Insurers between ‘a rock and hard place’ amid dual pricing

The current dual pricing situation is putting insurers between “a rock and a hard place” due to the complicated economics of selling insurance to consumers in the UK.

This was the message of Tony Tarquini director of insurance, EMEA Pegasystems, he said: “It would be extremely detrimental to insurance firms if the FCA were to enforce blanket bans on automatic price rises.

“The primary way insurers secure customers via comparison websites is via new customers-only pricing. With these comparison sites creating a market where consumers will always go for the lowest possible price, this has cultivated a situation where insurers always lose money in the first year of the deal.”

It follows the FCA releasing its iterim report today on dual pricing. 

He said that the only way to recover these losses was to raise the cost of insurance in later years.

“If every single consumer switched insurer annually to get the lowest price, insurance firms’ profits would be negligible and there would be no surplus cash to invest in improving services for customers. Let’s not forget that for most of the last 25 years underwriting UK motor insurance has been run at a loss – only investment income makes it (marginally) profitable,” he added.

Matthew Maxwell-Scott, executive director at ACSO echoed this, agreeing that insurers need to “do more” for customers when it comes to price, as vulnerable groups who so not shop around lose out, and it is clear they need added protection.

“We hope that, as a result of the FCA’s scrutiny of their pricing practices, insurers will turn their attention to rebuilding customer trust by making sure they improve their claims performance.

”This been compromised in recent years as insurers focus on winning new customers, not keeping their existing ones,” he added.

Although the end of automatic price rises could be counterproductive to consumers. “Insurers would be forced to increase their introductory offers so they could be sure of making money, meaning the customer would once again bear the brunt of the cost,” Tarquini said.

‘Very significant regulatory development’

Chris Chapman – a London partner in the Litigation & Dispute Resolution practice of international law firm Mayer Brown, said it was is a “very significant regulatory development”.

He continued: “This latest development illustrates how prepared it is to do that, more so than traditional competition regulators, and in an important sector - with the retail general insurance market in the UK generating £24 billion of revenue in 2017.”

But he said that it also represents an ongoing shift towards pricing regulation which could transform the way financial services in the UK and the rest of the world operate.

Levelling playing field

But some insurers have been addressing the issue and that regulatory focus might create a level playing field to accelerate action as Keith Richards, managing director for engagement of the Chartered Insurance Institute, pointed out.

He said: “The FCA’s intervention has been expected for some time but we should not forget that the issue is not unique to insurance. Internet, cable and telephone companies employ similar pricing strategies in a market where consumers generally focus on price rather than benefits and value.”

Although the CII welcomed the FCA’s decision not to intervene in a prescriptive way and therefore focus on governance practices the sector.

Consumer trust

“Our own public trust index has shown that pricing practices around renewal are by far the biggest factor that negatively impact consumer trust, and we are not surprised to see the FCA focus in this area,” Richards added.

The FCA paper states that consumers tend to focus on the initial price of an insurance contract, rather than renewal prices.

“This means that unless the regulator keeps close tabs on governance throughout the sector, there will always be a short-term reward for firms that take a less stringent approach to their treatment of vulnerable clients,” he added.

Richards suggested that the only permanent solution for treating customers fairly with renewal pricing will be from focussing competition on sustainable factors such as quality of protection given to clients, the longer-term cost of the contract and the speed and ease of service for clients.

“The insurance profession as a whole has a challenge to develop ways to demonstrate the quality of its service as powerfully as the initial cost of the contract,” he said.

Clear and transparent 

Sharon Beckett, managing director at Be Wiser welcomed the FCA’s move. She continued: “As well as being fair and equitable for customers, it’s logical that renewal premium levels should be lower than new business costs, because underwriters will be in a position to more fully understand the risk.

“In fact, unless the customer has claimed, or there’s been a fundamental change in their circumstances, prices should fall, apart from rises needed to reflect inflation.

“The outcome we all want to see is that policies are priced correctly in the first place, and these new proposals from the FCA should make that happen.”

Tarquini stated that as per the FCA’s recommendations, what insurers “must do” is be clear and transparent in their dealings with consumers, and that it was a fantastic opportunity for insurance companies to build trust with its customers and therefore reduce customer churn.

He suggested using artificial intelligence to determine all possible actions with individual customers having curated deals offered to them.