The gulf in price between renewals and new business is back in the media spotlight

BBC TV’s consumer programme Watchdog has criticised insurers for raising renewal rates while offering cheaper deals for the same cover online.

It’s an interesting issue for several reasons. Some say that dual pricing distorts the market and should not happen, a common gripe among brokers.

Another side of the argument is that dual pricing is here to stay and common practice both inside and outside insurance – though Watchdog gave examples of fairly extreme price gaps between new business and renewals.

What is more interesting is that two of the insurers mentioned have decided to look at how they price for new and existing business.

Both Admiral and Swiftcover said they would review the practice, and both blamed their computer systems for the price gulf.

Will other insurers follow suit, or will dual pricing continue once the national media spotlight has moved off the issue?


Direct Line’s debt move is a good way to boost ROE

Direct Line has had a debt issue in its plans for a while. Finance director John Reizenstein mentioned it to Insurance Times after the company released its third quarter 2011 results.

Issuing debt will serve a dual purpose. Firstly, it will free up equity capital, which can then be used to pay its current parent, RBS, a final dividend.

The reduction in shareholders’ equity will have another benefit. Because return on equity (ROE) is profit divided by shareholders’ equity, a smaller equity number will produce a more favourable ROE calculation.

Direct Line is focusing on making its ROE look as healthy as possible for a good reason – it is a key measure used by stock market investors to evaluate insurance company performance.

Also, having a more diverse capital base is never a bad thing and, given low interest rates, raising money from bond issues is relatively cheap right now. Direct Line is wise to take the opportunity.