Six months on, Nick McCowan, Post Office Insurance’s Head of General Insurance who is using Earnix’s AI-powered pricing solution, Price IT, takes a look at how it’s faring.
On 1 January 2022, the FCA (Financial Conduct Authority) enacted rules to force motor and home insurers to charge the same for new business and renewals. Thus, the controversial practice of ‘price walking’ became a thing of the past. Price walking is when insurers effectively charge a ‘loyalty penalty’ on long-standing customers. This had become exacerbated by the rise of price comparison websites (PCWs) encouraging consumers to shop around for the latest ‘hot deal’.
The reforms have had the desired effect in that renewals prices have come down, while new business prices have increased. According to Post Office’s Head of General Insurance, Nick McCowan, insurers are no longer hiking renewal rates to fund bargain prices for new customers. There is, though, anecdotal evidence in the market of both prices rising and falling, while not all customers have benefited from improved renewal terms. The landscape is highly nuanced and rapidly evolving, therefore, so it is not as straightforward as it may first appear.
“In aligning new business and renewal prices, only a set margin was ever going to be redistributed as motor and home are not lines that typically attract uncomfortable levels of margin,” says McCowan.
“Price remains a very important factor in consumer buying decisions, but we are seeing less shopping around from customers looking to swap,” he explains. “Customers are staying with their existing providers at renewal in greater numbers than many anticipated – even with insurers who were at the sharp end of price walking. That presents a big challenge for lots of businesses like us who want new business growth.”
McCowan is keen to point out that ‘value’ is about more than just offering a good rate. “Real product value means getting the cover you need, and having your claim dealt with, paid for and serviced efficiently, effectively and quickly in the event of a loss,” he says. “I’ve been lucky to work for companies who have always taken these things very seriously, but not every insurance company has always offered this basic level of service.”
FCA REGS HAVE CHANGED THE LANDSCAPE
The concept of value is central in the FCA reforms, which in addition to price controls also includes rules making it easier for consumers to cancel automatic renewals and require insurers to demonstrate their products deliver fair value to customers. The new rules may also see the end of incentives and inducements being bundled with new business as these would also have to be applied to renewal business, which is unlikely to be economically viable over the long term.
“Entrenching better behaviours across the market and creating a level playing field on pricing is a really good thing and customers will, I think, get even better products and services as a result,” McCowan says. He insists, however, that the insurance industry always offered value to customers, even before the reforms. “Combined ratios in the high 90 percent range, or even over 100 percent in some years in motor insurance demonstrate these products do service customers’ needs and pay claims,” he argues.
Inflation may drive more price shopping
With the rule changes only six months old, it is probably still too early to fully assess the impact on the marketplace, though McCowan believes fundamental buying dynamics remain unchanged. “Customers are still shopping through PCWs for products they can afford, and PCWs are doing a better job of displaying product value and features to help customers make an informed choice,” he says.
“Inflation and the rising cost of living are likely to make insurance buyers more price sensitive and drive an increase in shopping in the months ahead,” he adds, “so we need to be ready to offer fair new business and renewal prices for a potentially larger group of consumers looking to save money.”
In a market and economy in flux, accessing the right data and tools to make prudent pricing and risk selection decisions has arguably never been more important. “This reinforces the need for better predictive models, market modelling and monitoring to allow insurers to trade competitively in this market,” McCowan says.