Building on my 2021 Actuaries Summit presentation and Paper, Deep Fried Bananas, Wholesome Banana Bread examines:
- The impact of legislative and regulatory changes on the automotive add-on insurance market, most notably the implementation of the Deferred Sales Model (DSM), and the consequences for consumers as well as add-on insurers.
- Whether there is an alternative product construction and market for essentially the same underlying products, which would not be subject to the DSM, yet provide good value for money to consumers and be an attractive proposition for.
For those that don’t know, “Deep Fried Bananas” is a metaphor for what I saw as the problem with automotive add-on insurances.
you start with something fundamentally “good” (an organic banana) but, after coating it in batter, deep frying it, and rolling it out onto a bed of castor sugar (i.e., adding incentive loadings), you have completely destroyed any goodness and are now selling an unhealthy product, typically at an excessive price.
At the time of writing Deep Fried Bananas in early 2021, the full implementation of the DSM was still more than six months in the future (October 2021) and its expected effect on the market was, at that point, not entirely clear.
However, over the past two years, the industry has seen the near-complete demise of automotive add-on insurance, resulting in consumers now having:
- a much-reduced choice of automotive protection products than they did previously;
- products that provide even less value than the insurance products that became notorious during the public airing of “dirty laundry” that was the Hayne Royal Commission of Inquiry; and
- little to no ability to buy insurance products for automotive protection but rather an array of far lower-quality “quasi-financial” products, often with hardly any security for the “promised” benefits.
This situation leaves a significant void in the market for reasonably priced, high-quality products available to protect consumers from the financial risks associated with motor vehicle ownership.
By all accounts, nature abhors a vacuum
In this Paper, I describe, in reasonable detail, the complete transformation of a former add-on insurance product that addresses the apparent plenism and creates a compelling and sizeable new sub-market for insurers.
Furthermore, building expertise in this transformed product could also give rise to other significant opportunities for insurers.
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