Briefing: Size is important when it comes to being resilient to the FCA’s GI pricing reform

By Editor Katie Scott

Deadline day has arrived for the official implementation of the first batch of changes under the FCA’s general insurance pricing reform.

With the second deadline at the end of 2021 mere months away, industry commentators are evaluating how resilient insurance firms will be to such a “market shock” – Consumer Intelligence’s Mike Miskelly, insights manager, for example, believes there is going to be “a mixed bag of winners and losers”, with success partially dependent on a business’ size.

Speaking at a webinar last week co-hosted by Insurance DataLab and Consumer Intelligence, titled ‘Seven days to save your 2022 plan: Coming face-to-face with the FCA challenges ahead’, Miskelly explained that although the sector may expect larger firms to struggle with the myriad of incoming changes due to their size and internal processes, these businesses may not be as exposed as some believe.

Although speed may not be commentators’ first thought when it comes to the operations of big firms, these companies do, however, have the resources to implement change – something they have already practiced following the Covid-19 pandemic and the step-change into homeworking. Miskelly believes these lessons learned can be applied to the FCA’s reform.

Despite this, he does feel that organisations already focused on fair value will be in the best position following the FCA’s deadlines, compared to businesses centred around “volume”, “aggressive pricing” and price comparison website distribution.

In his opinion, smaller firms could be “outgunned” by their larger rivals unless they take advantage of market opportunities as and when they arise. This could include, for example, utilising data driven decision-making.

While Matt Scott, Insurance DataLab co-founder, acknowledged that smaller companies may be able to make good use of their agility and the fact they are more nimble to respond to the FCA’s changes, he added that for those looking to increase their market share, the elimination of price walking could be detrimental.

He explained: “Smaller players with their agility, maybe being a bit more nimble, might be able to take advantage of things there.

“But on the flip side, if in the past they’ve been looking to grow their market share by offering low prices and then looking to take advantage of price walking at renewal, if they can’t do that anymore, are they going to be losing out to some of the larger players [that] already have that market share because they can’t offer those low prices over the lifetime of the policy because their [combined operating ratios] are higher anyway, so it wouldn’t be sustainable for them to offer those low prices at renewal as well.”

Ian Hughes, chief executive of Consumer Intelligence, added that smaller companies often struggle with issues around customer complaints – in turn, this could mean that they will also struggle with governance. This could be an advantage for established, larger firms, he noted.

Retention assumptions

There certainly appears to be an air of trepidation around the market ahead of the FCA’s new rules coming into force – Hughes observed that the one guarantee across the sector at the moment is change.

With this in mind, Miskelly added that consumers’ reaction to the FCA’s pricing changes is still unknown – but Consumer Intelligence’s past data suggests that while motor insurance may weather the regulation storm pretty robustly, the home insurance sector is “ripe for disruption”.

Miskelly questioned the potential impact of the FCA’s reform as his analysis has shown that the rate of switching is still high in the home insurance market, even when customers are offered a lower renewal quote – he emphasised that insurance firms cannot make assumptions, therefore, about their customers’ behaviour post-reform.

He explained: “The rate of switching is still quite high, even if their renewal premium was lower.

“I think that’s particularly relevant in the coming months because if there are heavily price walked consumers and the assumption is that their renewal price is going to fall quite heavily – the question is for that consumer, are they going to be happy about that? Are they going to see the financial saving and stay with their provider?

“Or, are they going to go ‘hang on a minute, have I just been ripped off? Do I now need to shop around?’ Some of the goodwill they have built up through their tenure with their provider might erode away and they might actually switch. You see that already in the market. We see it in motor slightly less, we see it even more in home.

“This is a longer-term trend, a very curious trend indeed. I don’t think [insurance firms] can assume [their customers] are going to stay with [them]. There are broader implications that might mean that they switch.

“That speaks to some of the volatility and turbulence we’re going to see in the market over the coming months, if not years, and I think it’s going to take a while for all of that to play out.”

Hughes added that this is a “major piece of information” for the home insurance market as although companies may assume that customers are more likely to be retained if they are offered a lower renewal price, Consumer Intelligence’s data proves the exact opposite is true.

For him, pricing changes and fair value are completely different, despite being tied together within the FCA’s work. He believes that 2022 will be the year of fair value, not the year of pricing change. “It’s going to be a lot of change next year,” he said.

Insurance companies have already put in a lot of hard graft to get compliant with all the elements required for deadline number one today – however there is certainly no nearby end in sight, especially as insurance firms may have to relearn how their customers behave in the post-reform era, which will have a knock-on effect on their strategies and business plans.

All the webinar panellists agreed that organisations are going to need to build in adaptability to their business models and be more dynamic to keep pace with what they predict will be a fast moving year – especially as there will undoubtedly still be “unknown unknowns” along the way.

The next phase of the pricing reform is here – it’s time to gear up for deadline number two.