FCA proposes ‘radical’ reform to motor and home insurance

The Financial Conduct Authority (FCA) is consulting on reforms to the insurance sector, designed to enhance competition, with the proposals predicted to save motor and home insurance consumers £3.7bn over 10 years when they renew existing policies

Under the plans, anyone renewing a home or motor insurance policy would pay no more than they would if they were new to their provider through the same sales channel.

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.

The regulator said that currently firms use complex and opaque pricing practices that allow them to raise prices for consumers that renew with them year on year. 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 6m policyholders were paying high or very high margins in 2018, with overpayments totalling £1.2bn.

The consultation is looking at other new measures to further boost competition and deliver fair value to all insurance customers.

These include 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; and 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.'

David Miller, financial services partner, KPMG said the proposals ‘cut straight to the heart of the issue of fair pricing’ and would remove the practice of increasing existing prices relative to new prices over time, therefore penalising longstanding customers for not shopping around.

However, he warned that whilst there are potential consumer savings in the long-term, there is a risk of short-term pricing increases for new customers.

‘The unintended consequence of these measures could also have significant impact on the wider insurance ecosystem, as consumers are less incentivised to shop around, impacting insurers’ distribution strategies.

‘This is a very significant intervention aimed at improving customer outcomes, with a number of the remedies going beyond the motor and home insurance. This leaves insurers with much to consider regarding some of the fundamentals of how they do business,’ Miller said.

Mohammad Khan, UK general insurance Leader at PwC UK, pointed out that consumers who regularly shop around for motor and home insurance will likely see premiums rise, with a potential hike of over £50 in young drivers’ annual insurance premiums.

Khan said: ‘The proposed remedies will, however, have some time to be enacted - potentially by 2022 at the earliest - which means that customers who don’t traditionally shop around for insurance will not see the potential benefit of this for another two years.

‘Firms will be reviewing the impact of these remedies on their strategies and business models. Considering the strength of the proposed remedies it is likely the insurance and broker markets will see significant changes well before the date the new rules become effective.’

Rodney Bonnard, UK head of insurance at EY, described the FCA’s report as ‘the most radical intervention in motor and home insurance by the FCA since its inception and arguably goes further than the industry was expecting.’

‘It signals a fundamental change to current market dynamics and practices, with the biggest change being the end of “price walking”, as all firms must now offer existing customers the same price for renewal as they would offer a new customer.

‘For many general insurance firms this is likely to mean an overhaul of their business models and a reset to their pricing to reflect longer term relationships. Fundamentally, it will provide the opportunity to build brand loyalty and have better engagement with customers.’

The consultation closes on 25 January 2021. The FCA says 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.

Useful links:

General insurance pricing practices market study Consultation on Handbook changes

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