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In the dull, grey, post-festivity days of January, many of us are already looking forward to our summer holiday.  Depending on your particular circumstances, the holiday may be a week with the family in a UK resort riding donkeys and zip wires, or it may be a week abroad with your partner drinking the type of cocktails they only serve in a foreign country.  

There are numerous things we take into account when booking a holiday, with budget often being at the top of our list.    What we probably pay less attention to these days, is the star rating of our chosen holiday.  In the days of Trip Adviser et al, the official star rating of our holiday is less and less meaningful – you can find plenty of ‘five-star' resorts with less than two-star guest ratings on Trip Adviser.  At the end of the day, what most of us really want from a holiday is the sun – everything else is negotiable.

And why should it be any different with insurance?

Many people are attracted to a five-star insurance product because they assume it means it's the best.  But what does the best actually mean?  And is the five-star definition of "the best" in line with the customer's expectations?

The first thing to consider is that there can be significant variations of product cover between many ‘five-star' rated home insurance products.  To take one example, Alternative Accommodation cover varied quite considerably between three five-star products – one offered 20% of the buildings sum insured (above the benchmark set by the company responsible for these ratings), one offered 15% of the buildings sum insured (below the benchmark set by the company responsible for these ratings), and one offers "reasonable cost", which seems to be open to interpretation.

The next thing to consider is what the differences are between a five-star product and, say, a three-star product.  One leading supermarket offers its' own branded home insurance product.  One version of that product is a five-star product and the other is a three-star product.  This brand says on their website that the difference between the five star and the three-star product are the sums insured, and the fact that on the three-star product a couple of the cover sections are optional (suggesting they are mandatory on the five-star product).  That sounds obvious, right?  So what does this mean?

Now we come back to what a customer actually wants from their home insurance product.

Looking at this same supermarket's home insurance, the five-star product provides £750,000 buildings insurance and £75,000 contents insurance and the three-star product provides £400,000 buildings insurance and £50,000 contents insurance.  If a customer has a large house which has a rebuild cost approaching £750,000 then the five-star product will be totally appropriate.  But the average price of houses in the UK is £196,666!  So, unless a client has a particularly large property then they are unlikely to need anything like £750,000 to rebuild their home.  If the rebuild cost of their property is less than £400,000 and their contents equal less than £50,000, then, in this case, the three-star product is likely to be more appropriate.

The purpose of insurance is to put people back into the position they were in before an insured event occurred.  This means that if a two-up two-down in Salford has to be demolished and rebuilt, the insurer is only going to pay for another two-up two-down to be built – they're not going to rebuild the Ritz.  In the event of a total loss then, using the example product above, the three-star product is likely to pay out a very similar (if not the same) amount that the five-star product would.  

And what does this difference cost?  Using my own property as an example, the difference was £50 per annum.  That's £50 per year for additional benefits that most average customers won't be able to access.

If your customers are tempted to pay out for a five-star product, ask them to take a look at what the cover limits are, and challenge whether they would ever actually benefit from those higher cover limits.  A five-star product is bound to cost more than a three-star product, even if the benefit to the customer is effectively the same.

There are also omissions from the most prominent star rating system that will be of critical importance to your customer.  The clearest omission is probably the most important factor for most customers – price.

The other thing that doesn't appear to be considered in the most prominent star rating system is the financial stability of the provider – or put simply, the likelihood they will still be in business to pay claims when they happen.  Whilst it's not at the front of most people's minds when they pay their insurance premium, it's a critical part of the value judgement.  

I have the first-hand experience of dealing with customers who are in the middle of a claims process when an insurer fails.  It's terrible, and one can only imagine what the customers themselves have to go through.  Thankfully, it doesn't happen very often – but isn't it best to minimise the chances of this happening in the first place?

So, are star ratings a complete waste of time?  No -  star ratings are a useful guide to what the ‘best of breed' insurance policy generally looks like.  I would say however that the majority of customers will not need to pay the extra for a ‘best of breed' insurance policy as they may not benefit from the extra stars. 

The saying that "All that glitters is not gold" is equally true when it comes to five-star ratings.  It's always worth scratching below the surface of the five-star dazzle to see how a product matches with a customer's actual needs.

Phil Lewis, Head of Compliance & Risk