With customers having less incentive to shop around following the FCA eliminating price walking, how can underwriters leverage data to offer discounts to their least risky customers?

The FCA’s general insurance pricing regulations represent a seismic shift in how insurers are able to extract value from their customers.

Since January 2022, underwriters are no longer able to differentiate between new customers and renewing ones when it comes to pricing. This makes competition on new policy pricing alone impossible and prompts a larger question – what will replace the new customer discount model?

Previously, many insurers would scoop in profit from customers who would remain on their books at higher rates having been initially enticed by new customer discounts. Now, however, they will have to seek out new methods for profit-making away from price walking.

For Jeffrey Skelton, managing director of insurance for the UK and Ireland at data firm LexisNexis Risk Solutions, the new model for boosting insurers’ bottom lines will involve “very aggressive segmentation” of customers by their risk profile.

Skelton explained that LexisNexis Risk Solutions has already seen a “considerable” increase in retention rates for insurers compared to prior years, due to the FCA’s regulatory changes. He said that customers were “no longer finding great discounts” from shopping around.

“If there’s no benefit to switching providers, then why switch?”

However, the main disadvantage of increased customer retention rates for insurers is that this can hamper business growth. Skelton continued: “Not everyone can grow if everyone’s holding on to what they’ve got.

“You don’t have this exponential growth and new insurance customers in the marketplace – it’s not like we’re importing billions of people every year to sell insurance to. There’s a defined pool of people.

“It’s a very cut-throat game – for my company to grow, yours has to lose.”

For insurers to grow, therefore, they will have to seek out new opportunities to offer discounted rates. Luckily, the FCA regulations allow for discounts to be provided to customers where there is data to evidence higher or lower risk profiles.

Enticing customers

Skelton predicted that insurance firms seeking growth will now target increased pricing segmentation.

Segmentation refers to the practice of dividing different groups of customers defined by certain characteristics into different risk profiles. Traditional customer segmentation in the insurance industry has relied on basic demographic data, but the advancement of data gathering methods now presents more developed opportunities for underwriters.

Insurers will realise that they can offer certain groups of customers bigger discounts than others for the same product based on data, Skelton explained. For example, in motor insurance, differential pricing could be offered based on something as simple as prior driving experience or vehicle type. 

Skelton believes that the opportunities to leverage data to identify lower risk customers are endless.

He said: “Increased segmentation is about looking at your data, giving it one more crank and seeing what other value you can squeeze out of it.

“What additional segmentation can we find in this information? What if I combine these two attributes – will that inform me differently than looking at them separately?”

Skelton added that different distribution channels – such as going direct to an insurer or via a broker – should also allow the market to try out higher or lower rates.

For customers who are shopping around, however, premiums will look broadly similar – unless insurers begin to segment their business.

Skelton said: “If insurance companies want to grow, they’ve got to figure out how to segment that new business so that they can attract those customers. They can’t look like everybody else.”

Squeaky clean

The way insurers can leverage segmentation most effectively will probably involve creating new books of business that are free from the weight of legacy costs, noted Skelton.

“There will be a shift to this idea of creating clean books of business,” he explained, “Insurers will say ‘you know what, I can actually offer this group of consumers a bigger discount than these other consumers for the same product’.”

Legacy books of business require that rates at renewal be set with prior performance in mind. One way to avoid this requirement is to start a new book with no legacy losses associated with it.

“Then you have the exact same product, but you can charge a lower rate,” said Skelton. “So you start with a clean book of business, same product, lower rates, but you change your underwriting criteria so that you’re only letting in the best risk.”

Insurers could then use their new data metrics on their customer pool to feed that new book of business, while being “ultrasensitive” to risk factors and sending any elevated risk profiles to their legacy book.

Skelton believes this approach would allow underwriters to create a “squeaky clean” book of business that is economically able to maintain lower, discounted rates for customers, since data has informed a much lower risk profile.

Firms could also then screen any renewals in the legacy book and move suitable risks across to the newer, cheaper book – this would slowly depopulate the legacy book, in which consumers would be paying a higher rate.

Mark Cliff, chairman at Hastings Direct, agreed with this concept, observing that ”more diversification of segmentation across the market” is certainly taking place following the implementation of the FCA’s pricing rules.

He said: ”If you’ve not been in a segment before, you can put some prices into a segment because you’ve got no legacy. [There are] some new entrants coming into spaces they’ve not been in because price walking is not applicable.”

In-depth data could empower underwriters to explore more profitable and less risky segments of consumers, creating a pricing market that is much more responsive to individual characteristics than ever before.

Taking advantage of the opportunities around segmentation will, however, necessitate that underwriters become more data literate – this is imperative if they are to make sure they are not left behind following the end of price walking.