UK regulatory body the Financial Conduct Authority (FCA) has published a new report arguing that competition in the home and motor insurance markets is not working well for all consumers.
The FCA estimates that around 6 million policyholders pay high prices and are not getting a good deal on their insurance.
In particular, the regulator raised concerns about how pricing in these markets leads to consumers who do not switch or negotiate with their provider paying higher prices for insurance.
Insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch, the FCA noted.
The Authority’s consumer research also found that 1 in 3 consumers who paid high premiums showed at least one characteristic of vulnerability, such as having lower financial capability.
“This market is not working well for all consumers,” said Christopher Woolard, Executive Director of Strategy and Competition at the FCA. “While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects around 6 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.”
Solutions proposed by the FCA include banning or restricting practices like raising prices for consumers who renew year on year, or requiring firms to automatically move consumers to cheaper equivalent deals.
It also recommends halting practices that discourage switching, and forcing firms to be more clear and transparent in their dealing with consumers.
Mohammad Khan, UK General Insurance Leader, PwC, commented on the FCA report: “Potential remedies to pricing and renewal processes can impact the industry hardest. The most significant are: restricting or banning pricing optimisation linked to how likely consumers are to renew, require automatic switching to lower priced products offering the same level of cover and banning auto renewal or making it opt-in only.”
“Some of the proposed remedies are likely to shake up the industry,” he added, “the FCA recognises supply side remedies are likely to create winners and losers but seem to be willing to take such risk and monitor the situation closely once the remedies are in place.”
Jane Portas, Insurance Partner, PwC, also stated: “The FCA has concluded 6m consumers in the general insurance market are getting a raw deal, a third of which are vulnerable customers.”
“The remedies proposed in today’s report are wide ranging and of significant impact if they go ahead,” she explained. “They impact pricing, renewal processes, enhanced communication and transparency requirements and expanding pricing and product governance requirements.”
“After a long wait, the range and depth of potential action will be a worry for the industry. The FCA calculates 6m consumers are getting a bad deal with a cost of £1.2bn annually if they were to pay average premiums. This is more than enough to justify tough proposals.”