Getting Real on the pricing front
03/08/2010
The head of Real Insurance, Roger Grobler, is the first to admit that his battle against Suncorp and Insurance Australia Group for a share of the $20 billion home and car insurance market is slow going.
The big guys are right. It will take a long time for challengers to take market share away,” Mr Grobler said.
“We’re doubling in size every year and it will take years before we take size away from them.”
But he has other ideas about how to make life difficult for the incumbents.
“It’s the way we’re changing pricing and transparency that is the major thread,” Mr Grobler said.
Real Insurance, which is backed by international firm Hollard Group and set up in Australia in 2005, is one of a handful of overseas companies including Youi and Progressive that have been lured to the local market by high returns and falling barriers to entry.
These companies are counting on cheaper policies and innovative products from their home markets to break Suncorp and IAG’s hold on 75% of the market.
The centrepiece of Real Insurance’s push into the retail market is ‘pay as you drive’ comprehensive car insurance, where drivers pay for the kilometres they drive instead of being charged a flat fee.
Motor accounts for more than one quarter of IAG and Suncorp’s insurance profits, and earns margins of more than 10 per cent.
Mr Grobler said Real’s pricing model, which was on average 30 per cent cheaper than most comprehensive insurance policies, would cut retention rates among incumbents.
“If people actually realise they’re paying more and more with the big guys that they’ve been loyal to for years, then they’ll start churning away from them,” he said.
Mr Grobler believes that a move to pay as you drive will upset the pricing structure of large insurers, which rely on low-risk drivers, and force incumbents to charge more across the board.
“That’s going to make a big difference to the profit dynamics of the big insurers,” he said.
One of the hurdles the company faces is the need for well-established brands to legitimise the pricing structure by adopting it themselves.
“The best thing that can happen to us is that AAMI brings out a pay as you drive policy, because it will accelerate the (move away from flat-fee car insurance),” he said. AAMI is owned by Suncorp.
Both Suncorp and IAG have introduced internet-only brands, The Buzz and Bingle, but analysts say the launches have been soft, given the risk of cannibalisation of existing businesses.
“It’s like the prisoner’s dilemma. As long as nobody does it, everyone is better off,” Mr Grobler said.
This impediment was waning though, he said, as Coles expanded into car insurance and Myer and Woolworths canvassed partnerships with insurance providers.
“All of these things are good for challenger players because the more choice out there, the higher the churn rates and the more business we write,” Mr Grobler said.
Analysts estimate that challenger brands market share could reach 20 per cent in the next five years, up from 6 per cent at the end of last year.
Even if the market share projections aren’t met, the increasing presence of foreign insurers is expected to increase customer churn, while the targeting of more profitable segments could increase loss ratios among incumbents.
Mr Grobler said while his firm’s market share was around 1 per cent, damage was being done elsewhere.
“It doesn’t sound like a lot if you’re IAG or Suncorp, but it’s not only market share that is the threat,” he said.
“It’s the dynamics of the profitability on the existing book that is the thread, especially on the retention side.”
One of the claims made against overseas insurers operating in the local market is that discounted pricing is unsustainable and even loss making.
“All the challenger brands that have started up here have decades of experience and are very profitable in other jurisdictions,” he said.
“They’re not going to price to blow up.”
One development linked to inaccurate pricing is the use of aggregators, which have reshaped the insurance industry in the United Kingdom by allowing people to more easily compare prices, thereby pushing down premiums.
Mr Grobler said while it was unclear how Australian aggregators, which have struggled to replicate UK success due to local market concentration, would develop, they would not be as destructive in the UK.
“The challenger brands underwrite more, not less, than the big guys,” he said.
“We all ask more questions, we’ve got longer quotation procedures, select risk better and that’s why we can lower prices.”
Author: Katja Buhrer
Australian Financial Review