Stephen Kennedy, director of insurance pricing at Pearson Ham, reviews how the FCA’s general insurance pricing reform is bedding in after coming into force from 1 January 2022
How quickly are insurance prices changing following the FCA’s GI pricing reform?
Prices in home and car insurance have been in a downward spiral since the start of the pandemic.
Over the past two years, car insurance prices have dropped by around 13%, with a slightly lower movement observed for home cover.
As Covid-19 restrictions have been eased, there was an expectation that prices would rise - this did not materialise.
It was also predicted that new business rates would increase in the months running up to the end of 2021. While some insurers did start to raise their prices last November, most waited until December - or even into the first few weeks of January - before deploying increases.
Several providers reduced prices in the last quarter of 2021, to drive additional volume ahead of implementing big price increases.
What movement are you seeing with customers switching providers?
For more than a decade, customers have learned to shop around for better deals – they are unlikely to stop immediately.
However, given overall market increases, it will be more difficult to make the same savings through switching insurers as it has been historically. It is too early to say how customer switching will be impacted in the longer term, although there are early signs that market quote volumes have reduced.
How are price changes affecting home and motor insurance?
On average, the most competitive home insurance prices quoted on price comparison websites have increased by around 14% in response to the FCA’s changes, while car insurance prices have increased by 7%.
Home prices went up earlier and have continued to rise throughout February, whereas motor pricing appears to be stabilising.
An expected rebalancing of new business versus renewal pricing has inevitably resulted in most customers who shop around being quoted higher prices.
Some insurers with large back books appear to have priced themselves out of the new business market to protect value within their existing business, with observed price hikes of up to 65%.
Following initial increases, we’ve seen prices stabilising in February. However, some further calibration is likely over the coming months.
As we move into 2023, when both previous and current year prices will have been set within the new regulations, it’s possible that we may see more stabilisation of pricing.
What challenges do brokers face from the FCA’s reform?
Broker pricing has become reliant on lifetime value models, with low acquisition rates to attract customers who become profitable in subsequent years.
Margins are tight with large dependencies on add-on products and premium finance - with the FCA’s focus on fair value, it will be challenging to leverage these revenue streams much further.
There may be opportunities for brokers to promote service and other non-pricing elements to attract new customers, however price remains the main driver of consumer decision-making.
Portfolio management is now more important, as is a clear understanding of back book risks versus new business.