The FCA has published the final report of its market study into the pricing of home and motor insurance and has concluded that these markets are not working well for consumers.
The regulator is proposing significant reform of these markets through measures which seek to enhance competition, ensure consumers will receive fair value, and increase trust in these markets.
The FCA is proposing that when a customer renews their home or motor insurance policy, they pay no more than they would if they were new to their provider through the same sales channel. For example, if the customer bought the policy online, they would be charged the same price as a new customer buying online. Firms would be free to set new business prices, but they would be prevented from gradually increasing the renewal price to consumers over time (known as ‘price walking’) other than in line with changes in customers’ risk. For existing consumers, their renewal price would be no higher than the equivalent new business price.
Firms use complex and opaque pricing practices that allow them to raise prices for consumers that renew with them year on year. While some people shop around for a deal, many others are losing out for being loyal. Firms target price increases on consumers who are less likely to switch and use practices that make it harder for people to leave. At the same time, firms do not always offer regular switchers their lowest prices. The FCA identified 6 million policyholders were paying high or very high margins in 2018. If they paid the average for their risk, they would have saved £1.2 billion. Some of this is due to harmful pricing practices, which the FCA’s proposals aim to tackle.
The FCA is also consulting on other new measures to further improve 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.
Christopher Woolard, interim chief executive of the FCA, said: “We are consulting on a radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers.
“The package would also ensure that firms focus on providing fair value to all their customers. We welcome feedback on the proposals.”
The regulator believes that, In the long-term, the proposed remedies are designed to improve competition. This should lead to lower costs for supplying insurance, and ultimately lower the prices paid by consumers on average. The FCA estimates that its proposals will save consumers £3.7 billion over 10 years. The FCA will monitor the impact of these proposals on the market.
The FCA is seeking views on its proposals by 25 January 2021. It will consider all the feedback and intends to publish a Policy Statement and new rules next year along with its response to the consultation feedback.
Alongside the potential remedies outlined above, the FCA has published rules on the publication of value measures data on claims frequencies and acceptance rates, average claims pay-outs and claims complaints across all general insurance products. This data provides an important indicator of how insurance products are performing. Making this information available to firms, as well as the media and consumer groups should help deliver better outcomes in the market.