The Financial Conduct Authority’s crackdown on the practice of ‘price walking’ – also known as the loyalty penalty – promises to create a fairer industry by saving consumers billions of pounds. But questions remain over its long-term impact.
On 1 January, the watchdog introduced new rules banning car and home insurers from quoting loyal customers a higher price for renewing their policy than they would pay if they were a new customer.
While price differences between new and existing customers is a feature of other competitive markets, insurers stand accused of using “complex and opaque” pricing practices that have led to very high prices for some long-standing customers. The FCA found that, on average, new customers paid £285 a year for motor insurance, while existing customers typically paid £370. The gap is even greater for customers in the home insurance market, with new customers tending to pay £130 versus the £238 price tag for loyal customers.
The radical move by the FCA to end this imbalance is expected to save consumers more than £4bn in insurance premiums over the next 10 years. Yet critics have raised concerns that the new regulation will see both existing and new customers face higher premiums as insurers seek to balance sales with margins.
Malcolm Tarling, chief media relations officer at the Association of British Insurers, says: “Everyone will be looking out for any unintended consequences. For example, where different parts of the distribution chain do not apply the rules in the same manner, leading to some customers not receiving the same outcomes as others.”
But he says the price of home and motor insurance will remain a commercial decision for individual insurers to take. “Home and motor insurance premiums are calculated by insurers independently, using a wide range of factors,” he explains. “For motor insurance, your age, type of vehicle, driving record and claims history will typically be relevant.”
Although the new rules are still in their infancy, data so far suggests that insurance customers are already facing heftier premiums as providers jostle to find their place in the new landscape.
Analysis from market research firm Consumer Intelligence showed that 55% of motor insurance brands on price comparison websites significantly increased prices in January. The results were even more pronounced across the home insurance market, with 70% of brands significantly increasing prices.
Consumer Intelligence said the rules had led to the biggest month-on-month increase in home and motor insurance in January in over eight years, with the average premium for home insurance jumping 9.1%, while motor insurance rose by 4.9%.
For Karen Houseago, head of insurance at Consumer Intelligence, the sharp rise in prices suggests the majority of insurance providers made a one-step change to new business premiums in order to be compliant with the new rules.
Houseago says: “It does appear that some providers either over or under-shot in their expectations of market-level inflation and have made adjustments subsequent to their initial pricing changes. However, it is still a very competitive market and we are neither observing nor anticipating an upward spiralling of prices at the rates we saw in January.”
But she concedes that underlying pricing pressures are broadly upward: “We do anticipate general inflation in prices across both motor and home in 2022.”
Indeed, the rising cost of motor repairs and parts, building materials and labour is placing pressure on premiums, with the average amount paid for damage repair to policy-holders’ vehicles rising by 59% between 2015 and 2020, according to the ABI.
According to Houseago, the changes will likely have a bigger effect on insurers with larger back books and longer tenure customers than on those with smaller back books. The rules also pave the way for new players and new insurance offerings to enter the market over the next 12 months.
Building consumer trust
The ban on price walking inevitably raises the question of whether further regulatory intervention is likely.
For Houseago, avoiding further FCA scrutiny will require insurers to be compliant not simply with the new rules, but the FCA’s overall ‘fair value’ principle, which is designed to ensure insurance providers are focused on driving the best customer outcomes through enhanced product governance.
Houseago explains: “One way providers can begin to demonstrate their commitment to championing customers is to start an open and transparent dialogue about the changes and why they’re happening. We’ve seen a small number of brands do this effectively through their customer communications since the beginning of the year, but this is not as common practice as we would have hoped at this point.”
One project has seen the ABI, together with insurance firms Aviva, Direct Line Group, Royal London, RSA and Standard Life, join forces with Plain Numbers to help people who struggle with numeracy to better understand customer communications, in an effort to build trust and generate better consumer outcomes.
Phil Jeynes, director of corporate strategy at insurance broker Reassured, says the key to building consumer trust is transparency throughout the underwriting process and clear communication about what the customer can expect in return for premiums.
“Too often this gets muddied by a tendency within the industry to worry about nuances in the sales process which are largely irrelevant to the end consumer – what they care about is clarity and value,” he says.
“By sticking to these core principles, consumer trust will follow and it won’t be necessary for the regulator to implement further legislative change.”