Free cash, but not for all

How important is money? Replies to this question often reflect a level of importance inversely related to the respondent’s wealth. People with plenty see it as less important than people that never have enough. Perhaps it’s the wrong question. Responses might change if it were rephrased to: would having no money affect your life?

Maybe failure to recognise money’s importance is due to its abstract nature these days. If you’ve ever waited behind someone at the ‘six items’ checkout in Waitrose as they pay for a £2.40 tub of butter with their debit card, you’ll know it’s not just the Queen (oh, and a former PM) who doesn’t carry cash.

In this near-cashless society, you can pay in many ways that don’t involve parting with notes and coins. The only impact is a minor adjustment to a transient number stored in a computer system and only occasionally viewed. That number fluctuates but, provided it’s not red, it matters little.

A few decades ago (and even today for many), receiving and spending money was a more visible and tangible experience because most transactions involved handing over cash or writing the amount spent – twice – on a cheque. Technology that enables all the alternative payment methods is great but does have vulnerabilities, as does cash itself.

Last week, a consumer TV programme highlighted complaints from deprived areas, where fewer people have alternative payment options, about the lack of cash machines that don’t charge for withdrawals. Users who could least afford it were paying about £1.75 ‘to access their own money’. It’s easy to sympathise, but there is a cost to installing cash machines, security and topping-up the readies.

Many people trek miles across towns and cities to find a fee-free ATM and save £1.75, which shows how important small amounts of cash can be to some people’s day-to-day lives. Banks can’t afford any more bad PR, so a spokesman for LINK was there to promise the TV presenters a review of free-to-use ATM availability in some places.

There are complex cross-charging and cross-subsidy issues to all this. ATM access has become an expected banking service and co-operation between competitors makes most ATMs available to all customers. But some customers are bound to be geographically challenged by the location of free machines; ATM operators that serve them for a fee don’t have the bunce from customers’ deposits to cover the costs.

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Investment marketing has more KIIDs

From Monday, 20 February, investment managers including Invesco Perpetual and Barclays Wealth are introducing new procedures that will make the process of selling collective investments rather more cumbersome. This is because, thanks to European Directive UCITS IV, the FSA has brought in new rules about the literature provided to investors who want to buy units in a collective investment scheme.

What has been known as the Simplified Prospectus is being replaced by the Key Investor Information Document. This will provide, in comprehensible form, essential information specific to the fund involved, such as investment policy, risk and reward, charges and past performance. Past performance? In August 2000, an FSA report said: “investors would not find it useful to examine funds’ past performance in making investment decisions,” but never mind.

Anyway, all good news for copywriters, designers and other marketing folk, because someone has to write and produce all these new documents. And it’s given sub-editors the chance to think up silly headlines incorporating the acronym, such as ‘New KIIDs on the block’ – unfortunately, as that’s what we were going to call this blog post! No plagiarism allowed.

As to when a KIID has to be provided, the short answer is “before an investment is made”, which applies to additional lump sum investments (or changes to monthly payments) into a fund already held as well as to investments in a fund the investor does not already hold. Managers seem able to accept phoned investment instructions, with confirmation that the latest KIID has been received, for additional investments but not new ones.

The 20 February and other early start dates reflect that some fund managers have already acted on, as one leading legal firm put it, ‘adopting the KIID’ before the mandatory deadline of 1 July 2012. So, investors with some fund managers have already received letters explaining the changes, whilst other managers have yet to make contact. The whole exercise is bound to increase all managers’ admin costs.

Whether the cost to managers (and ultimately to investors) is justified must be questionable. Financial advisers are affected, too. They have a duty to ensure that an investor has received the relevant KIID before arranging their investment – admittedly, a small extension to the issues an adviser already has to deal with. Indeed, it’s probably investors without an adviser to guide them that most need the information a KIID gives.

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Free lunch marketing

Any business can suffer fluctuations in demand. Financial services companies, for example, may see increased activity towards the end of the tax year. Few businesses, however, must cope with the variations in demand experienced by restaurants. Packed out around the weekends, these must use smart marketing to fill tables at other times.

It’s hard to tell customers that a particular dish will cost £10 on Tuesday but £15 on Saturday. They may perceive this as a rip-off because it is an identical plate of food served in the same restaurant, not recognising that supply and demand make time a key part of the pricing calculation. It’s rather like naïve parental disquiet over identical travel deals costing 50% more during school holidays.

Restaurants have long had ways of getting around the problem, offering on some days a cheaper lunchtime or early-evening menu, bargain dishes on the blackboard or a limited table d’hôte menu, whilst keeping à la carte prices steady. The way restaurant proprietors cook up deals has, however, changed in the past two decades with the spread of popular restaurant chains.

At first we all noticed offers springing up – 50% off at some eatery or another with a voucher cut from the right newspaper. Usually, the offer would involve one free main course per pair of diners on Monday to Thursday. It worked well for restaurants, given the cost of the food for one main course compared to the wasted staff and other overheads if the couple didn’t otherwise come in and spend on starters, the other main course, desserts and drinks.

Today there’s no need to buy a newspaper. Just go online, take your pick, oh, and divulge your contact details if you wouldn’t mind. The free main course format is now so universal – and sometimes, surprisingly, a 7-days-a-week offer – that many people suspect it has been fully priced into the menu. There have been significant increases to menu prices at some chains over the past two years.

So, is there a danger that consumers will bear this price shift in mind and decide never to eat at certain chains unless they have a usable voucher with them? Once people see menu-price-less-one-free-main-course as the ‘normal’ price, they may regard the full menu price without discount as a rip-off to avoid. Then those pub chain perpetual two-for-ones could triumph.

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Bad PR for pet insurers

It’s been an inauspicious start to 2012 for the insurance industry, with pet insurance the latest area to hit the headlines. This comes just days after adverse publicity about annuity charges and at a time when motor insurance costs and PPI mis-selling are still in the public’s consciousness.

There are probably grounds for criticism in some cases, but it would be unfair to apply them to all insurers. Anyway, the issue with pet insurance seems to revolve around pets deemed uninsurable because of inevitably large future vets’ bills due to age or known medical conditions.

Reports suggest that more pet owners that didn’t opt for lifetime cover are being turned down at renewal if an episode has generated big vets bills. These bills, we understand, are rising rapidly due to advances in veterinary science that enable treatment of serious illnesses or injuries that would previously have been terminal. Understandably, owners want to save their pets if possible.

A pet owner refused cover by their existing insurer will have difficulty finding cover elsewhere. This is understandable to insurance insiders, but maybe the industry has been slow to put across the message that, in all policyholders’ interests, insurance is there to deal with unexpected problems. If a major claim is known to be inevitable, providing cover is unviable.

Perhaps pet insurance has become a combination of two things that need differentiation: an easy payment plan to meet unexceptional vets’ bills and insurance to cover the less likely but big expense of scans, operations and advanced drugs. People may forget that much of their premium is used up on the former (the underlying cost of any pet’s medical needs) and only what’s left from that is available to insure the big, unexpected cost.

Maybe the easy payment element needs taking out of the equation, as it gets policyholders used to more or less recouping their premium each year in saved vets bills, whilst still being covered for a costly episode. Solutions could include cheaper plans with an excess broadly equivalent to the typical annual vet’s bill.

Pet insurance has been a growth market in the past decade and some insurers may have competed over-enthusiastically for the business. A total review would be timely, along with an effort to level with policyholders about a key fundamental of insurance: if you are really fortunate you won’t get any of your money back.

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Sales strategy: turn customers away

It emerged this week that some 200,000 households in flood-prone areas could find it hard to get insurance as from next year. This is because a deal between the government and the insurance industry ends in 2013. The deal under which homes remain insurable whilst the Environment Agency continues to improve flood defences may ultimately be renewed, but potentially affected householders are right to be worried.

For anyone involved in marketing, the thought of product providers consciously reducing the size of their marketplace is counterintuitive. For householders, the threat that those most in need of flood insurance may not be able to get it at any price is alarming. Yet insurers have long been in the business of assessing degrees of risk and denying cover, loading premiums or giving discounts accordingly.

It would be a more perfect world for insurers if every proposer for every form of insurance presented an equal risk and made honest claims. Those fortunate enough not to claim would subsidise the unfortunate few on a fair basis. In the real world, however, there has to be some limit on the extent to which low-risk policyholders subsidise the high-risk, whether or not it is the latter’s fault that they are deemed high-risk.

Clearly, it would be against the interests of insurers and other policyholders if someone unfortunate enough to be terminally ill were accepted for a £1m life insurance policy on normal terms. That is why medical questions and sometimes medical examinations became part of the acceptance process long ago. New ways of identifying added risk, such as using genetic data, have been more controversial.

Motor insurance is another area where assessing individual risk by reference to age, claims record and other factors has largely squeezed out any cross-subsidy between low-risk and high-risk categories. Near-untouchable drivers are the equivalent of the high-risk home on a flood plain. The impact is similar: insurance can be prohibitively expensive, if available at all. The end result is all too often an uninsured risk.

Taken to its extreme, could this differentiation of risk damage the insurance industry? There will always be unknowns, but if separating the high-risk and the low-risk categories becomes too scientific and increasingly accurate, the first category may decide they don’t need insurance (unless obligatory) and the second may not be able to afford or access it. Maybe this process is already under way. Any actuaries out there?

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Quirky pricing of the ‘opoly’

Pricing is a key element in any marketing strategy. The obvious theory is that a lower price will increase sales of a product or service and a higher price the opposite. It is a matter of finding the level at which profit margin multiplied by sales volume produces maximum profit. In reality, of course, it’s not that simple. Things like capacity constraints, competitor response and inflexible demand can complicate the theory.

Sometimes pricing can be very odd. Take postage. Pop a couple of letters in the box, one to the other side of town and one to the furthest extremity of Britain; they both need the same 1st or 2nd class stamp. Then take rail travel. A passenger on a train from London to Scotland may be sharing a carriage with others making an identical journey at a fraction of the cost.

These two examples make nonsense of normal pricing theory because the issues of cost, supply and demand are distorted. Letter post is a monopoly and it has been decreed that the same charge should apply regardless of distance, so the local letter subsidises the long-distance one. The rail oligopoly has a state subsidy (lower than elsewhere in Europe) and the government controls some fare levels.

Although this January’s average increase in controlled fares was in the end 6% rather than 8%, user groups have expressed concern about that and also the complexity of the fares structure. Things were simpler in British Rail days. There were standard 1st and 2nd class tickets and a straightforward range of off-peak fares that could be further reduced with a railcard.

Rail privatisation brought only limited situations where train operators such as National Express or First Group compete for passengers on the same route. They just compete with each other when bidding for an operating franchise. All of this leaves them relative freedom on pricing structures for uncontrolled fares; for longer journeys they adopt airline methods of pricing and seat allocation.

This means minimising empty seats by offering ridiculously cheap fares to some passengers, whilst charging ridiculously expensive fares to others. The trick is to make sure that captive customers travelling at short notice or peak times (whether business travellers or unemployed people visiting sick relatives) cannot use the cheap fares aimed at luring those who aren’t obliged to take the train. It’s a market few see as either free or fair.

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Complaints? No such department

There are some inspired TV advertising campaigns that pass into marketing folklore and keep a brand’s name in the public’s consciousness for years afterwards. The world of amber nectars has produced some unforgettable classics, including the one in which someone in London asks ‘Crocodile Dundee’ Paul Hogan the way to Cockfosters. “Serve it warm, mate.”

Even British brands have excelled, with the English holidaymaker who cannily gets his towel onto the sunbed before continental rivals, to suitably patriotic music. And nobody could forget the lager ad campaign that might eventually have got around to saying something like “we don’t do stocks & shares ISAs but if we did they’d probably be the best stocks & shares ISAs in the world.”

In another ad for the same brand, the camera takes viewers on a brewery tour and soon shows a fusty old office, long abandoned and full of cobwebs. Then the outside of the door is revealed; its sign says ‘Complaints Department’. The message was clear, which makes it surprising that even today there are organisations, in financial services and other sectors, that have busy offices with a similar sign on the door.

About 20 years ago, one of the clearing banks appointed a new director to its insurance arm. He was, the story goes, amazed that the offshoot had something called a Complaints Department. “We get so many complaints that we need a whole department to deal with them?” The answer to that was actually “yes”, but he didn’t continue advertising the fact and it soon became the Customer Relations Department.

Brewers can, of course, be jumped on by the Advertising Standards Authority, which is why the word ‘probably’ was inserted in front of ‘the best lager in the world’. Claims must be verifiable and, anyway, how do you define ‘best’? It can be tougher still in financial services and other professions, where regulatory bodies like the FSA scrutinise marketing material and lay down strict complaints procedures.

Financial Ombudsman Service statistics prove that large financial services companies need substantial resources to handle complaints – maybe a whole department. But why shout about it? Firms are required to tell customers where to address any complaint for initial consideration before an ombudsman gets involved, but they are not required to use the name ‘Complaints Department’. Calling a spade a spade isn’t always best.

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Plus ça change…

An AA survey’s findings that typical car insurance premiums rose by about 15% in 2011 were rather less surprising than earlier data suggesting a modest fall during the third quarter of the year. That young drivers tended to suffer the biggest increases was also no surprise; they may feel hard done by over this, but the fact that some insurers won’t touch under-21s at all is prima facie evidence that the added risk involved for them is genuine.

As well as being a useful form of market research, such a survey can be a very effective promotional tool. Concerns over car insurance premium levels and the factors that cause them have been high profile since last autumn, so the AA gained ample media coverage when its latest survey results were released. It’s worth remembering, though, that the AA is no longer a member-owned breakdown assistance club but a venture-capital-owned business with a big car insurance brokerage.

So, with car insurance back in the spotlight, what are the causes of high premiums? In short and rather obviously, it’s all down to the cost of claims – including those due to accident-prone drivers who regard insurance as optional and add to others’ costs, often via the Motor Insurers’ Bureau that meets certain uninsured liabilities. Then there are the allegedly staged accidents that add to the spurious whiplash and other dubious personal injury claims (though many are genuine), exacerbated by claims farming and referral fee arrangements.

One of the issues that many consumers fail to grasp is that the risk and likely cost of a third-party claim bears little relationship to the value of the insured vehicle. Moans that ‘my insurance is more than my car is worth’ miss the point that even a £500 banger can inflict serious damage to someone else’s Bentley Continental or, worse still, major injuries to another road user or pedestrian.

Have things really changed much? We have just looked at some 1967 car insurance documents for an 18-year-old male where Royal London quoted a renewal premium of £29.0s.6d for third-party cover on a twelve-year-old 1172cc Ford Popular (top speed around 55mph) bought for £25. In the 1960s, about £700 a year was reasonable pay for someone of that age. So, the annual premium was something over two weeks’ wages – which shows there’s nothing new about an insurance premium greater than the value of the vehicle.

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Wanted, dead or alive: grey pounds

There’s an amusing animated TV ad campaign on at the moment, in which a short-term loan company’s online applications are turned round in under 15 minutes at an office full of senior citizens. This is more true to life than many people realise and not just because of uplifts to the State Pension Age. If statistics about age profiles and wealth are to be believed, the grey pound is plentiful, whilst other data suggests that short-term loan users are predominantly young adults.

So, the animations showing oldies dishing out dosh for consumption by a young target borrower are telling it how it is. One way or another, albeit mostly through their bank deposits and investments rather than directly, an affluent older generation is providing costly cash to a strapped element of the younger generation. In so doing, they are probably further widening the generational divide that is already exacerbated by university tuition fees and youth unemployment, to name but two obvious elements.

Some people say that the young will never be able to accumulate wealth but, in fifty years’ time, when most of today’s 50-plus population has died off, all of the assets they currently own will be held by or on behalf of individuals who are under 50 today or as yet unborn. They will get their hands on the wealth, the real questions being how, when and to whom it will cascade down. That’s all assuming a whiz-kid banker doesn’t by then invent a way of taking it with you using swaps and derivatives.

One issue to emerge is whether today’s youth can realistically aspire to home ownership – ever. Unassisted first-timers often have little hope of buying and are forced to rent. This rental demand helps buoy-up the buy-to-let market and keep owner-occupancy out of reach. It could, at worst, be the start of a long-term reversal of the property ownership revolution of the past half-century. The private rented sector could become a much larger part of the overall market.

So, it would hardly be surprising if today’s twenty-somethings felt they had a raw financial deal: tuition fees, unemployment, house prices and much more to worry about – including their own eventual pensions – whilst also threatened, as current or future taxpayers, with paying towards public sector pensions and medical and care costs for an older generation that, the stats indicate, already holds most of the nation’s private wealth.

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Metal risks verge on the uninsurable

For insurers, their business is all about accepting financial risk on behalf of policyholders on the basis that the relatively modest premiums collected from the many will cover the potentially substantial claims of the unfortunate few. If the few become an increasing proportion of the many and the cost of a typical claim also inflates, premiums inevitably rise, as in the well-publicised case of motor cover.

So, spare a thought for a specialist insurer of a different kind that has seen claims skyrocket. As the name suggests, Ecclesiastical has long been a preferred insurer for the Church of England. It covers such risks as arson and metal theft, which have been problems for years. Rising metal prices during the commodities and raw materials boom fuelled by demand from emerging economies has unfortunately brought a massive increase in thefts of lead from church roofs – a record 2,500 claims were made in 2011.

The problem became so bad during last year that Ecclesiastical acknowledged: Insurance is there to provide protection in the event of unexpected losses and events, but unfortunately, as theft of metal has increased in frequency over the last few years, it is no longer an unexpected event, but rather an inevitability.” The insurer has therefore withdrawn cover where vulnerable materials such as lead roofing are not protected by SmartWater systems that can help identify thieves and stolen property.

With prices that seem to have brought copper, brass, bronze and some other metals and alloys into a ‘precious metals’ category below gold, silver and platinum, and the existence of rogue dealers and processors willing to handle stolen metal, it seems that nothing metallic is safe. Lead roofing, alloy wheels, copper pipes, railway cabling, bronze sculptures by Henry Moore and Barbara Hepworth and even war memorial plaques have been targeted by gangs willing to stoop to unimaginable depths.

A particularly disturbing aspect, and one that insurance cannot always cover, is the lack of regard for the full financial, emotional and practical consequences that massively outweigh the cash gain for the criminals. Their level of disconnection from civilized society is worrying and will need to be addressed alongside any legislative action aimed at restricting cash deals in scrap metals. Otherwise an increasing range of risks could become virtually uninsurable, along with the lead on any church roof that has not been security treated.

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