I’ve been following with interest the UK Financial Conduct Authority (FCS)’s recent market study – General insurance pricing practices, and for those that have missed this, the FCA have been looking at the current practice of charging existing customers more for their home or motor insurance renewals than new customers.
“Price Walking” has been prevalent in the industry for years; combined with the increasing use of auto renewals, the FCA have concluded that customers are losing out to the tune of over £1.2bn a year.
Motor insurance premiums have been found to vary by up to 30%, with an average new premium of £285 compared with £370 for a renewal. The same story is true in home and contents: £165 to £287. These are not trivial numbers, and the FCA have clearly decided it’s not acceptable.
Insurers are not typically viewed as paragons of treating customers fairly nor always best known for providing outstanding service. Consumers, as a rule, buy insurance because they have to; motor insurance is a legal requirement and buildings insurance is typically a pre-requisite often insisted upon by a mortgage provider.
Regrettably, the general population is not encouraged to understand that the basic premise of insurance is to protect one’s assets and to cover potential third-party liabilities. Instead we are inundated with advertising encouraging us to shop around and pay as little as possible for fundamentally a distressed purchase. Only a few “brave” insurers set their stall out around the underlying value of the product and the service provided rather than price.
The relationship between price and service
The FCA acknowledge that there is a relationship between price and service, and therefore a discrepancy in pricing, but service is a hard thing to compare and measure when the only time an insured gets to experience service is in the event of a claim. The vast majority of people pay their premiums and, other than at renewal never interact with their chosen insurer/broker. With the increasing use of auto-renew it’s all too easy to inflate a premium without due cause and simply rely on a customer’s oversight or apathy to check whether they are paying a fair price.
There appears to be little logic in charging an existing customer more for the same risk than that being offered to a new customer; it’s clearly a marketing decision. The increasing use of clever software to guess which customers are more likely to accept an increase than others also appears unfair. The insurance market is perverse; one would be hard-pressed to think of any other industry which penalises loyal customers, so it’s hardly surprising that once this becomes clear to a consumer, there is a breakdown in trust.
The FCA appears intent on putting an end to the practice and to ensuring that consumers are protected. This will be achieved by either the insurer/provider self-regulating and ensuring that there is no difference in the price being offered, or by the FCA imposing rules around disclosure and greater transparency so that it is made abundantly clear to the consumer whether they are being disadvantaged by not actively shopping around.
A word of caution
On the face of it, this sounds like good news for the consumer. A word of caution though: there is every possibility that with the harmonising of new and renewal pricing that the average premium is actually increased. Aggregate premiums for the market will still need to cover claims, administrative, and distribution/commission costs. Hard-pressed motor underwriters would only be too happy to see premiums increase so that underwriting profits become the norm and not the exception.
Further, there are a huge and growing number of alternative distribution channels for insurance products. The amount of capacity (i.e. underwriters) and therefore the ultimate service providers are, through continuing trend in mergers, in decline, so one can see that the “choice” for the consumer for products may well increase, but that it will become hard for the consumer to compare and contrast products which look very similar and are potentially only differentiated in the complex policy wordings which most people a) don’t read and b) don’t fully understand.
Treading the line
The FCA will need to tread a fine line between wishing to retain a free market whilst at the same time controlling how prices are set. Insurers and distribution partners should be encouraged to deploy new technology to not only reduce costs but also to improve customer service. It doesn’t seem unreasonable that a high proportion of these benefits be retained by the business making those investments and converted into profit, rather than being obliged to pass all the savings on to the consumer; market forces should be sufficient to regulate this.
There is also a clear risk that, whilst premiums might be equalised, product distributors, be they brokers or direct capacity providers, will focus more on supplementing their income through sales of add-on products and providing expensive premium finance. Also not considered is the ability of the provider to charge for small changes, mid-term adjustments (MTA’s) which do not have any impact on premium – or if they do, what controls are in place to make sure any increase in premium is reasonable?
Outside of indemnity costs, the highest proportion of expense in a policy is the commission/acquisition cost. Perhaps this is an area that should be investigated further. The price comparison sites have a near monopolistic stranglehold on the personal lines market. Charging typically £45+ a policy is disproportionate for the limited service provided, and insisting on most favoured nation (MFN) pricing is resulting in the very outcome the FCA is wishing to avoid – namely a plethora of products which are very hard to differentiate between.
A single, marginally-costed comparative quotation platform open to all market participants would cut costs at a stroke, negate the need for expensive marketing budgets, and facilitate a far easier way of comparing products with one another. All of which would be good for the consumer and meet the aspirations of the FCA.
Transparency is key
“Price Walking” is clearly an issue and should, quite rightly, be eradicated; in my opinion this is an “above the parapet” issue, i.e. high visibility and pretty straightforward to resolve. I would suggest, however, that there are, albeit less obvious, structural and related transactional issues which have a far greater impact on the overall costs incurred by insurers and the service provided to consumers – but I’ll save that for another time…