Furthermore, the home insurance market will be more affected than motor insurance as around ‘80% of premiums comes from renewal business’
The FCA’s investigation last year into price walking practices used by insurers within the home and motor markets will “reduce profitability” in the short-term, however “we don’t expect over the longer term that profitability will be structurally weak”, said Graham Coutts, senior director and head of EMEA reinsurance at credit ratings agency Fitch Ratings.
Speaking on 27 January at the agency’s webinar ‘Ask the Analysts: UK Non-Life Insurance’, Coutts discussed the companies market, which excludes Lloyd’s and the London market. Flagging the impact of the FCA’s fair pricing report on insurers’ profitability, Coutts added that “virtually all insurers do rely to some extent on price increases at renewal to compensate for lower new business premium”.
The FCA published its General Insurance Pricing Practices Market Study report on 22 September 2020. The two-year project explored thousands of policies and consulted with industry stakeholders in order to get to grips with the practice of price walking.
“The FCA fair pricing investigation looked at so-called dual pricing practices and that’s where a new customer pays a significantly lower premium, while customers who renew are penalised by paying much higher premiums,” Coutts explained.
“It’s known as the loyalty penalty or price walking and it is a widely used technique among personal lines insurers.”
Offset price cuts
Coutts said that he expected “the home insurance market to be more affected than the motor market” following the publication of the FCA’s findings.
He continued: “For home insurance, 80% of premiums comes from renewal business and only 20% comes from new business and you compare that to motor, where the split is much more 50:50.
“That means many household insurers have built up quite large back books and they operate business models that capitalise on brand loyalty for those long-standing customers.
“Essentially, home insurance customers tend to stay with one provider and price comparison websites have led to much more shopping around in the motor market.”
Primarily, Coutts believes the FCA’s steps for mitigating price walking will “reduce profitability” in the short-term.
He explained: “The FCA has yet to implement the final measures, but they are likely to include a requirement for firms to offer existing customers renewal prices that are no higher than what they might pay as a new customer. And there’s also other steps, so making it easier for customers to decline auto-renewals and also attestation of compliance on an annual basis.
“These new rules are likely to come in before the end of 2021 and we do think that, at least in the short-term, they will reduce profitability, so insurers will have to update their pricing systems, the distribution models and - the biggest impact - they have to reduce premium rates for long-standing customers.”
Despite this, Coutts added that “we don’t expect over the longer term that profitability will be structurally weak”.
“We do think insurers will offset the price cuts for existing customers with price rises for new customers and that’s because the sector’s profitability is already very weak and it’s not really viable for insurers to significantly cut prices in one area without rising them in others,” he said.
Diminished PCWs?
Price comparison websites (PCWs) are also set to be impacted by the FCA’s report – Coutts thinks PCWs will be affected in the medium-term, however they still have value in the short-term, at least until the FCA’s mitigating measures are fully implemented.
In the long-term, Coutts believes the role of PCWs could “diminish” as customers in the future will have less incentive to switch insurers based on price.
He added that there will always be a place in the market for PCWs, however the need for customers to shop around on an annual basis for their insurance will decrease.
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