“Look very carefully at policies” insurers warned ahead of FCA pricing review

Industry experts have warned insurers to “look very, very carefully” at their policies ahead of an FCA review into general insurance pricing practices.

Citizens Advice today made a super-complaint to the Competition and Markets Authority (CMA) over dual pricing in five sectors, including home insurance.

Gary Nixon, chairman of the Association of Independent Non-Executive Directors and himself a previous non-executive chairman of two insurance companies, said insurers only had to look at what ensued from the last super-complaint over PPI to understand the “serious and profound” effect it could have on the market.

He said it would lead to a “significant insurance market change.”

Nixon added: “If I was on the board of an insurer, I would see this as a warning beacon prompting me to look very carefully at how my firm’s policies and working practices may stand up to the harsh spotlight of external criticism as there will be plenty on the way.

“My advice to the chair of any board in the insurance sector is to look very, very carefully at the policies driven by the board and the composition of the board itself.

“Does the board contain someone sufficiently independent to stand up for the rights of the consumers and ensure that changes are made?

“After all, any such changes now should help avoid the potential downsides of future compensation and redress.”

Radical solutions 

Fairer Finance managing director James Daley said the impact of the super-complaint might have been watered down by criticising dual pricing too broadly across five sectors.

But he said for too long regulators have not done enough to tackle dual pricing and was pleased that the issue was being called out.

Daley said: “The issue of dual pricing has been around a long time and is a problem that is almost impossible to fix without some regulatory intervention.

“I hope that through this investigation the FCA can come up with some radical solutions because we need to find a way so that providers can start to compete on quality and we can reverse this race to the bottom on price.”

He said “honest conversations” were needed about the gap between customer expectations and products actually offer.

Daley added: “The pricing has become so destructive that firms have to try and turn down every claim they can, so insurance policies do less of the things that customers want them to do. It’s not good for customers, but it’s not good for insurers either.

“As things stand we are in a death spiral and there’s no foreseeable way that anything is going to get better, so I welcome Citizens Advice forcing the CMA to have another look at this.

“It puts the issue back on the table in a formal manner and will hopefully come up with some radical solutions.”

Branko Bjelobaba, head of general insurance compliance firm Branko, said the super-complaint and upcoming FCA investigation would pressurise insurers into explaining why a loyal customer would cost more to service than a new one.

He added: “For a long time insurers have penalised loyalty and favoured discounting new clients over existing ones with very little effort made to push the value envelope. 

“Risk should always be assessed so that two clients who are the same should pay the same and this will mean loyalty costs no more than new clients who will change insurers for a fiver.”

Regulator action

But data from Consumer Intelligence shows the FCA’s moves to force insurers to publish the previous year’s premium on renewal, and encourage customers to shop around, is helping to improve the fairness of pricing.

Its Insurance Behaviour Tracker shows the number of consumers shopping around at renewal is now 85.1% for motor and 77.6% for home. This signals a 1% increase in motor and a 3% increase in home.

Consumer Intelligence chief executive Ian Hughes said insurers are moving in the right direction with the help of the regulator, but indicated there was still a long way to go.

“Insurers are in a difficult position – damned if they do and damned if they don’t in many respects,” Hughes said. 

“Most insurers want to break the cycle but presently depend on new business to maintain volume. 

“The raising of external pressures should however, in the long run, help the market move faster as one, reducing first mover disadvantage, and help it fully address the issues around dual pricing.”

Not all agree the FCA’s renewal transparency rules have been effective though.

Jim Dart, managing director of Dart Compliance, says the regulations have been “patchy” among intermediaries and among larger industry players “laden with accidental or IT-based errors”.

He said the FCA has been slow in evaluating the success of the solution and that more active intervention and checking was needed from them.

Following the super-complaint from Citizens Advice, though, he also had concerns about how the CMA would respond to the dual pricing problem.

He said: “I am slightly concerned as to how the CMA would, operationally, implement and monitor changes, with the majority of the broker market seeing their previous involvement in private motor Protected No-Claims Bonus as being uninformed and providing no ultimate benefit to customers.

”Many brokers still believe in the value of loyalty as being a positive influence in achieving better claims settlement, but this must be balanced against the additional premiums being charged and an increasingly remote relationship between insurers and intermediaries as more business is transacted electronically.

”This electronic relationship has also swayed the acquisition cost element of the insurer’s new business transaction against the intermediary, who will need to re-key and transact the ‘renewal’ as a new policy to obtain the lower rate, while the insurer does nothing.”

Recognised problem

Others in the industry have previously recognised the problem of dual pricing in insurance.

The ABI and Biba in May jointly launched a set of guiding principles and action points to help tackle excessive premium differences between long-standing and new customers.

“In any market where there is regular switching and fierce competition for new business, good deals are available to those who shop around but this does mean long-standing customers can lose out,” said ABI director general Huw Evans.

But he said the insurance industry stood out as the only sector to have taken voluntary industry-wide action to tackle it.

This includes commitments from firms to review premiums charged to customers who have been with them for five years and the industry publishing a report on progress within two years.

And Evans added: “In a competitive free market, where three out of four people shop around, there is no easy fix available and these measures will take time to bed in.

“But we believe that these industry commitments are a positive step in tackling excessive premium differences that can unfairly penalise long-standing customers.”

The CII is another industry body to look into the issue of penalising loyal customers.

The CII trust index, published in July, identified rewarding loyalty as the key opportunity for the insurance profession to build public trust.

And its research also found loyalty to be where there was the biggest gap between consumers’ expectations and insurer performance.

Lawrence Finkle, public affairs executive at the CII, said: “Although the growth of price comparison websites have helped those consumers able to shop around, clearly it is ‘dual pricing’ - or charging excessive differences between new customer premium prices and those at renewal for long standing customers - which has been most corrosive of trust in our profession. 

“Earlier this year the insurance profession set out a framework on maintaining fairness between new and existing customers when setting renewal premiums. We have called on all insurers to implement these principles fully and wholeheartedly, and look forward to responding to this market study in more detail.”