Why the dual pricing ban will mean everyone wins with insurance
In this Opinion piece, Callum Rimmer, founder & CEO, ByBits, looks at how the recent FCA ruling will fundamentally change car insurance.
After the last couple of years, the insurance sector could have been forgiven for thinking 2022 was going to get off on the right foot. Not so, after the FCA’s ruling on dual pricing came into force. This is where insurance providers artificially lower their acquisition pricing to win new business then ramp up the prices at renewal time in order to try to recoup their acquisition losses and move to profit.
When written in black and white, it’s not hard to see why the regulatory commission – and indeed consumers reading this story – were so quick to put an end to this practice.
Price, and so much more
For too long, consumers have felt short-changed by insurance companies. In most instances, they have been paying for little in return, particularly with necessary policies like home or motor (which are the focus of this ruling), which have felt like an additional tax, rather than a value-add service. No surprise then that consumers want more. The CII’s latest Public Trust Index found that consumers wanted to see a discount for staying with the same company at renewal. The research found that avoiding dual pricing is important to policyholders to feel that their loyalty is being acknowledged.
Indeed, the FCA believes the new rules will save consumers £4.2 billion over 10 years. In its interim report, published in October, the regulator said that about six million policyholders pay high prices and are not getting a good deal on their insurance. In fact, it found that if those customers paying high premiums paid the average premium for their risk, they could save about £1.2bn a year in total. When inflation and the cost of living is increasing at such a rapid rate, this is news to be celebrated.
But, while on the face of it, this all looks to be about insurance pricing, it is actually far more than that.
Welcome to the 21st Century
It’s widely accepted that this regulation is going to lead to some short-term volatility as insurers attempt to find the Ying to the FCA’s Yang. But the situation will settle down and the industry establishes a status quo fit for today where the financial ecosystem has been disrupted by consumerisation. Namely, the use of technology in an everyday, consumer-oriented context that is inextricably connected to our personal lives. It is something the financial sector has been quick to adopt with the notable exception of insurance. The pandemic, too, has been another scenario where insurance has failed to shine with brands criticised for poor messaging, poor service, poor policies that didn’t adapt to major socio-cultural changes.
This is particularly the case in vehicle insurance where brands have the opportunity to become truly customer-focused with telematics allowing risk – and therefore price – to be more individually aligned as opposed to being based on generic mass data. Collecting customer data and tailoring policies accordingly will bring many other benefits. For example, in an era of pervasive massaging around sustainability, driver data can be used in everything from encouraging users to drive less, or at different times of the day.
Like it or not, this is a ‘welcome to the 21st Century’ for insurers that have been resistant to change.
Value, trust, and understanding
Aside from providing insurers with a clearer, more flexible understanding of risk, insurers will move away from a purely cost-saving model as ease-of-doing-business becomes increasingly important. As a result, brands will find themselves competing more fiercely on things like value, trust, and understanding. Ultimately customers can then be rewarded through tailored pricing, incentives, and other value-add services like apps, rewards, personalised usage data, and more, which will increase retention.
This is where technology has a role to play – particularly automation which the insurance industry is beginning to adapt, though at a speed that is slower than required. At the very least, this can automate essential but low-value-adding tasks, enabling the human workers to focus on customer experience to drive the business forward. Indeed, by automating what happens behind the scenes in a smart, data-centric way, insurers can create a frictionless experience for the customer across different services and claims, one that is more finely tuned to their needs and specific to their usage. This is especially powerful when combined with another trend drivers are calling for – usage-based insurance (UBI).
The transition from today into tomorrow
UBI provides transparency in pricing to customers which increases the feeling of ‘value’. It means customers are only being charged for what they use and, in a new world of insurance, it represents a logical step for some insurers to take. The advent of UBI is an ideal solution for this scenario, especially for large companies which traditionally lack the agility to respond swiftly according to unpredictable market trends.
It’s an offering insurers can make without having to overhaul legacy technology at all. In fact, UBI is a plug-and-play system and works by adding tools to an existing tech stack. It can also be fully operational in weeks so, for insurers playing catch-up to this regulation, it’s a no-brainer. Any industry making a leap into the technological unknown is, understandably, beset by fear, inertia and uncertainty but, for insurance, UBI is the ideal way to transition from today into tomorrow without the financial gamble.
A scenario where everybody wins
Insurance is being forced to clean up its act in no uncertain terms. A customer-centric and technology-driven approach will go a long way in improving the ease of doing business in this highly complex industry. And that will ultimately lead to more brand trust and an enhanced industry reputation in 2022 and beyond.