The Financial Conduct Authority (FCA) has published its interim report on the pricing of home and motor insurance. It found that six million policyholders are overpaying and not getting a good deal.
In addition, the if the overpaying customers paid the average premium for their risk, £1.2bn ($1.48bn) would be saved a year.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, commented: “This market is not working well for all consumers. While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects around six million consumers.
“We have set out a package of potential remedies to ensure these markets are truly competitive and address the problems we have uncovered. We expect the industry to work with us as we do so.”
The FCA found a number of trends:
- Insurers often sell policies at a discount to new customers and increase premiums when customers renew. In addition, increases are targeted at those less likely to switch;
- Longstanding customers pay more on average, but even some who switch pay higher prices;
- One in three consumers who paid high premiums showed at least one characteristic of vulnerability. For consumers who bought combined contents and building insurance, lower income consumers (below £30,000) pay higher margins than those with higher incomes;
- Those paying high premiums are less likely to understand insurance or the impact renewing has on their premium;
- When setting a price, most firms include their expectations of whether a customer will switch or pay an increased price. This is not apparent to customers;
- Firms do a number of actions to raise switching barriers, and
- Getting a good deal when switching or renewing is possible.
The FCA intends to also publish a full report in Q1 2020.
Comments on the FCA report
Commenting on the report, Tony Tarquini, Director of Insurance, EMEA, Pegasystems believes this situation is more complex than it first seems.
He said: “It would be extremely detrimental to insurance firms if the FCA were to enforce blanket bans on automatic price rises. The primary way insurers secure customers via comparison websites is via new customers-only pricing. With these comparison sites creating a market where consumers will always go for the lowest possible price, this has cultivated a situation where insurers always lose money in the first year of the deal. To recover these losses the only way is to raise the cost of insurance in later years. If every single consumer switched insurer annually to get the lowest price, insurance firms’ profits would be negligible and there would be no surplus cash to invest in improving services for customers. Let’s not forget that for most of the last 25 years underwriting UK motor insurance has been run at a loss – only investment income makes it (marginally) profitable.”
“Clearly, the end of automatic price rises could be counterproductive for consumers. Insurers would be forced to increase their introductory offers so they could be sure of making money, meaning the customer would once again bear the brunt of the cost. As per the FCA’s recommendations, what insurers must do is be clear and transparent in their dealings with consumers. And this is a fantastic opportunity for insurance companies to build trust with their customers so they don’t go looking elsewhere. Using AI to determine all the possible actions that could be taken with an individual customer, and what curated deals could be offered to them – at the right time, in the right context – insurance companies will be able to dramatically reduce their customer churn, also taking pressure off their sales teams.”
FCA report good sign for home and motor insurance?
Jimmy Williams, CEO and Co-Founder of Urban Jungle, takes a different view. He added: “Today’s news from the FCA is the biggest sign yet that they are willing to take bold action to address loyalty pricing and soon. Some of the measures they are proposing could have a profound effect on the insurance industry and how customers interact with it.
“First, customer prices would almost certainly go up significantly for the regular switchers. The loss-leading prices that insurers currently offer through comparison sites are largely funded by over-charging loyal customers, so this practice would have to end.
“Second, it may drive a big industry shake up. When customers find out they’ve been being over-charged for years they may switch en masse and we might see profit warnings from among the big insurers. The comparisons sites may also be significantly effected as a big flattening of prices means there is much less incentive to switch insurers regularly. We’ve already seen the most forward thinking comparison providers make moves to address this.
“Third, it may well open the door to a number of challenger brands (like ours) who have taken a stand against loyalty pricing early and have a clear message on it. This increased competition in the sector is ultimately what the FCA is looking for.”