Aviva may be adding a postcode element to its life insurance premiums. The insurer is currently trialling the use of postcodes to illuminate the personal circumstances of its life customers, having already introduced postcode weightings on its annuity products, along with several of its competitors.
Aviva’s protection director, Richard Verdin, says research by the group indicates that customers want more recognition of their personal circumstances to allow for fairer pricing: “We have been using similar pricing techniques and expertise in house and motor insurance for years and added postcode as a rating factor on our annuities business in the second half of last year.”
According to the insurer, a postcode rating could vary a premium by up to 10%.
Critics argue that people living in deprived areas of the UK could be put off buying insurance altogether by postcode driven rate hikes.
The pilot started in May on Aviva's simplified life products with a select number of distributors and it will end once the firm feels it has gathered sufficient data to decide whether to proceed with a full rollout. Neither L&G nor Prudential, who both use postcodes for annuity business, say they have any plans to introduce the pricing model for protection.
There is no reason why in theory life offices should not begin to offer premium rates that are also varied according to socioeconomic group and postcode.
Nearly all household insurance is now postcode rated, often right down to l
ocal codes. The problem with very localized data, even on home and motor, is that in postcodes with few people, claims figures can be too detailed. For example, if there are 100 people in your post code and two people write off their cars, the statistical significance is much greater than if 2 people in a post code of 10,000 people write off their cars, but to an insurer using raw data, the smaller populated post code is many times more risky than the other one, so premiums will be much higher as the claims ratio is higher.
In motor insurance, the postcode element is quite small compared to the details of the car and driving history - the only real relevance is theft and vandalism.
In home insurance, the main risk is theft, with fire playing a part in rural locations. But the main difference is that while your home will always be in the same postcode, you will not.
Insurers rightly argue that health and life expectancy vary by region. But what no-one has been able to show statististically is that where you live is more important than your medical history, eating and drinking habits, and weight.
So, if people in inner-city Glasgow live shorter lives and are more unhealthy than identical people in a Cotswold village, insurers argue that it makes sense to charge more for health and life cover to those in Glasgow.
Even if where you live is a factor, unlike houses, people move around. So I could live in Glasgow now, but have spent 50 years in the Cotswolds - or vice versa. So where I live now gives the exact opposite underwriting information.
To make it fair, underwriting should be based on the number of years you have spent in each postcode. That is a marketing and logistical nightmare.
I for one, would struggle to provide the number of years and post codes of the various places I have lived in around the UK. And what happens if you spent a long time overseas?
Life and health offer a huge range of variables to underwrite from. Perhaps the only relevant one for postcode underwriting is how far you are from a hospital in an emergency - as this could affect your changes of dying on the way there.
