In late 2015, the UK government passed a law that would require large retailers to charge customers a 5p fees for plastic bags. Retailers like Tesco, Sainsbury’s and Asda followed suit. 4 years later, the results are in: a whopping 90% reduction in plastic bag usage! While the scale of reduction is fascinating, it is hardly surprising. It is what standard economic theory predicts.
Economics 101 = incentives work. Which is why I found the recent announcement by UK-based insurance aggregator, GoCompare (GC), that it would waive off the £250 excess for buyers of car insurance from its website quite surprising. That is quite a bold move given that GC typically only makes £50 revenue for brokering each policy. The fundamental bet thus is simple - for every customers that claims, can we get more than 5 extra customers in the door. Actually, revenue is likely not very accurate as GoCompare pays a significant portion of revenue to Google and TV advertisers for all the ads it does.
A better metric might be marketing margin - GoCompare operated with a 46.7% marketing margin last year. That means that for each customer GoCo made £23.37 after paying for marketing. Then the above equation becomes the following.
For each £250 excess that it pays, can GC get an extra 250/23.37 = 11 customers in through the door. Now, let’s look at some numbers. Here’s (slightly dated) switching data for the UK:
Anecdotally, GC has between 18-20% market share. Let’s use 18% to be conservative. 18% * 8m = 1.44M car insurance customers. Let’s assume that 90% of these bought a comprehensive policy (the type that is eligible for GC’s offer). So, 90% * 1.44 = 1.3M customers.
Now, let’s say about 13% of insurance customers claim in a typical year (likely slightly higher for new business customers but let’s stick with 13%).
That means 13% * 1.3million = 163,000 customers.
Furthermore, something like 45% of these customers will have claims which don’t involve windscreen or small damage and will qualify for the offer.
163,000 * 45% = 73,350 customers.
Let’s assume, another 50% among these are at-fault customers and thus directly eligible for the benefit.
73,350 * 50% = 36,675 customers.
So 36,675*250 = 9,168,750M = £9.2M
£9.2M = About 6% of GC’s revenue. Not super material but not chump change either.
The offer has also lead to some good press for GC as insurance excess is genuinely something a lot of customers get annoyed about. However, the big bet on GC’s part is not around garnering good media. The bold bet is that the offer will lead to a significant influx of new customers. A few of these customers use GC not just for Car insurance but also potentially home and energy switches that the £9M spent will seem like a great investment.
While these numbers could obviously shift higher, there is a larger liability not captured by this analysis. This liability could come in the shape of changing claims behavior and worsening loss ratios.
If GC’s offer causes:
a) people to start claiming more often
b) people who have a higher propensity to claim to start using GC (instead of another aggregator)
the ‘quality’ of GC’s customers will decrease. Twelve months down the line GC could be talking to a lot of unhappy insurers who are seeing high loss ratios for the GC account. This could then cause these insurers to charge higher prices to GC. As a result, GC would then lose customers and any gains from the £250 excess waiver offer might be erased completely.
Incentives work, after all.