The Financial Conduct Authority has set its sights on revamping the UK motor and home insurance marketplace to help customers, especially loyal policyholders, save money.
The FCA is proposing reforms of these markets that it says will “enhance competition, ensure consumers will receive fair value, and increase trust in these markets.”
The FCA is proposing that when customers renew their home or motor insurance policies, they pay no more than they would if they were new to their provider through the same sales channel. For example, if the customer bought the policy online, the insured would be charged the same price as a new customer buying online.
Insurers could still set new business prices, but they would be prevented from gradually increasing the renewal price to consumers over time — which the FCA said is known as “price walking”— other than in line with changes in customers’ risk. For existing consumers, renewal prices would be no higher than the equivalent new business price.
The FCA contends that insurers’ current pricing practices and algorithms raise prices for consumers that renew with them year on year. While some people shop around for a deal, many others are losing out for being loyal. The FCA says insurers target price increases on consumers who are less likely to switch and use practices that make it harder for people to leave. At the same time, firms do not always offer regular switchers their lowest prices.
The FCA estimates that its proposals will save consumers £3.7 billion over 10 years.
Insurers agree with the call for reforms. The Association of British Insurers (ABI) said the home and motor insurance markets “do not work as well as they should for all customers,” and that the insurers support the FCA’s work to address this.
In fact, the insurer group, along with the British Insurance Brokers Association (BIBA), issued guidelines in 2018 that it says are working to address “excessive price differences between new customer premiums and subsequent renewal premiums.”
“Insurers and brokers have already begun to tackle the issue of excessive price differences between new and existing customers through an industry initiative that has seen over 8.5 million pricing interventions across home and motor insurance worth £641 million.
“It is vital that price comparison websites and insurance brokers are subject to the same level of supervision and monitoring by the FCA to ensure a balanced approach,” ABI stated.
The FCA said it has identified six million policyholders who were paying high or very high margins in 2018. If they paid the average for their risk, they would have saved £1.2 billion. The FCA maintains that some of this is due to “harmful pricing practices,” which its proposals aim to tackle.
Despite industry taking some steps to address concerns about pricing practices, the FCA said it believes its intervention is necessary.
Christopher Woolard, interim chief executive of the FCA, called the reforms a “radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers.”
The FCA is seeking views on its proposals by January 25, 2021 and said it hopes to issue new rules next year.
The FCA said it is also considering on other new measures to further boost competition and deliver fair value to all insurance customers including:
- Product governance rules requiring firms to consider how they offer fair value to all insurance customers over the longer term.
- Requirements on firms to report certain data sets to the FCA so that it can check the rules are being followed.
- Making it simpler to stop automatic renewal across all general insurance products.
The ABI said it will consider the FCA’s package of proposals.
“There are winners and losers in the way the market works currently with those who switch insurance provider every year often ending up with lower prices,” ABI said, adding that the FCA has “confirmed that insurers have not made excessive profits.”
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