FCA pricing report benefits customers – but is there more to it?

The insurance industry has largely backed the FCA pricing practices report as being right for the customer.

The FCA’s report proposes a ban on ”price walking”, meaning that the customers – new or existing – should be charged the same price for insurance. It also puts forward a significant reform on home and motor insurance markets through measures that enhance competition, while also ensuring fair value for customers and increasing trust.

At face value, the FCA’s report benefits the customer, but is there more to it?

Biba previously made clear that price was not the only deciding factor in insurance purchasing, meanwhile the rest of the insurance industry has echoed a similar trajectory as well as raising various other concerns.

Reasonable

According to Keith Richards, chief membership officer at the CII, the FCA’s ban on price walking and governance proposals is reasonable.

Richards continued: “The FCA’s solution – to require firms to charge the same for existing as new customers – is very much in line with what customers have been telling us they want.

“Normally, we would be concerned about prescriptive regulatory intervention on charges, because this often leads to unintended consequences. However, in this case, well-known behavioural biases (choosing the best option in the short term, rather than the best option in the long term and favouring the status quo) mean that there are competitive pressures on insurers to engage in price walking – as many firms do in several key markets, including utilities – even if they would prefer not to.”

But Richards said there still may be instances where insurers want to offer cheaper prices to new customers in order to change the risk profile of their book, for example wanting to set a lower price in order to continue to attract new, lower risk customers, while also repricing existing customers to take account of their changing risk profile.

“In this way, it would be trying to retain cover for as many existing customers as possible, while also providing a competitive rate for new customers, not because of price walking, but because of a genuine change in the nature of the risk,” he added. ”It may be useful for the FCA to consider producing governance standards that would allow firms to do this with proper regulatory supervision, without breaking the spirit of the rules.”

Richards did, however, welcome the announcement that the FCA is not ending auto-renewals, pointing out that auto-renewal is helpful to customers as it stops them from allowing their cover to lapse, which would expose them to risk.

Transparency

Mark Bower-Dyke, chief visionary officer at Be Wiser Insurance, said that price increases should be based on risk profiles and inflation, but transparency is key.

He told Insurance Times: “These proposals are the right result for the customer. It has never been fair that existing customers should be disadvantaged by a pricing system focused on new business to the detriment of people who have been loyal to an insurer.

“Price increases should be based on changes to risk profile, plus inflation, and this should be transparent and consistent. We have always taken this approach – we believe that nothing should change at renewal other than these elements. Apart from that, renewal premiums should be lower than new business premiums.

“We will need some time to look at the FCA proposals in detail, but if they correct this issue and are adopted it feels like it will be a significant and positive step forward for the industry.”

Not yet enacted

But Mohammed Khan UK general insurance leader at PwC UK, pointed out that the remedies are yet to be enacted, and may not be in place until potentially 2022. He said that this means that customers who do not traditionally shop around for insurance will not see the potential benefit of this for another two years.

“The proposed rules can have a significant impact on certain business models particularly firms with large back books,” he added. ”Firms will be reviewing the impact of these remedies on their strategies and business models. Considering the strength of the proposed remedies it is likely the insurance and broker markets will see significant changes well before the date the new rules become effective.”

Short term risks

Meanwhile, David Miller, financial services partner at KPMG, warned on the short-term risks, despite the report cutting “straight to the heart” of the issue of fair pricing by removing the practice of increasing prices over time that penalise long-standing customers.

”While there are potential consumer savings in the long-term, there is a risk of short-term pricing increases for new customers,” Miller said. ”The unintended consequence of these measures could also have significant impact on the wider insurance ecosystem, as consumers are less incentivised to shop around, impacting insurers’ distribution strategies.

“This leaves insurers with much to consider regarding some of the fundamentals of how they do business.”

Vulnerable customers

Rodney Bonnard, UK head of insurance at EY, said that the FCA’s report represents “radical intervention in home and motor insurance” and goes further than the industry was expecting.

The biggest change being the end of price walking, which could result in parity across the industry.

Although he warned: “While this should mean that on average premiums will be lower, it’s likely that older customers, who were less prone to switching, will enjoy the larger savings while younger customers, who tended to shop around more, may see their premiums rise.

“For many general insurance firms this is likely to mean an overhaul of their business models and a reset to their pricing to reflect longer-term relationships. Fundamentally, it will provide the opportunity to build brand loyalty and have better engagement with customers.”

Implementation challenges

Graham Wright, UK P&C pricing product claims and underwriting lead at Willis Towers Watson, said that one of the biggest challenges for insurers and intermediaries alike is managing the implementation transition given current market competitive pressures.

As well as deciding how and at what point these price changes should be made.

Wright continued: “While at face value the proposed remedies will require insurer and intermediaries to significantly adapt their pricing practices, the scale of the change is not incomparable to that which was required of the industry in 2012 when the ruling against the use of gender in insurance pricing was enacted.

“To that end, we would expect the insurance industry to rise to the challenge posed by the FCA over the coming months. It is also worth noting that although the main focus is on home and motor insurance, the product governance rules will also apply to wider general insurance and pure protection products.”

Wright warned that that stopping firms from price optimising completely could lead to less effective competition and worse consumer outcomes overall.

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 Read more…Briefing: The winners and losers from the FCA’s pricing ban

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