UK regulator the Financial Conduct Authority (FCA) has proposed a set of measures designed to tackle unfair pricing practices for customers renewing their retail home and motor insurance policies.
The proposals follow on from the FCA’s October 2019 report, which found that 6 million policyholders paid high prices in 2018, and could have saved £1.2 billion if they had paid for their actual risk.
The regulator noted that insurance firms use complex techniques to identify consumers who are more likely to renew with them.
Firms then increase prices to these customers at renewal each year, resulting in some consumers paying very high prices, with many mistakenly believing that their provider is offering them a competitive price at renewal.
In addition, some insurers use practices that can discourage consumers from shopping around, including by making it more difficult to cancel automatic renewal, and some do not always offer regular switchers their lowest prices.
To remedy this, the FCA has put forward several measures designed to stop systematic price increases in home and motor insurance, promote fair value for customers, and increase trust in general insurance markets.
Firstly, the regulator wants to require firms to offer a renewal price that is no higher than the equivalent new business price for that customer through the same sales channel.
The aim is to prevent firms from price walking customers and tackle high prices for existing customers who have already been price walked.
Insurers will still be able to offer different prices to different consumers to ensure that consumers still have a range of choices in the market and encourage competition.
The FCA estimates that average prices will fall by £3.7 billion over the next 10 years as a result of this pricing proposal.
This measure will be accompanied by enhanced product governance rules to help ensure that firms deliver fair value for all consumers.
A further proposal will ensure that firms make it easy for customers to stop a contract from auto-renewing and make it easier for consumers to decline auto renewal for policies, both when they purchase and at renewal.
Together, the FCA expects these new rules to improve competition, lower the overall costs for supplying insurance, improve competition and ultimately lower the average prices paid by consumers.
However, Mohammad Khan, UK General Insurance Leader at PwC UK, warned that the move could result in the cost of insurance increasing for other customers, particularly those who regularly shop around.
And with the proposals unlikely to be introduced until 2022 at the earliest, customers who rely on renewals won’t see any potential benefits for another two years.
“The proposed rules can have a significant impact on certain business models particularly firms with large back books,” Khan added.
“Firms will be reviewing the impact of these remedies on their strategies and business models. Considering the strength of the proposed remedies it is likely the insurance and broker markets will see significant changes well before the date the new rules become effective.”
But Keith Richards, Chief Membership Officer of the Chartered Insurance Institute, welcomed the move to end unfair renewal pricing and said the proposals were in line with customer demands.
“Normally, we would be concerned about prescriptive regulatory intervention on charges, because this often leads to unintended consequences,” he said.
“However, in this case, well-know behavioural biases … mean that there are competitive pressures on insurers to engage in price walking – as many firms do in several key markets, including utilities – even if they would prefer not to,” Richards explained. “As a result, we think the FCA proposal to ban price walking, along with the product governance proposals that it has suggested, are reasonable.”
David Miller, Financial Services Partner at KPMG, also supported the new measures and said they “cut straight to the heart of the issue of fair pricing.”
“Ensuring that existing motor and home insurance customers can pay no more than new customers at renewal will remove the practice of increasing existing prices relative to new prices over time therefore penalising longstanding customers for not shopping around,” he noted.
But while the intervention will likely lead to customer savings in the long-term, Miller did acknowledge that some customers could see their insurance prices rise in the short-term.
“The unintended consequence of these measures could also have significant impact on the wider insurance ecosystem, as consumers are less incentivised to shop around, impacting insurers’ distribution strategies,” he remarked “This leaves insurers with much to consider regarding some of the fundamentals of how they do business.”
