Motor insurers risk FCA probe over new customer discounts

Motor insurers must break their addiction to offering discounts to new customers or risk FCA intervention, consumer Intelligence chief executive Ian Hughes has warned.

Hughes’s comments follow a survey by his market research firm, which found 50% of UK motor insurance customers would prefer to stay loyal to one insurer.

Despite this, the survey found that 75% of UK drivers feel compelled to shop around every year because of the discounts offered to new customers and the resulting price hike drivers face after their first year with an insurer. This compares with 28% in Canada and 20% in the US.

Hughes told Insurance Times that he expected the FCA to examine new business discounts because of the regulator’s focus on ensuring fair outcomes for customers.

He said: “Is it a fair outcome that a customer that has been with you for six years could, for instance, get a premium that is half what they are currently paying if they were a new customer? I would argue that it is not and as a result is the sort of thing the FCA would look at.”

Hughes described new customer discounts as “a real problem”. He laid the blame squarely with insurers rather than price comparison sites.

He said: “A lot of people try to put the blame at the door of price comparison sites, but they are not to blame for this problem. This problem is created by introductory discounts – by giving your best prices to your least loyal customers.”

Hughes contended that the industry would be better off tackling the discount issue itself before the FCA gets involved.

He said: “It is always my hope that the industry can be grown up enough that it can recognise and fix its own failings. When a regulator has to step in, nine times out of 10, that creates issues and challenges all of its own.”

Hughes’s suggested remedy is for insurers to set prices commensurate with the risk being written and stop using discounts to lure customers. Instead, he suggests insurers should try to attract customers through marketing and creating products that fit their needs.

But he recognised that this is easier said than done because if an insurer abandoned discounts in isolation, customers would flock to those companies still offering cheap introductory deals.

Hughes said: “The problem is that if any one company starts to try and address the problem then, unfortunately, they will lose a lot of business.

“No one company can fix this by themselves. It needs to be corrected as an industry and that is a big challenge.”

Consumer Intelligence polled 500 motor insurance customers in the US, Canada and the UK online.

It said the differences between the UK and the other two countries was that the US and Canadian motor insurance markets are still focused on local broker distribution, while the UK’s is focused on direct sales and acquisition.