Car manufacturers offering insurance to their customers has a number of advantages, not least to customers who see it as a convenient way to obtain a policy specific to their purchase, as Sam Barrett discovers
News that Ford is ending its affinity partnership with Norwich Union has kept the rumour mill busy over the last few weeks in the motor insurance market. The partnership, which has been running for 10 years, is set to end this September.
It is not yet known which insurer will take over from Norwich Union as Christopher Makin, director of communications for Ford Financial Europe, explains: "We have given NU notice and we're in the process of appointing a new supplier. It's likely that details of this will be available closer to September."
But while the identity of the new partner is still unknown, industry experts are not surprised that Ford is looking to continue offering insurance to its customers. "Motor manufacturers want these types of arrangements. All the mainstream manufacturers have arrangements in place and many of the smaller players will also provide their own brand insurance. If you can create the right scheme it's good for the manufacturer, the insurer and the customer," explains Ian Wardle, partnerships director at Fortis.
The benefits for the motor manufacturer have evolved considerably since these arrangements first appeared in the late 1980s. Originally dreamt up to help get boy racers into prohibitively high insurance rated models, affinity schemes have become a valuable customer retention tool.
Because vehicles are much more reliable now, customers need to return to the dealer much less frequently. "On average a dealer has contact with a customer 0.6 times a year. If they sell them insurance this increases to 1.6 times," explains Mr Wardle.
As well as helping to build customer loyalty, insurance deals also help to generate revenue for the manufacturers. This is important given that factors such as over-supply and pricing competition mean that the market's profits are seriously under pressure.
"Very few manufacturers make money from selling cars," says Shaqueel Hussain, portfolio manager for product protection at QBE. "A partnership with an insurer can be a valuable source of revenue."
The commission these deals generate only accounts for a small percentage of this revenue. More important are the conditions that manufacturers will usually demand. These see manufacturers insisting on own- brand courtesy cars and redirection of repair, so any claims are directed to dealer approved bodyshops and vehicles are repaired with the manufacturer's parts.
Mr Wardle, who worked for a motor manufacturer before joining Fortis, estimates that this is worth hundreds of millions of pounds to the manufacturers.
Customers also appreciate these arrangements. It is convenient to arrange cover alongside the finance and having the manufacturer's own policy is also seen as a means of ensuring the integrity of the vehicle if a claim is made.
"Customers will often believe they have additional leverage if something does go wrong. As well as dealing with the insurer, they can also go into the dealers if there are any problems with their cover," explains Mr Wardle.
Given the stream of potential business these arrangements offer, it is hardly surprisingly that insurers are also keen to have these relationships with the manufacturers. Charles Crawford is managing director of partnerships and international at Royal Bank of Scotland Insurance, which provides deals for several manufacturers including Vauxhall and BMW through its UK insurance brand.
He says: "It is a highly competitive market but we have maintained our partnerships by providing packages that add value to manufacturers' promotions and brand propositions."
And other insurers are eyeing the market too. Neil Walker, motor manager at Allianz Insurance, says that although the firm is active in this area in other countries, for instance Poland and Australia, it is keen to do more in the UK.
"It's a business opportunity," he explains. "If customers want to buy through this route, then why not? We're currently researching the market with a view to becoming more involved."
However, there are potential hitches. The UK motor insurance model does not lend itself to this practice as well as that of other countries. "In other countries the insurance policy is attached to the vehicle so when you buy a new car you need a new policy. This isn't the case in the UK," explains Mr Walker.
Manufacturers can sometimes break the incumbent insurer's stranglehold with offers such as a year's free insurance but, where this is not the case, it is not always an easy sale. More significantly, margin is tight on motor insurance and this is no different when it is being knocked out through the manufacturers. "The manufacturers squeeze all their suppliers and this includes the insurers," says Mr Hussain.
A costly business
Set up costs can also be high, especially as manufacturers often require insurers to build quote engines for their websites or to be used through the dealerships. Because of these costs, contracts tend to be for a reasonable length of time, with most running for five- year periods and three years being an absolute minimum.
"It's important to have continuity as this works better for everyone involved," says Brian Thomas, general manager of Volkswagen Insurance Services. "This means we're careful to make sure the product offering and pricing - especially for our target audience - and service capability, are right before we appoint an insurer."
This does not mean that insurers which haven't already secured deals have to hang around until a contract comes up for renewal. Manufacturers will sometimes use other insurers to offer short-term deals. This could be the case if they wanted to run a promotion on a particular model or wanted to target a specific audience.
Further developments are also likely in this market. For example, Mr Wardle believes that it provides a potential testing ground for initiatives such as telematics. "Margins are very slim but it could benefit both the insurer and the manufacturer to include this type of technology in future models," he explains.
But, however the market develops, while there are benefits for both the manufacturer and the insurer, one thing is sure, affinity partnerships are here to stay.
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