Millions of UK drivers head to price comparison websites (PCWs) on the hunt for a deal when purchasing or renewing car insurance. But according to flexible insurance provider, Cuvva, premiums are set to rise on PCWs as soon as the start of 2021.
According to the insurance app that’s going against the sector status quo when it comes to treating customers fairly, insurers will have to reassess their pricing structures on PCWs in order to implement more realistic prices that align with the Financial Conduct Authority’s (FCA) proposed remedies aimed to eradicate loyalty penalties when it comes to home and motor insurance renewals.
Freddy Macnamara, CEO at Cuvva says: “The aggregator model has driven down premiums substantially over the years to a level that’s unsustainable for insurers to maintain. It subsequently discourages loyalty in the market and fuels dual pricing as insurers are then forced to increase premiums at renewal time to account for the low premiums set initially to win new business on heavily price-competitive PCWs.
“It’s almost expected that consumers will save money with a new quote on a PCW if it’s being compared with more expensive renewal quotes.”
Macnamara continues, “In the short-term, insurers will have to increase premiums on PCWs. But premiums that are more sustainable will prevent dual pricing from being practiced at renewal time, which has caught many drivers out, who have ended up paying way more in the long run.”
The FCA plans to finalise and release a policy statement in Q2 2021 after monitoring the market, ongoing impacts of the pandemic and following a consultation period. “Insurers will have to plan ahead and adjust pricing to avoid loyalty penalties for those renewals that fall at the end of 2021,” says Macnamara. According to FCA’s final report, “fair value in a digital age is a key priority”. The regulator aims to improve sector competition, adding true value for consumers in the sector that’s known to be riddled with unfairness.
“We applaud the financial regulator for taking action. PCWs have dominated the market, especially in the last decade. The steps proposed by the FCA will encourage sector loyalty and transparency. People will continue to frequent PCWs but the gap between new and renewal premiums will close, resulting in fairer outcomes for consumers,” says Macnamara.
An FCA report on pricing highlighted aggregator profit margins in car insurance alone was 144% higher than insurers profits in 2018.
Aggregator pricing misconceptions
According to data from GlobalData, PCWs can be as much as £360 more expensive than going directly to an insurer.
Further analysis found that a quote directly from a leading insurance provider was £248.64 for the year. The exact same quote on a PCW was over £614, which made the policy 145% more expensive if purchased on the PCW.
PCWs make commission from every sale on its platform, thus relying on consumers switching providers annually. PCW fees range anywhere from £40 to as much as £160 for each policy sold via its website. This cost is often passed onto the consumer, as insurers adjust their premium to cater for the shortfall.
It is obvious that if the insurance industry is required by the FCA, or by new laws in 2021, to offer long term discounts to those customers who stay loyal to any motor insurer, and NOT make a claim, that initial premium prices must rise. You cannot square that circle.
If insurance is going to become cheaper as time goes by then drivers who manage 20 years claims free are going to expect cover for a paltry £150-£250 a year. They won’t get it, but they are being led to believe that they will get it eventually under these new proposals for rewarding loyalty. What must end is the practice of price-walking, whereby loyalty via automatic renewal means drivers who are claim-free suddenly get stung an extra 50 quid. The industry could have grasped this nettle sooner and headed off criticism by Martin Lewis, Which? the BBC and others, but it is too late now.
The end result will be a clash of unattainable expectations in 2021 and beyond. Fact is, you cannot automatically apply a loyalty discount anymore than you can automate a price hike every year at renwal. The nature of driving, commuting and mobility in general is rapidly changing too. So insurance must evolve for the 21st century. That means the end of TPFT/Fully Comp as the default settings, for these are essentially 1960s concepts of driving behaviour and car ownership. Both insurers and brokers alike will have to use data much more to underpin true risk. That means collating data from a variety of sources, so that drivers who complain about price rises can be shown that claims for vandalism, serious debt, or convictions for various offences by other household members etc all play a part in assessing the overall risk.
If the car insurance sector can show it is adapting to the new data-sharing paradigm then it can take the public with it. Prove that you are flexible with PAYG cover, end MTA charges, create smartphone apps that allow drivers to truly manage their own risk and share data to EARN their long term loyalty rewards. That way, you win hearts and minds. And wallets.