Shares in general insurers were lower heading into the weekend after the Financial Conduct Authority (FCA) published its interim report on pricing in the £24bn a year UK retail insurance market.
The report makes grim reading, the key finding being that 6m customers pay high prices and many loyal customers are not getting a good deal.
It estimates that if those customers paying high premiums paid the average premium for their risk 'they could save around £1.2bn a year’.
It also found that insurance firms actively engage in a range of practices to raise barriers to switching, which is anti-competitive.
Central to the FCA’s study is the insurance industry’s ongoing exploitation of existing customers for the benefit of new customers.
Despite new rules introduced in 2017 insurers are still selling policies to new customers at a discount while increasing premiums to existing customers when they renew.
Damningly, the FCA found that one in three people who paid high premiums ‘showed at least one characteristic of vulnerability such as having lower financial capability’. It goes further, saying that ‘lower income consumers (below £30,000) pay higher margins than those with higher incomes’.
It also found that ‘people who pay high premiums are less likely to understand insurance or the impact that renewing has on their premium’.
In September 2018, Citizens Advice made a ‘super-complaint’ to the Competition and Markets Authority (CMA) over loyalty pricing in five markets, one of which was home insurance.
The CMA responded last December with a recommendation that the FCA looked into ways of tackling what it called ‘price walking’ – or the bumping up of renewal prices – and other harmful practices.
With over 45m home and motor insurance policies written a year, the FCA wants the industry to deliver 'good outcomes for customers’.
RAFT OF REMEDIES
The study found that firms use ‘complex and opaque pricing techniques’ to identify customers who are more likely to renew and from whom they can therefore earn higher margins.
They give these customers higher renewal quotes and automatically renew their policies, while at the same time their contracts discourage customers from shopping around.
Therefore the FCA is considering various remedies such as banning what it calls ‘margin optimisation’ based on the likelihood of a customer renewing; making insurers automatically switch customers who are paying high prices to lower-priced products that provide the same cover when they renew; and making insurers give customers information about alternative deals as well as identifying those who might need help moving to better-priced products which provide the same level of cover.
This effectively puts the burden on the insurance industry to make sure that customers are getting a good deal rather than the customer having to do all the leg-work.
Also, while it isn’t imposing price regulations, these remedies will increase the insurers' cost bases while reducing the margins they can make on renewals. Moreover if the industry doesn’t play ball the FCA has a big stick in the form of ‘a range of industry-wide measures to reform these markets’.
Insurance is the first market which the FCA has targeted: still to come are reports on 'price-walking' in markets like broadband and mobile phone contracts.