FCA Report on Insurance Pricing – Where is The Loyalty Bonus?

The FCA has today published the interim report of its market study into the pricing of home and motor insurance. The FCA found that competition is not working well for all consumers in these markets. It sets out concerns about how pricing in these markets leads to consumers who do not switch or negotiate with their provider paying high prices for their insurance.

The FCA estimates that around 6 million policyholders pay high prices and are not getting a good deal on their insurance. If those customers paying high premiums paid the average premium for their risk they could save around £1.2 billion a year. This affects all types of customers. The FCA estimates this includes 1 in 3 people who are potentially vulnerable.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, commented:

‘This market is not working well for all consumers. While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects around 6 million consumers.

‘We have set out a package of potential remedies to ensure these markets are truly competitive and address the problems we have uncovered. We expect the industry to work with us as we do so.’

In particular, the FCA found that:

• Insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch.
• Longstanding customers pay more on average, but even some people who switch pay higher prices.
• From the FCA’s consumer research, 1 in 3 consumers who paid high premiums showed at least one characteristic of vulnerability, such as having lower financial capability. For consumers who bought combined contents and building insurance, lower income consumers (below £30,000) pay higher margins than those with higher incomes.
• People who pay high premiums are less likely to understand insurance or the impact that renewing has on their premium.
• Most firms, when setting a price, include their expectations of whether a customer will switch or pay an increased price. This is not made clear to the customer.
• Firms engage in a range of practices to raise barriers to switching.
• Many consumers who switch or negotiate their premium can get a good deal.

The FCA is undertaking a range of activities in order to address the problems it has identified. Through new rules introduced in 2017, the FCA has already improved transparency on renewal for general insurance policies which has delivered significant savings to customers.

The FCA will also continue its work to ensure firms improve the oversight of their pricing practices and deliver the changes required following other recent policy changes.

The FCA is also considering remedies to:

• Tackle high premiums for consumers – this could include banning or restricting practices like raising prices for consumers who renew year on year or requiring firms to automatically move consumers to cheaper equivalent deals.
• Stop practices that could discourage switching – including restricting the way that firms use automatic renewal.
• Make firms be clear and transparent in their dealings with consumers – including improvements to the way firms communicate with their customers. The FCA is also considering whether firms should publish information about price differentials between their customers.
• Harness the benefits of innovation in the longer-term, so that general insurance markets benefit positively from technological developments including Open Finance.

INDUSTRY COMMENT:

The former Head of General Insurance Supervision at the FCA, and current partner & adviser to Huntswood, Michael Sicsic commented:

“Providers should see this interim report as a wake-up call from the FCA, but also as an opportunity to remedy the loyalty penalty that is resulting in large numbers of consumers not getting a good deal on their insurance. A full assessment of fair pricing practices and an end to pricing discrimination is necessary if firms hope to retain customers and avoid further interventionist policies from the regulator in its final report early next year.

“It is also clear that vulnerability remains high on the agenda, particularly as unfair pricing and high premiums for those who do not switch disproportionately affect vulnerable customers. Firms must adopt a transparent approach to both pricing and communication with customers if they hope to secure value from customer relationships in the long-term.”

PEGASYSTEMS TONY TARQUINI;

Tony Tarquini, Director of Insurance, EMEA, Pegasystems believes this situation is more complex than it first seems and puts insurers between a rock and a hard place due to the complex economics of selling insurance to consumers in the UK.

“It would be extremely detrimental to insurance firms if the FCA were to enforce blanket bans on automatic price rises. The primary way insurers secure customers via comparison websites is via new customers-only pricing. With these comparison sites creating a market where consumers will always go for  the lowest possible price, this has cultivated a situation where insurers always lose money in the first year of the deal. To recover these losses the only way is to raise the cost of insurance in later years.

If every single consumer switched insurer annually to get the lowest price, insurance firms’ profits would be negligible and there would be no surplus cash to invest in improving services for customers. Let’s not forget that for most of the last 25 years underwriting UK motor insurance has been run at a loss – only investment income makes it (marginally) profitable.”

“Clearly, the end of automatic price rises could be counterproductive for consumers. Insurers would be forced to increase their introductory offers so they could be sure of making money, meaning the customer would once again bear the brunt of the cost. As per the FCA’s recommendations, what insurers must do is be clear and transparent in their dealings with consumers. And this is a fantastic opportunity for insurance companies to build trust with their customers so they don’t go looking elsewhere. Using AI to determine all the possible actions that could be taken with an individual customer, and what curated deals could be offered to them – at the right time, in the right context – insurance companies will be able to dramatically reduce their customer churn, also taking pressure off their sales teams.”

GO COMPARE

Lee Griffin, founder, and CEO of GoCompare comments: “We welcome this update from the FCA.  The proposals, if implemented, will go some way towards increasing transparency for consumers and encourage more shopping around and switching. The proposals also call on the industry to stop raising prices for those customers that auto-renew year after year, which could help protect the most vulnerable and those worst affected by the so-called loyalty penalty.”