As expected, the FCA is implementing a package of remedies to improve competition and protect home and motor insurance customers from loyalty penalties – so called `price walking.’ This includes new rules so that renewal quotes for home and motor insurance consumers are not more expensive than they would be for new customers.
These measures address the issues identified in the FCA’s September 2020 market study, which found that millions of home and motor insurance customers lose out if they renew repeatedly with their current providers. In 2018, 6 million loyal policy holders would have saved £1.2 billion had they paid the average price for their actual risk.
Many firms increase prices for existing customers each year at renewal – this is known as price walking. This means that consumers have to shop around and switch every year to avoid paying higher prices for being loyal. It also distorts the way the market works for everyone.
The FCA’s new rules will stop firms price walking. Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer. It is likely that firms will no longer offer unsustainably low-priced deals to some customers. However, the FCA estimates that these measures will save consumers £4.2 billion over 10 years, by removing the loyalty penalty and making the market work better.
In addition to the new rules on pricing for home and motor insurance, the FCA is also bringing in new rules to:
- give most consumers easier methods of cancelling the automatic renewal of their policy,
- require insurance firms to do more to consider how they offer fair value to their customers, and
- require home and motor insurance firms to report data to the FCA so that it can supervise the market more effectively
Sheldon Mills, Executive Director, Consumers and Competition at the FCA commented on the new rules:
‘These measures will put an end to the very high prices paid by many loyal customers. Consumers can still benefit from shopping around or negotiating with their current provider – but won’t be charged more at renewal just for being an existing customer.
‘We are making the insurance market work better for millions of people. We will be watching closely to see how the market develops in the future and to ensure firms continue to deliver fairer value to consumers.’
The pricing, auto-renewal and data reporting remedies come into effect on 1 January 2022. The FCA will also review the effects of the remedies over the course of 2022, ahead of a full evaluation in early 2024.
Commenting on the Financial Conduct Authority’s (FCA) finalised rules on General Insurance Pricing Practices, John Taylor, Immediate Past President at the Institute and Faculty of Actuaries, said:
“It is vitally important that the home and motor insurance markets work well and deliver fair value to consumers. Mitigating harm to those currently penalised by price walking should lead to fairer premiums for loyal customers. The new FCA rules should also result in less switching or ‘churn’ and lower frictional costs which could benefit consumers.
“There is an expectation that the pricing remedies should see lower premiums through increased competition and a rebalancing of the market but the impact may be limited in practice. Potentially the remedies could have the opposite effect, or lead to some firms leaving the market. It is crucial that the FCA’s future assessment properly considers the impact of these changes on competitiveness for home and motor insurance.
“We support the principle of removing unreasonable barriers to consumers on exiting insurance auto-renewal. However, auto-renewal does give policyholders some assurance they will not accidentally find themselves uninsured. The FCA will need to carefully consider balancing the removal of barriers with the risk of consumers inadvertently being left without insurance.”
The consumer expert Martin Lewis recently tweeted;
Charlotte Clark, Director of Regulation at the Association of British Insurers, said:
“Insurers support these reforms and will continue working closely with the FCA to ensure they are delivered effectively. While the FCA recognises their interventions could lead to price increases for consumers who regularly shop around, these remedies should ensure that all customers get fair outcomes from competitive insurance markets.
“It is vital that the new rules are applied across the whole insurance market, including price comparison websites and insurance brokers, with a uniform level of supervision and monitoring by the FCA, to ensure good customer outcomes. As the FCA has said previously, insurers do not make excessive profits and, as they now point out, it is likely that firms will no longer be able to offer unsustainably low-priced deals to some customers.
“It will remain important to maintain incentives for customers to shop around, while ensuring competitive deals for those who stay with their insurer. When shopping around people should ensure that they choose the right product for their needs, looking at the overall value of the product, and not just buying price”
Commenting on the FCA’s dual pricing reform update, James Thomas, Managing Director in Insurance, Accenture UK & Ireland said:
“Whilst insurers have started to adapt over the past year, now they must race to implement fundamental changes to their business model. A key challenge will be pricing in a way that reflects customer lifetime value from the outset, using more sophisticated pricing algorithms to adapt to real-time changes in the market.
“Consumer trust and retention will be imperative as longer-term customer relationships become the norm, meaning insurance propositions that combine impeccable customer service, seamless digital interactions and reliable claims experiences will be winners going forward.
“UK insurers are already planning and implementing different strategies to address this regulation, but the timelines are tight and the changes significant – so we do expect the UK personal lines market to look considerably different in 12 months’ time, with some emerging stronger than others.”