The FCA published its interim report of its market study into the pricing of home and motor insurance on 4 October. The report sets out the FCA’s initial findings and possible remedies to tackle the issues surrounding pricing practices in the insurance industry, in particular to address the high prices that loyal customers are paying. Alongside the paper, it has published an evaluation report on the intervention measures it took in 2017 on transparency at renewal.
The FCA has uncovered a number of problems relating to insurance pricing and estimates that up to 6 million policyholders are getting a bad deal on their insurance. The report is particularly critical of “price walking” – the fact that firms use pricing practices that allow them to raise premiums for renewal business and do not make this clear to consumers. The FCA’s concerns include the following:
- Insurers attract new customers by offering a discount but they increase premiums when these customers renew their policies – and target increases at customers least likely to switch;
- Firms are not transparent about pricing (including reasons for price changes) so customers cannot know whether the price is competitive without searching for other offers;
- Customers who are less likely to understand insurance pricing or lack the ability to shop around for a more competitive price end up paying more – FCA has identified that one third of customers who pay high premiums showed at least one characteristic of financial vulnerability;
- Firms engage in practices to discourage switching;
On the whole, customers who do switch can get a good deal, but sometimes even switching attracts high premiums.
The FCA has estimated that around 6m customers paying high premiums could make annual savings of c.£1.2 billion if they paid the average price for their risk. Whilst the FCA has already implemented changes to improve transparency which have seen customers make significant savings, the report sets out further possible remedies. FCA also thinks intervention will be required – in particular it is not happy with the overall response of firms to its Dear CEO letter of October 2018. These include:
- Challenging high premiums for customers, possibly by restricting or banning firms from increasing prices for renewing customers and/or introducing automatic switching.
- Encouraging firms to be transparent when dealing with customers. The FCA has recommended improvements to the way firms communicate with customers.
- Banning practices that deter customers from switching. This may involve banning policy auto-renewal or making it opt-in only.
- Embracing innovation so general insurance markets benefit from technological advances, e.g. Open Finance.
The FCA will publish its final report and consult on possible remedies in Q1 2020. In the meantime, it welcomes comments on the interim report by 15 November.