FCA seeks to level the playing field of dual pricing

At the beginning of October 2019, the Financial Conduct Authority (FCA) set off a depth charge underneath the insurance industry.

The cause was a long-awaited interim report, the General insurance pricing practices market study, which is designed to tackle the practice of so-called ‘dual pricing’ by car and home insurers. The final report is due to be published in quarter one of 2020.

The origin of the report was a super-complaint to the government, submitted by charity Citizens Advice in September last year, about what it described as the ‘loyalty penalties’ being paid by long-standing customers across a swathe of industries.

David Williams, managing director of underwriting and technical services at Axa Insurance UK, doubts that anybody has a problem with new joiners being offered lower prices.

But, he acknowledges that there have been abuses by insurers, particularly in the home sector.

“Insurers have had every opportunity to get their house in order,” he said. ”The bad news is that some continue to price to the extremes.”

The irony is that the churn the existing system facilitates isn’t necessarily in insurers’ best interests given that the expenses on renewals are much lower than on new business, Williams added.

“We would all rather have longer standing customers. You have a better relationship with the customer and can provide a better service. It is ironic that despite the fact that we want to keep [loyal customers] more, we’ve been penalising them more.”

Renewal cut-off

But, are the potential remedies being proposed by the FCA too harsh and could they actually make the diagnosed problems even worse?

The most draconian remedies proposed by the FCA include banning auto-renewals, imposing a cap on renewal prices and making automatic switching compulsory.

Ian Hughes, chief executive at Consumer Intelligence, expresses particular concern about the suggestions to scrap automatic renewals. “This is not rewarding loyalty but stopping it full stop” he said.

Furthermore, he added, it could mean customers who are incapacitated when their policy is up for review are then without cover, leaving them in an even more vulnerable position.

Banning or restricting auto-renewals would increase customer churn and raise customer-acquisition costs, warns credit ratings business Moody’s in its recently published analysis of the changes.

The agency has particularly strong concerns about the FCA’s proposal to cap the level of annual premium increases, which it says would hit insurers’ profit margins by restricting insurers’ ability to respond to rising claims inflation.

While insurers could raise new business prices, in practice competitive pressures would limit their scope to do so, further eroding profits in a sector where underwriting earnings are already thin.

Switching it up

At the other end of the scale, the FCA moots automatic switching, an idea that is beginning to take off in the energy sector.

But, it will be more complicated to introduce this concept into insurance due to the nature of underwriting risks, warns Mark Andrews, director for general insurance at consultancy Altus.

“You can do [automatic switching] for other products like utilities and mobile phones but you can’t do that with insurance because there are so many things that will influence the purchase of insurance, like changes in circumstances,” he explained.

However, auto-switching to equivalent and cheaper policies could be hard to achieve in practice. Hughes added: “If you are switched from home contents insurance that gives £1m of cover to a policy that is cheaper but gives you £100,000 of cover that would not be equivalent.”

The dangers of rapid change

The far-reaching nature of many of these remedies pose big logistical challenges for the industry, which would be likely to overhaul the legacy IT systems where many of these large back books of long-established customers are logged.

“I don’t think a lot of insurance companies will be able to make these changes quickly,” says Andrews.

Plus, pushing the industry to change too rapidly could force it into pushing up premiums, chips in Hughes.

Overall, the measures proposed by the FCA will weigh on the revenue and earnings of UK home insurers, judges Moody’s.

And, while the focus is centred on loyal customers who are currently losing out, getting rid of cheap deals will inevitably make it harder for certain sectors to access insurance.

Pointing out that cash strapped customers are often already purchasing insurance on credit, Hughes added: “If prices go up across the market as a whole, vulnerable customers may be priced out of the insurance market. We don’t want to encourage uninsured driving.”

Williams agreed: “If they can’t [shop around], they will end up not insured, which is not good for the community.”

Price comparison leads to competition

The regulator has “missed a trick” meanwhile by not focusing more on price comparison websites rather than insurers, said Andrews. “They have opened the market up to a lot more customers and they have kept insurance companies more honest, but the focus is still on price and not on the quality of product,” he explained.

Axa’s Williams argued that a better way forward on pricing is a combination of even greater transparency as well as action to curb the most egregious abuses, which he said could extend to stop companies charging above a certain percentage for renewals.

He stated that problems often occur after several years of rolling price increases; Axa is looking at any customers who has been with the company for more than half a decade to ensure they are not being “unduly penalised”.

But while the focus is now on consumers who are paying the price of loyalty, the flipside of scrapping introductory rates is that the UK general insurance industry will become a less competitive one by inhibiting the scope for new entrants to offer discounts.

“You would see some more consolidation in the market and fewer entrants coming into the market,” said Hughes. He added that the five biggest carriers control less than 40% of business in the fiercely competitive UK motor market. 

“Price comparison has helped us to have one of the most active markets in the world and one that is easy to access,” Hughes said.

Williams agreed: “If they restrict things too much, they will restrict the things that make insurance in the UK a really good deal from the perspective of customers.

“If someone wants to move their insurance every year, they get a bloody good deal. If the regulator wants to stop that, they need to know they are penalising a huge proportion of the population.”