Briefing: FCA must focus next on customers’ expectation gap following dual pricing ban

By Editor Katie Scott

It’s been all change in the general insurance industry following the FCA’s reform around pricing, which banned the practice of price walking – where renewing customers are charged less competitive premiums than new business – and formally introduced the concept of fair value.

After the regulation was fully implemented in January 2022, there has been a flurry of “budget” and “essentials” products launched, as insurers have looked to introduce tiered propositions in order to still offer cheaper price points to insurance customers, explained Catherine Carey, interim marketing director at Consumer Intelligence, who was speaking at a webinar hosted by market insight firm Insurance DataLab this week (26 July 2022).

This tactic often results in “stacking” on price comparison websites (PCWs), she added, whereby search results will list different products that are all actually provided by the same insurance group.

The problem here is whether customers truly understand what they are buying, Carey told online attendees.

The expectation gap between what insurers intend to cover and what policyholders believe they are insured for has been an ongoing industry challenge – I’m sure I don’t need to remind anyone about how clearly this was evidenced by Covid-linked business interruption (BI) claims during the pandemic.

James Daley, managing director of consumer group Fairer Finance and a fellow webinar panellist for Insurance DataLab, described the expectation gap as “the number one problem in insurance”.

In his opinion, the FCA should have been concentrating its efforts on minimising the expectation gap, rather than dealing with the “sideshow” of dual pricing.

However, now that the regulator has launched its new pricing practices regime, Daley believes “it’s time to deal with that issue of the expectation gap”.

He explained: “Insurers have been gambling for a long time on the fact – particularly in lines like car and home where people rarely make claims – that if they can get [customers] in the door and give them a reasonably easy experience at a low price, the majority of them won’t claim anyway and so they might be able to get away with having a product that isn’t particularly great because the majority of people won’t notice it.

“But for that minority that do [make a claim], an increasing number of them find themselves disappointed. That’s what continues to undermine trust in the sector.

“This is going to be a really interesting few years for general insurers because I don’t think they’ve really got to grips with some of these problems that have been around in the background for a long time.”

A prime example of the expectation gap in action is the “oddity” of courtesy car provision, Daley added.

He said that this is often misunderstood by insureds because in most cases, courtesy cars are only provided to replace vehicles that are being repaired in a garage, rather than those that have been stolen or written off, for example.

However, Daley lamented the number of insurers he has seen offering “guaranteed” courtesy car provision in their advertising – with unread policy small print then clarifying that this service is only offered for repairable vehicles.

In his mind, motor insurance should not be complex and laden with extras and add-on products.

On the flip side here, however, Carey confirmed that Consumer Intelligence’s ongoing analysis found that customer satisfaction around motor claims had improved, with consumers’ courtesy car needs being met.

She attributed this to the current issues around supply chains and the provision of car parts – due to the lack of available cars, many policyholders are therefore receiving higher value courtesy cars than they would ordinarily be entitled to and are able to enjoy them for longer hire periods.

‘Hollowing out’ horror

Tiered products showcasing different cover limits and exclusions may contribute to the current expectation gap, Daley noted.

This is because creating cheaper, more budget-focused products could result in the “hollowing out” of policies, whereby coverage will not necessarily insure the full extent or cost of policyholders’ risks in order to reduce premiums.

He added: “We’re seeing a hollowing out of products - so paying more, getting less. I don’t think it’s a particularly good outlook for the sector in terms of [consumer] trust and happiness going forward.”

Daley cited an example he had seen where a travel insurance policy would not pay out enough to fly a dead body home if an insured died while abroad – he said the policy only covered around a quarter of the cost, yet the policyholder’s family would undoubtedly expect the entire cost to be insured.

“Franker discussions” with consumers is a must to mitigate any misunderstandings, he noted.

Carey added that a lot of the new products being introduced following the FCA’s pricing reform are very profit driven – with no back book and often offering “below par” cover, the lower premiums these products can generate are typically being used to entice in new business, she explained.

However, she warned that this type of innovation is not what the FCA intended with its value driven regulation – she thinks the FCA will step in to demand more creativity from insurers if these new product trends continue.

Being proactive

The FCA has slowly and steadily been steering its lens more towards supporting consumers – firstly with the fair value focus of its general insurance pricing reform and secondly, through its outcome-centric Consumer Duty principle.

Considering the huge pressure on the insurance industry for greater transparency following the business interruption insurance test case in 2020 and 2021, which the FCA spearheaded, you would think that the regulator would be looking more closely at the insurer-customer expectation gap.

However, insurance firms also need to take responsibility for their own actions and if consumers are struggling to understand policies and coverage, then it is up to insurers and brokers to think of ways to more clearly communicate cover boundaries. Both Carey and Daley agreed that firms burying their heads in the sand around transparency is simply not an option anymore.

The last thing the sector needs is another line of business, such as travel insurance, to follow in the footsteps of BI cover, to squash the precariously stacked building blocks of consumer trust that the industry is attempting to re-establish and grow.

Insurance DataLab’s webinar this week also featured Neil Bayton, head of partnerships, UK at Trustpilot and Insurance DataLab co-founder Matt Scott.