Navigating the UK household insurance market

SINA THIEME: Hello and welcome to Rethinking Insurance. I'm your host Sina Thieme. And today I'm delighted to be joined by my guest Stephen Cox. He's a Director in WTW's insurance consulting and technology business. Stephen, you're the head of innovation for our UKI product pricing claims and underwriting consulting team. And you've got 20 plus years of experience in general insurance, including 14 years of leading the analytics and pricing functions at legal and general insurance and at Swinton Group. Thank you so much for joining me.

STEPHEN COX: Hello, yeah, it's a pleasure.

SINA THIEME: So I think today's discussion is going to be on UK household insurance trends. If you're also interested in trends in the US, then there's a podcast that we did on navigating the Florida homeowners' insurance market with Klayton Southwood and Trevar Withers. And also a bit related is another podcast with my colleague David Singh about how climate conditions impact both insurance present day and future risk. Both of these are in season three so check them out if you're interested.

Before we get into UK household insurance trends, let's first find out a little bit more about our guests. Steve, there's so many Stephen Cox's around. One of them is an established contemporary artist who carves marble in Alabaster.

Another one is a founder of the World Education Summit and he creates an online system for teacher and learning development. Another one is a research fellow at the University of Cambridge, investigating the behavior of liquids. So, I mean, are these the sorts of results you wish one would find when googling your name?

STEPHEN COX: Well, I did have my own kind of research career many years ago, but that was being very nasty to caterpillars, et cetera. So, yeah, maybe it's best if that's lost in the mists of Google, et cetera.

SINA THIEME: So your new hobby, not so new anymore, UK household insurance market, you've looked at that for many years. What do you think are the biggest challenges right now for that market?

STEPHEN COX: Yeah. Well, I think, obviously, a lot of the challenges are the same as they are for other products such as motor, et cetera. Being able to manage all the changes in costs and the volatility and those we've seen recently.

Being able to take and maintain a kind of more elegant and agile approach to portfolio management, and, of course, to make effective use of those newer modeling and analysis techniques. But there are also a number of challenges which I think impact home more than other classes. There's weather and climate, of course, escape of water, and customer outcomes and other aspects of product design.

SINA THIEME: So I think it would be helpful if we looked at each of these in a bit more detail, actually. So you mentioned weather and climate, so what are you seeing with respect to those?

STEPHEN COX: Well, yeah, that's probably the most talked about topic. Probably no surprise there. And in the UK we saw quite a flurry of activity following all those different events with different perils that were in 2022. And, of course, that kind of interest and worry has been continuing.

I see quite a few firms having a disagreement between almost what they thought they were exposed to, what they thought they controlled through their investments in pricing and underwriting, and the actual experience which they've been experiencing that has happened over '22 '23 in particular.

And that's often not helped by them having quite an unclear view of what their own risk appetite is and probably not also much of an awareness of what their exposures are to these different risks. And definitely one of the most valuable things I've found, and actually quite enjoyable talking through with firms, is to chat through with their boards, their execs, et cetera, sort of examples of what their appetite is around things so that their sort of true underlying risk appetite can emerge.

SINA THIEME: So what are some of those examples then that you find useful chatting through?

STEPHEN COX: Yeah, yeah, I think, obviously, examples rather than theory works really well. And those examples might be things like possible events like a large storm, maybe a Severn Estuary surge, or a freeze during the Christmas holidays with an occupancy, et cetera. Or it could be outcomes like performing worse than maybe some of their key peers within the market.

So for some firms there can be this strong desire to avoid too much volatility of their own results to find in some way. And it's important to work out what that is. But with other firms their main fear might be around that underperformance versus peers. Yeah, they're in insurance, they don't mind a bit of volatility that's where they get their return, but they definitely don't want to be bottom of the pile.

And one thing we always talk through with people is have a good affirms underwriting. If it's materially over indexed with a higher market share in maybe a broad area like Yorkshire land, for example. And if that happens to get hit by an event, then that firm might look worse than the market even if their underwriting is very good. And that's essentially bad luck. So it's important just to try to build an awareness of that and think through, do they want to manage that risk or is that something that they're willing to accept? Et cetera.

SINA THIEME: Yeah, right. An exposure monitoring and exposure management, obviously, plays an important part here as well, like what are you seeing in the market on this.

STEPHEN COX: Well, yeah, because once that risk appetite is defined, there's, obviously, the need to monitor the exposure and make sure that that appetite is aligned with what's actually on the books. And to be frank, I think that has been another area of weakness. I think even where firms have that monitoring in place, it can often miss event level views.

And then we can see things being missed such as, yes, they've drawn a kind of red line of what they're willing to accept somewhere, but then they've got a real pile up and a concentration of risks just below that line which they're not really aware of, et cetera.

And there might be other things like exposure to Flood defense failure or maybe reservoir failure, et cetera. So when we look at their exposures, there are often a few talking points that come out there that [INAUDIBLE] hasn't been able to pick up.

Some firms then focus only on de-risking. And that's often ineffective anyway. But what we tend to advocate and see is being more successful is a balanced matching of exposure to appetite. So always be looking at where can we be expanding our exposure within that appetite, but then able to balance that by taking out the bits which don't fit within it which are an undue risk, et cetera. And that keeps a nice balance to the portfolio rather than sort of knee jerk reaction or over de-risking, et cetera.

And then once the firm's got that awareness of what exposure is, obviously it needs controls in place to maintain the exposure in line with that. So for pricing and underwriting, obviously quite a key control, there's been a lot of investment in additional external models and data.

But then that's presented increasing challenges for how do you combine multiple models, and how do you combine them with your own experience as a firm? And how do you allow for the different credibility for different types of events between those different sources? Et cetera. And that sometimes takes a bit of a mind shift and sort of really embracing the inherent uncertainty of the events and of the models.

And, actually, I think that can be useful beyond even sort of weather and climate, et cetera. And that can be taken to how people think about more traditional perils and other models as well with benefit there. Then in terms of driving that forward again, there's interest in increased use of data from imaging solutions, et cetera, satellite imagery, but that's within the UK personal line. That's still pretty early days, but definitely interest there.

Overall one thing that I think really comes out of getting this right, though, is creating that strong narrative of how underwriting pricing and exposure management come together. And we see that as really helping get better reinsurance rates, which has been quite a concern recently with reinsurance rates rising, shifting the book to a more capital efficient mix, and really supporting the senior leadership in understanding how the portfolio works and what the sort of resulting opportunities and risks are, et cetera.

And I think I really should mention Flood Re as well. It's certainly a big one in the UK. Everybody's worried about what their Flood Re strategy is. They say that they're spending lots of money in terms of the levy. And they're like, yeah, but how do we do the best in terms of our RM business with writing sort of Flood business, et cetera?

But Flood Re does worry me because I feel that some of the unrealistic messaging that's come out of Flood Re about making risk reflective pricing potentially affordable at the end of 25 years does risk undermining the original purpose we set Flood Re up for of giving people a kind of a generation to adapt to the cost of Flood insurance for these properties, et cetera.

And I think more widely I'm very interested to see the renewed debate about some of the interaction of how insurance, social purpose, and government responsibility comes together, which is arisen with challenges such as that around correlation of pricing with ethnicity, for example, in the UK. And in Australia it's been felt very strongly in terms of the impact of weather risks and the associated costs of insurance, which do fall most heavily on the vulnerable there and it's really leading to some interesting debate.

SINA THIEME: Yeah, that's interesting. And maybe we pick up a Flood Re in a separate podcast, probably worth it. The other issue that you mentioned in the beginning was escape of water. So I don't know if you could elaborate a bit and explain what the issues are that you're seeing and how some of the firms are tackling those.

STEPHEN COX: Yeah. And to me this is a real perennial one. So I think it's basically the last 25 years most of the time there has been concern about escape of water inflation. And whilst I say escape of water, in a sense it really is all the sort of so-called wet perils. And I think there's no one silver bullet here. People have been looking for that for, like I say, over 20 years. But I think there are definitely a number of valuable activities that we could look at doing more of across that range.

And I think it's also important to think how to sustain the benefits because a lot of insurers have suffered a kind of, oh, let's give it some focus, let's take some action, there's an improvement. And then it drifts back again, and they get that kind of saw tooth of experience which is never the most efficient way of doing things.

So I think some of the examples of the things there that we do see providing success, well, claims control, obviously, that's where the money goes out the door and grabbing hold of those claims early, drying the properties out effectively, having strong customer communication and stopping some of that to and fro or argument that can slow things down can make quite a big difference to those mid to larger size wet peril claims.

Of course, better pricing MI, et cetera, but really building that on top of underwriting now. So thinking about meaningful segments, doing the right kind of data engineering to really capture the risks and the nature of the underlying property and some of the behavioral aspects. Rather than simply relying on machine learning or in other cases, basic GLMs, et cetera.

And then, of course, there's a lot of opportunities for combining those two together. So how do you get insight out of that claims data and other elements of analysis that can be done to really strengthen that and give it real bite to the things which are what cost you the money and where money goes out the door. And what can be learned from those claims in terms of better understanding the underlying risk that doesn't quite come through on a few questions and a bit of external data enrichment.

SINA THIEME: You mentioned strong customer communication there. A bit more broadly, what are the challenges around customer outcomes generally and around product design?

STEPHEN COX: Yeah, I think home insurance has been a bit more sensitive to product design, the number of other classes, because customers are more concerned about their homes and some of their possessions than their car say. Sometimes cars they're a lump of metal, let's get the cheapest possible policy. But your home is your castle, it's your family, et cetera, so there is more of that emotional connection there.

So we do see this being more important within households insurance, and there tends to be a bit more variability in product design than it does in some other classes. So within the UK the current challenge is, of course, the consumer duty which builds on things in PROD 4, in IDD, in TCF, et cetera.

And whilst in Europe there's been a lot less attention, I think, paid to POG and IDD in many cases but now even there we're seeing that with things such as EIOPA's take on differential pricing, et cetera, there's a lot more interest in kind of responsibility around customer outcomes and fairness, et cetera. So things are changing rapidly across Europe.

I think in the UK have been quite heartened by some of the progress, considering potentially vulnerable customers. Not just things like let's look at some older customers but a more nuanced view. And not just saying these people are vulnerable but that potential vulnerability which I think FCA found applies to maybe some 47% of customers, et cetera, does feel a much more mature approach.

And there's definitely a lot of consideration about the fair value of covers, et cetera. But I think too often we see that fair value assessment just being insufficiently granular. It's done across broad swathes of the portfolio, and that does mean there can be smaller segments that are receiving value that the firm might not consider reasonable if looked at in isolation that gets hidden by that broad view.

And I think FCA have certainly been, every time they speak about this, gradually being a lot firmer on the granularity required here and making sure that there is fair and good value for every customer within the target market, et cetera. And I think that just thinking about this can also lead to an identification of some of those more vulnerable segments where more proactive action is required because those customers aren't going to make a song and dance about it themselves, et cetera.

I think I'm also worried about some of the product design things that have happened recently. I mean, if we look at the GI pricing practices, some of what that's led to is an increasing desire to get increased sales to balance out, trying to protect the value of the back book. And so there's been some tendency to remove cover that may not be understood or valued by customers.

And yet arguably you might be required to meet their sort of basic and genuine needs for the insurance. I think looking at household, I'm particularly worried about some of the products that have maybe removed tracing access or have put in a higher compulsory excesses for certain perils.

I can trust that with over my working career we spent a long time adding tracing access in because we felt it was-- even though it wasn't understood by customers, it was a basic need that almost assume or expect was there, et cetera.

And I think that got to the point where that was almost universal, but now the fact that it's starting to go backwards because of some commercial needs, et cetera, but also arguably cost of living pressures, et cetera, to me is a little bit of a concern.

And that's not to say that it's necessarily the wrong thing to remove the cover because many would argue that cheaper policies meet a customer need. But if I look at what I see in terms of evidence and consideration at firms, sometimes they've thought it through, sometimes they haven't, but many times it just isn't documented even if they have thought it through, et cetera.

And I think being able to have that clearly written down to evidence to the regulator, to be able to challenge oneself about why it's been done or maybe to change it as time moves on, et cetera, is definitely something that firms need to just invest a bit more effort in, in my opinion.

SINA THIEME: Thanks. That was a lot. And I guess some of these require some longer term strategic thinking as well. What do you think insurance professionals should be focusing on today or tomorrow? Let's say.

STEPHEN COX: Well, yeah, I think making sure there's that shared and clearly defined risk appetite is pretty fundamental to the business we're in, and really helps join together some of the different functions. And, of course, being able to check the exposure against the appetite. These are really just hygiene factors, as I see it.

And then, yeah, being able to use the leading external models and own experience, weighted together based on the relative credibility-- which is, of course, never 100%-- is important. And then using the right analytical tool for the right job rather than just a one size fits all.

And that might be machine learning, it might be classification, it might be GLMs, but really thinking about the question being posed. And, of course, we're normally thinking about capturing future events rather than fitting to the past. And, of course, there are also benefits from having greater stability over time rather than some sort of fluctuating pursuit of best fit, et cetera.

For those looking to go further, I think it is worth exploring the use of some of the imaging solutions, such as satellite imagery, et cetera. But at the end of the day, I think there's, of course, great benefit in getting that better, more granular and segmental understanding of the manufacturing cost. And that really does require more effort, I think, for us as an industry, linking together some of the underwriting and claims with what analytics and data science can tell us.

And then just maybe, coming back to that last point around some of the governance, et cetera, I think when conducting and documenting meetings and thinking through product design, I like to imagine I've kind of got the FCA sat on one shoulder and maybe a potentially vulnerable relative on the other shoulder.

And they're looking at everything that we're saying and we're doing, just making sure that the words capture that and are written with just the right consideration of the impacts, et cetera, rather than us just getting caught up in our insurance jargony kind of world, et cetera. And then to me that's what's always given me the confidence to pursue the exciting or fun or value adding ambitions that we've got as firms.

SINA THIEME: Steve, thank you so much for your time and your thoughts. That was really great.

STEPHEN COX: My pleasure.

SINA THIEME: Thank you to our listeners as well for joining this episode. And if you found this interesting, then please join us on other episodes of Rethinking Insurance.

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