been the case in the past. However, he rightfully added that in an era of treating customers fairly and ready recourse to the Financial Ombudsman Service, there is a limit to how much onus can suddenly be shifted from insurer to customer.

Indeed, one of Mr Staniland's arguments for the advantage of NCD on household cover is that if insurers just put their prices up, then there is bound to be some sort of backlash. Voicing his opinions further in relation to policy wordings becoming tighter, he adds that this is beginning to happen, but that there is "only so far an insurer can go".

"There comes a point when you have to realise it is not reasonable to fall within the customer's responsibility," he says. "Could we reasonably expect that a customer who is going away over a Christmas period would not only keep the heating on, but also open the loft hatch to let the hot air circulate up there? I suspect not. We have got to consider what is reasonable for the customer to do — and expecting customers who are going away in the winter to open loft hatches is not reasonable."

Communicating clearly
Mr Gilbert agrees that insurers are reacting to the overall increase in escape of water claims by amending the terms and conditions in their contracts, a feature that he considers will become more prevalent: "Naturally though, until they become the market norm, such significant and unusual terms or exclusions will need to be communicated clearly to customers during the selling process, with the successful application of these initiatives remaining to be seen."

There is always an argument in the industry for better education passed on from the insurer to policyholders to help mitigate losses. However, as Mr Kiernan highlights, the insurer has to be careful regarding the weight of responsibility it transfers to the customer.

"An increase in severe winter weather events should certainly provoke more proactive communications by insurers with their customers," adds Mr Gilbert. "But the challenge has always been to target advice at the time it is likely to be acted upon effectively. There is little point texting a customer the night before temperatures of -15∞C are forecast telling them to lag their pipes, and it is equally difficult to secure effective action if the same message is delivered in the middle of summer."

He adds, however, that tailored advice, such as leaving the loft hatch open in anticipation of severely cold conditions, is "more practical".

Direct Line tries to maintain a consistent level of communication on how its customers can protect themselves, according to Ms Trueman. She says: "We will speak to our customers when we are aware there is going to be some very cold weather coming, to give them advice as to how they can protect themselves, and we have a lot of advice on our website to try and educate customers. From our point of view, we will try and have that advice ready and available consistently throughout the year and, if we know something is coming up, we will enhance the level of information we are giving out."

Unforeseen consequences
Mr Staniland may be confident that NCDs offer a solution to the problem, but are there concerns that they could actually cause insurers' bottom line more harm in the long run? Homeowners keen not to impact their no claims household bonus could decide to ignore repairs that need to be done, fix them themselves, or use non-insurer-approved builders of dubious ability.

After all, motorists will often get bumps and scratches fixed to protect their NCD, so why wouldn't homeowners? However, the consequences could be more disastrous for insurers when the weather turns, and the shoddy workmanship and neglect is shown up for what it is.

But, according to Mr Gilbert, there is no evidence customers are failing more than usual to carry out necessary maintenance to their properties. He adds: "We continue to scrutinise claims to ensure that wear and tear elements are identified. We would have no hesitation in continuing to handle claims fairly, ensuring that loss or damage incurred is covered under the policy and settling valid claims as quickly as possible — we owe it to non-claiming customers to ensure that an equitable claims settlement process is maintained since, ultimately, it's their premiums that are funding the losses of the claimants."

Mr McChesney adds that the industry has to recognise that "an insurance policy is not a maintenance contract for the house".

He says: "We are assuming — and there is a contractual obligation — that the house is going to be maintained to a good standard. I don't necessarily think this is going to encourage people to not maintain their property to a good standard, because this is an insurance policy to put someone back into the position they were before the property was damaged, it is not a maintenance contract for keeping the property in a good condition."

The jury is still out on the benefits of NCD for household, but one thing is sure — insurers will be doing all they can to ensure that the escape of water events of 2010 are not repeated in the future.

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