Firms have until January to feedback on the FCA’s final proposals for ending ‘opaque’ pricing practices

Firms will be forced to offer the same price for insurance products at renewal as they do for new business, the FCA said in its final report on pricing practices released today.

The proposed remedy aims to end the practise of so-called ‘price walking’, where customers - particularly in retail motor and household - are penalised by paying higher premiums upon renewal.

Firms will be forced to ”offer a renewal price that is no higher than the equivalent new business price for that customer through the same sales channel”, it said.

The FCA highlighted particular concerns with vulnerable customers falling victim to this practice.

The report is a culmination of a two-year study, which looked at thousands of policies and consulted widely with industry stakeholders and the public.

Firms will have until 25 January 2021 to offer feedback on the proposals.

The FCA found that:

  • On average, new customers pay £285 for motor insurance, while customers who have been with their provider for more than five years pay £370.
  • New customers for buildings insurance pay £130, while customers who have been with their provider for more than five years pay £238.
  • New customers for combined buildings and contents insurance pay £165, while customers who have been with their provider for more than five years pay £287.
  • New customers for contents only insurance pay £56, while customers who have been with their provider for more than five years pay £138.
  • 10 million policies across home and motor insurance are held by people who have been with their provider for five years or more.

”Despite industry taking some steps to address concerns about pricing practices, we believe that FCA intervention is necessary to address the harm we have identified in this market and to deliver good outcomes for consumers,” the report said.

It added that the package of remedies ”would stop firms systematically increasing prices in home and motor insurance for loyal customers in the future”.

The FCA is also consulting on measures to stop auto-renewal being used as a barrier to switching, it said.

”It is important that general insurance markets work well and deliver good outcomes for all consumers,” the report said.

”Our work on general insurance pricing practices has shown this is not the case. We found extensive evidence of some firms gradually increasing the price to customers who renew with them year-on-year.”

It said firms use ”complex and opaque pricing techniques to identify consumers who are more likely to renew with them”.

”Firms then increase prices to these customers at renewal each year, resulting in some loyal customers paying very high prices.

”In addition, some firms use practices that can discourage consumers from shopping around.

”While lower prices are available for consumers if they regularly switch or negotiate with their existing provider, price walking distorts competition and increases costs for both consumers and firms, leading to higher overall prices for consumers.

”All consumers should be able to make informed choices about general insurance products that meet their needs at a suitable quality and price, and they should not be exploited or targeted with poor value products.”

The FCA said it recognised that it was consulting during a challenging time for the industry, as it battles the effects of the Covid-19 pandemic, but it is important to ensure customers are ”treated fairly”.

Under the proposals, firms will have to provide data to ensure they are pricing fairly and the FCA said it may publish that data as a “sunlight” measure.

The FCA admitted that the pandemic has had a positive impact on pricing, but this has not “fundamentally changed the way in which firms set their prices or altered our concerns about pricing practices”.

It added: “We believe action is still required to address the harms we have identified.”

Commenting on the report, the ABI’s general director Huw Evans said the trade body agreed with the FCA ”that the household and motor insurance markets do not work as well as they should for all customers, and we continue to support the FCA’s work to address this”.

“Insurers and brokers have already begun to tackle the issue of excessive price differences between new and existing customers through an industry initiative that has seen over 8.5 million pricing interventions across home and motor insurance worth £641 million.

“It is vital that price comparison websites and insurance brokers are subject to the same level of supervision and monitoring by the FCA to ensure a balanced approach.

”We will consider carefully this package of proposals, so that we can engage with the FCA on the most effective measures possible. There are winners and losers in the way the market works currently with those who switch insurance provider every year often ending up with lower prices. The FCA has confirmed that insurers have not made excessive profits.”

What the FCA found:

Some firms gradually increase the price to customers who renew with them year-on-year. This is called price walking.

When setting a price, most firms take account of the likelihood that a customer will switch supplier at their next renewal, or in the future.

Some firms also use practices that make it more difficult for consumers to make more informed decisions and raise barriers to switching. In particular, we saw practices that make it difficult for consumers to stop their policy from automatically renewing.

The cost of attracting business is significant. Using financial data from firms, we estimate that the cost of attracting business is £2bn per year for insurers, £0.3bn for intermediaries and £0.1bn for price comparison websites. Ultimately, consumers will bear this cost by paying higher prices.

The fact that firms use price walking practices is not clear to customers and so many are not aware that firms do this.

Some consumers are unlikely to switch because they do not know that their renewal price may not be competitive. These consumers tend to be price walked each year. Some consumers may wrongly view price increases as due to industry-wide cost increases and so underestimate the benefit of switching provider. Over time, some of these consumers are charged prices that are substantially greater than those available if they were to switch.

Many consumers who frequently switch provider or negotiate their premium can get lower prices. Shopping around and switching is generally good for competition and can benefit consumers, for example where consumers want to find better quality products or better service. However, shopping around and switching merely to avoid price walking takes time and effort and can impose unnecessary costs on consumers and firms.

Our analysis of data combined from consumer research and from firms shows that people who pay high premiums are less likely to understand insurance products or the impact that renewing with their existing provider has on their premium.