Stephen Kennedy, director of insurance pricing at Pearson Ham, reviews the impact of the FCA’s pricing practices reform on premiums in the last year
Regulatory changes following the FCA’s general insurance pricing practices market study in September 2020 were aimed to improve sector-wide competition, provide longer term fair value for consumers and bolster customer trust in insurance.
The FCA anticipated that the average prices paid by customers would drop and competition would remain intense, driven by differences in product features, quality and service. Several product and pricing strategies were observed by market commentators, both before and after the changes came into force.
Having now passed the 12-month milestone after the rules came into full effect from January 2022, with both previous and current year prices being set in the new regulatory context, it is worth reviewing how well the FCA’s objectives have been met.
The FCA estimated that around six million customers were being overcharged by £1.2bn by not switching providers.
Clearly there were issues with the way general insurance pricing was working.
A market where prices were unsustainably low for new business but increased with tenure caused challenges - it could adversely affect customers’ perceptions of fairness and any inaccuracies in lifetime value predictions could have a serious impact on insurers’ profitability.
Prices had already been falling throughout 2020 - before the changes were announced - due to the impact of the Covid-19 pandemic. This continued throughout 2021.
Strategies to drive acquisition ahead of the new regulations were aided by changes in customer behaviour and reduced claims frequency. In both home and motor, acquisition prices rose sharply in January 2022 followed by a period of recalibration.
However, some providers did not make any pricing changes until the first or second week of 2022, which may have been facilitated by holding back on renewal invites or sending them early.
A smaller number of providers waited even longer, made more gradual premium changes each month, or did not deploy any changes at all.
As renewal prices dropped, insurers enjoyed their highest ever retention rates – this had the impact of reducing new business demand. Product features additionally became differentiators, with new product development focused on reduced cover - higher excesses enabled prices to be kept low.
It is difficult to fully isolate the impact of the FCA changes as other factors have significantly impacted pricing too. Energy inflation, paint and material prices, courtesy car costs, parts delays and labour force shortages have combined to drive the cost of claims up, resulting in premiums increasing since the middle of last year.
However, the ABI reported that in 2022, the average price paid to renew an existing motor insurance policy fell by 7% compared to 2021 to £392, while the average new business price rose by 11% to £500. This rebalancing could be viewed as a success by the FCA.
One year on, the market continues to adapt and prices are still fluctuating. Insurers are getting used to new pricing strategies and optimisation approaches while contending with rising costs and claims inflation. Opportunities exist, but only for providers able to react to changing market conditions.