The Financial Conduct Authority (FCA) has proposed that insurance firms implement rules around pricing practices by 1st October 2021.
After conducting a large-scale study over two years, the FCA found that retail, home and motor insurance markets are not working well for all consumers. It has confirmed proposals to prohibit “price walking” practices. Further proposals since these findings were published state that the 1st of October deadline is “for the systems and controls rules and the product governance rules and until the end of 2021 for the pricing, auto-renewal and reporting requirements. In reaching this decision, we have sought to balance ensuring firms have sufficient time to put the changes into effect and acting quickly to address consumer harm.”(FCA).
Why is the FCA getting involved and what is ‘price walking’?
The FCA’s market study (over a two-year period) found extensive evidence that some firms gradually increase the premium price to customers who renew with them year on year. This is called price walking. The FCA’s report goes on to mention that firms are using complex and opaque pricing techniques to identify consumers who are more likely to renew with them. These firms then increase prices to these customers at renewal each year resulting in some loyal customers paying very high prices.
According to the FCA, it is estimated that the cost of attracting business is £2 billion per year for insurers. £0.3 billion for intermediaries, and £0.1 billion for price comparison websites. This means the higher prices are ultimately paid for by the customer.
What have the FCA found in their pricing investigation?
The FCA’s analysis shows that for a typical risk, on average, new customers:
- Pay £285 for motor insurance while customers who have been with their provider for more than 5 years pay £370.
- For buildings insurance pay £130 while customers who have been with their provider for more than 5 years pay £238.
- For combined buildings and contents insurance pay £165 while customers who have been with their provider for more than 5 years pay £287.
- New customers for contents only insurance pay £56 while customers who have been with their provider for more than 5 years pay £138.
- 10 million policies across home and motor insurance are held by people who have been with their provider for 5 years or more.
Almost 46 million home and motor insurance policies were written in 2019. Home and motor insurance generated almost £18 billion in gross premiums in 2019. Arguably, this is an important facet of the UK economy. However, if the general insurance markets are not working well and delivering good outcomes for all consumers, further investigation is warranted by the financial body.
Measures will be put in place to ensure that:
- Customers are not penalised for remaining loyal to their insurer upon renewal
- Any other products sold alongside policies are taken into account for fair pricing
- Insurers are compliant with the FCA’s regulations through new reporting requirements
- Customers have the ability to switch easily (i.e. they can easily stop their policy from auto-renewing)
Consumer trust needs to be built within the insurance market; especially during a highly disruptive time when more autonomous products are being gradually introduced to the sector. So what is expected from firms going forward?
What do firms need to do?
The FCA has proposed that firms must implement certain remedies by the end of September 2021. These remedies will require significant operations and business-wide changes. For example, re-coding IT systems as well as introducing (and more importantly, testing) new pricing models are some of the more momentous tasks firms are facing.
Additionally, the FCA is consulting on other new measures to further boost competition and deliver fair value to all insurance customers including:
- Product governance rules requiring firms to consider how they offer fair value to all insurance customers over the longer term
- Requirements on firms to report certain data sets to the FCA so that it can check the rules are being followed
- Making it simpler to stop automatic renewal across all general insurance products
The September deadline to have all of this in place by is no small challenge for insurers. These regulation implementations must be highly auditable and transparent for full compliance.
The FCA is continuing to work with firms and will publish their final rules in due course. Firms must plan their change programmes now to manage the final regulation ruling deadline, which is only a matter of months away.