The FCA has today published the final report of its market study into the pricing of home and motor insurance. The FCA is concerned these markets are not working well for consumers and is setting out proposed remedies to address this.
The FCA is proposing significant reform of these markets through measures which seek to enhance competition, ensure consumers will receive fair value, and increase trust in these markets.
The FCA is proposing that when a customer renews their home or motor insurance policy, they pay no more than they would if they were new to their provider through the same sales channel. For example, if the customer bought the policy online, they would be charged the same price as a new customer buying online. Firms would be free to set new business prices, but they would be prevented from gradually increasing the renewal price to consumers over time (known as ‘price walking’) other than in line with changes in customers’ risk. For existing consumers, their renewal price would be no higher than the equivalent new business price.
Firms use complex and opaque pricing practices that allow them to raise prices for consumers that renew with them year on year. While some people shop around for a deal, many others are losing out for being loyal. Firms target price increases on consumers who are less likely to switch and use practices that make it harder for people to leave. At the same time, firms do not always offer regular switchers their lowest prices. The FCA identified 6 million policyholders were paying high or very high margins in 2018. If they paid the average for their risk, they would have saved £1.2 billion. Some of this is due to harmful pricing practices, which the FCA’s proposals aim to tackle.
The FCA is also consulting on other new measures to further boost competition and deliver fair value to all insurance customers including:
- Product governance rules requiring firms to consider how they offer fair value to all insurance customers over the longer term.
- Requirements on firms to report certain data sets to the FCA so that it can check the rules are being followed.
- Making it simpler to stop automatic renewal across all general insurance products.
Christopher Woolard, Interim Chief Executive of the FCA, commented:
‘We are consulting on a radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers. The package would also ensure that firms focus on providing fair value to all their customers. We welcome feedback on the proposals.’
In the long-term, the proposed remedies are designed to improve competition. This should lead to lower costs for supplying insurance, and ultimately lower the prices paid by consumers on average. The FCA estimates that its proposals will save consumers £3.7 billion over 10 years. The FCA will monitor the impact of these proposals on the market.
The FCA is seeking views on its proposals by 25 January 2021. It will consider all the feedback and intends to publish a Policy Statement and new rules next year along with its response to the consultation feedback.
Alongside the potential remedies outlined above, the FCA has published rules on the publication of value measures data on claims frequencies and acceptance rates, average claims pay-outs and claims complaints across all general insurance products. This data provides an important indicator of how insurance products are performing. Making this information available to firms, as well as the media and consumer groups should help deliver better outcomes in the market.
Commenting on the publication of the FCA’s General Insurance Pricing Practices Market Study, Huw Evans, ABI’s Director General, said:
“The ABI agrees with the FCA that the household and motor insurance markets do not work as well as they should for all customers, and we continue to support the FCA’s work to address this.
“Insurers and brokers have already begun to tackle the issue of excessive price differences between new and existing customers through an industry initiative that has seen over 8.5 million pricing interventions across home and motor insurance worth £641 million.
“It is vital that price comparison websites and insurance brokers are subject to the same level of supervision and monitoring by the FCA to ensure a balanced approach.
”We will consider carefully this package of proposals, so that we can engage with the FCA on the most effective measures possible. There are winners and losers in the way the market works currently with those who switch insurance provider every year often ending up with lower prices. The FCA has confirmed that insurers have not made excessive profits.”
The British Insurance Brokers’ Association (BIBA) supports the Financial Conduct Authority’s (FCA) desired outcomes of enhanced competition, and long-term fair value for customers. As we stated in our response to the Market Study Interim Report MS18/1.2, we believe that although most brokers are not responsible for setting prices, they are very much part of the solution for customers.
The focus on equalising renewal premiums with new business prices reflects the concerns already raised and it is pleasing that the regulator recognises the good work that has already been achieved through market collaboration particularly by the application of the BIBA/ Association of British Insurers; General Principal and Practices on Pricing (GPAPs). The level of awareness of GPAPs is currently at 89% among BIBA member firms which have long been keen to reduce the practice of dual pricing and have combatted it by either routinely re-broking or doing so if the price has increased.
We are pleased that the regulator agrees that for many customers auto-renewal is of value and can be an essential safety net for vulnerable customers if managed appropriately by the provider. Insurance brokers are typically closer to their customer than insurers and will be key to explaining how automatic renewal works and how customers can cancel the facility if it is not the right solution for them.
The FCA had indicated that a measure of success would be less switching because of fairer long-term renewal pricing. However, it is essential to remember that price is not the only consideration when buying insurance. Insurance brokers can advise on the level and breadth of cover suitable for customers. While there may be less switching, brokers will be reviewing the market for their customers at renewal to see if there may be a more suitable alternative to their existing policy.
Steve White, BIBA CEO said: “Our broker members always aim to offer their customers insurance that meets their needs both in terms of price and cover. Their long-held concerns about dual pricing will be addressed by the FCA’s proposed measures and we look forward to working with the regulator constructively. The report is broad, alongside the ultimate aim of fairness it touches on addressing inequitable Most Favoured Nation clauses following the results of the Competition and Markets Authority enquiry and on firms using innovative solutions to compete.
Brokers are by their nature innovators they will continue to use their entrepreneurial approach to be the ‘go-to’ business for customers seeking fair and good value insurance.”
Today the FCA released its long-awaited final report into GI pricing practices. The headline finding is that the FCA has suggested a key pricing remedy which will equire firms to offer a renewal price for retail motor and home products that is no higher than the equivalent new business price for that same customer through the same sales channel. This report represents the latest milestone on a long journey for the insurance industry.
Graham Wright, UK P&C Pricing Product Claims and Underwriting Lead at Willis Towers Watson, comments: “The UK general insurance industry will no doubt welcome the publication of a proposed outcome to this long investigation, although inevitably the FCA’s paper will raise as many questions as it answers. One of the biggest challenges for insurers and intermediaries alike is managing the implementation transition given current market competitive pressures, and therefore deciding how and at what point price changes should be made.”
As well as outlining the proposed remedy and additional supporting measures, the report appears to effectively provide an endorsement for the use of complex modelling and price optimisation techniques, stating that “most significantly, it can allow firms to compete by offering different prices and products to different consumers. This can benefit consumers if it allows firms to offer a range of choice and better deals. Our judgement is that stopping firms from price optimising completely could lead to less effective competition and worse consumer outcomes overall”. In effect, this recognises that although general insurance pricing practices are extremely complex in the eyes of the average customer, ultimately this complexity is intended to harmoniously balance insurer and intermediary commercial objectives with fair individual customer outcomes.
Whilst at face value the proposed remedies will require insurer and intermediaries to significantly adapt their pricing practices, the scale of the change is not incomparable to that which was required of the industry in 2012 when the ruling against the use of gender in insurance pricing was enacted. To that end, we would expect the insurance industry to rise to the challenge posed by the FCA over the coming months. It is also worth noting that although the main focus is on home and motor insurance, the product governance rules will also apply to wider general insurance and pure protection products.
Stephen Jones, UK P&C Consulting Lead at Willis Towers Watson, comments further that: “As with any regulatory change, there will be winners and losers within the industry, and the winners will be those with the ability to flexibly adapt their pricing strategy. Critical to any effective adaption strategy will be strong portfolio management and governance, the need for greater operational efficiency, the ability to report clearly on the adherence to the remedy and flexible deployment.”