Consumer Intelligence warns premium hikes could follow FCA pricing report

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Consumer Intelligence has warned that premium hikes could follow the proposals that were laid out in the FCA’s pricing practices report which was published yesterday

Consumer Intelligence has welcomed the FCA’s move to end dual pricing and the loyalty penalty, but warned that insurance premiums could now rise.

Although the FCA’s actions could benefit customers, and especially vulnerable customers, insurers will not be able to make money elsewhere such as credit offerings and add-on products and this could lead to premium hikes, according to Ian Hughes, chief executive at Consumer Intelligence.

Hughes said: “As a result, one thing is absolute - premiums are going to rise. In the current model, insurers offer heavily discounted new business prices to acquire new customers, but don’t make profit until year two or three of the policy. So naturally, prices will need to even out to support the sustainability of the industry.

“In the long term, the announcement will increase confidence in financial services, however it is going to be a rocky year as the insurance industry and their customers wean themselves off the crack cocaine that they have been so accustomed to.”

Therefore, Hughes is predicting a new kind of savvy shopper as special prices for new customers disappear.

Pricing as a ‘drug’

Hughes said: “Up until today, every single player in the market has been hooked on introductory pricing – the crack cocaine of the insurance industry – insurers and consumers alike.

“The industry has attempted to wean itself off in recent years by narrowing the gap between new business prices and the prices charged at renewal (known as price walking), but it clearly wasn’t enough.”

Hughes said that rather than providing methadone to “treat the industry’s addiction” the FCA’s report asks the industry to go “cold turkey”.

Customer loyalty

Consumer Intelligence cited Admiral as one of the brands investing in customer loyalty:

Admiral’s move to automatically give motor customers back £25 during lockdown has been rewarded by a surge in brand loyalty and renewals.
This time last year Admiral’s customers were amongst the most fickle of the bunch Consumer Intelligence points out, with 85.9% shopping around at renewal, above the market average of 83.1%. Only 14.1% renewed without shopping around, compared to a market average of 16.9%.
But data from Consumer Intelligence’s Insurance Behaviour Tracker tool revealed a step change. As many as 21.4% of Admiral customers renewed their car insurance without shopping around in the four months to July.

Bad rep

However, Hughes said that the insurance sector has always struggled with a bad reputation which has worsened since the pandemic hit.

Consumer Intelligence’s research reveals that consumer protection has remained “rock bottom” since March.

“Our data tells us that today’s intervention will not impact all insurers equally. Currently in the motor insurance market, we see premiums rise by an average of 2.54%. In home, it stands at 12.67%. Home insurers will need to radically rethink how they do business,” he said.

“The removal of price walking provides the industry with an opportunity to regain consumer trust.

“With insurers no longer hiking premiums up at renewal, price will become only one of the deciding factors, rather than the deciding factor for consumers when purchasing insurance, Hughes continued.

”Firms will have to start focusing on the value of their products, strength of their brands and quality of customer service to win and retain customers.”