While better late than never, many believe that proposed changes to the UK insurance sector are long overdue. The Financial Conduct Authority (FCA) recently announced a revamp of regulations covering car and home insurance costs. For many years loyal insurance customers have been "penalised", with annual premium increases partly funding discounted new customer deals. In many ways, this is one of the main reasons why price comparison websites have seen a considerable rise in popularity in recent times.
The announcement of the changes was relatively brief and to the point, but they will rock the foundations of the insurance sector, changing the way they do business in the future.
Insurance market research proves an eye-opener
It has long been common knowledge that loyal insurance customers were effectively subsidising new customer insurance offers. In 2018 Which! magazine and the FCA carried out independent research into this area. The results of these surveys form the basis for what are considerable changes to the industry.
Which! Magazine survey
The research by Which! magazine focused on home insurance and involved more than 5000 people in the UK. Contributors were asked how long they had been with their insurer and the cost of premiums. The results were staggering:
- Existing customers paid on average 20% more than new customers
- Those staying loyal to an insurer for between 15 and 20 years were paying a staggering 75% more than new customers
Once this information was in the public domain, it is obvious that change was needed to bring the insurance sector into line.
The FCA has for many years been monitoring complex and opaque pricing policies in the insurance sector. This prompted research in 2018, which took in around 6 million policyholders in the UK. Due to a mix of loyalty penalties and different pricing policies, the conclusions were astounding:
- 6 million customers were paying £1.2 billion more than new customers
- Changes to the sector will save insurance customers more than £4 billion over ten years
So in effect, 6 million loyal insurance customers were funding promotional deals for new customers to the tune of £1.2 billion. A huge subsidy!
Changes to insurance policy pricing
As a consequence of the above research, the FCA will bring in several changes on 1 January 2022. These will ensure that:
- Renewing customer premiums will be no higher than those offered to a new customer via the same sales channel
- The process of cancelling the automatic renewal of insurance policies will be simplified
- Insurance companies place greater emphasis on providing fair value to their customers
- Home and motor insurance policy data is reported to the FCA to allow close monitoring of market changes
The system adjustments required to support the above changes will need to be in place by the end of September 2021. While many believe these changes should have occurred several years ago, there is no doubt that the FCA is in the middle of a broader clampdown on anti-competitive insurance sector activity.
There are many factors to consider regarding these changes and the long-term impact on insurance premiums.
Fundamental changes to the insurance sector
There is no doubt these changes will bring about a fundamental shift in how car and home insurance is sold in the UK. There will be winners and losers in the early days, but in the long term, all customers will benefit. Some of the issues to consider include:
The end of “price walking”
The term "price walking" describes the annual increase in premiums that many existing customers experience. This perfectly illustrates how loyal customers are penalised and why some pay a staggering 75% more in premiums than new customers. For many years the insurance sector has feasted on the fact customers are often too busy to look elsewhere or afraid of change. After all, car and house insurance are not topics regularly discussed in social circles, so very often, you have nothing to compare against your premiums. However, change is coming!
Comparing sales channels
They say the devil is always in the detail. Therefore, it was interesting to see talk of “sales channels” when comparing premiums for existing customers and new customers. There are numerous different sales channels when looking to purchase insurance which include:
- Comparison website
This is where it starts to get complicated. Existing customers looking to renew will be offered a deal no higher than they would pay as a new customer coming through the same sales channel. So, for example, customers renewing their policies over the telephone may be charged more than those using online facilities.
Even though the automated services associated with online applications/renewals attract lower long-term costs than telephone services, is this another area the FCA should investigate? Is the price differential between what are effectively the same policies reflective of the different operational costs? Many would argue that the FCA has now opened a “can of worms”, shining a light on the often opaque and outdated pricing structures used by many insurance companies.
Those who follow comparison websites will also be aware that many major insurance companies have recently withdrawn products from this sales channel. Intense competition appears to have been the reason, which is ironic when we talk about attracting new customers.
Haggling for the best price
Some insurance customers will recognise the annual challenge to reduce ever-rising insurance premiums. In many cases, this means ringing your insurance broker/company direct and haggling over the telephone. So, will haggling still be an option post-January 2022?
In theory, with existing customers charged no more than new customers in the future, there may be fewer opportunities to haggle. Interestingly, the FCA has not withdrawn the option for insurance companies to indulge in direct negotiations with clients. Consequently, those still unhappy with their insurance premiums, even after the changes, will still be able to put their haggling skills to the test!
How will these changes impact the insurance sector?
In reality, these changes have been on the way for some time, and the only surprise is they have taken so long to arrive. So, we can be reasonably certain the insurance sector has been preparing for these fundamental changes for some years. This now prompts the question, how will these changes impact the industry?
Before we look at the potential changes to the sector, there were two further intriguing comments in the FCA announcement small print. The regulator will:
- Review the effects of the remedies throughout 2022
- Carry out a complete evaluation of the impact in early 2024
These indicate potential future adjustments, if the sector fails to abide by the letter and spirit of these changes. Interesting times!
The devil is in the policy detail
When comparing and contrasting the cost of premiums, you also need to take into account policy details. In theory, the insurance sector will be stripped of around £1.2 billion, historically used to attract new customers. Consequently, there may be subtle changes in policy details, such as an increase in the excess figure or a reduction in the level of cover.
Any wholesale changes in insurance policy cost/cover would need to be across the board; otherwise, some insurance companies could see mass customer migration. This will be one area that the FCA will monitor during 2022 ahead of a full-scale review in 2024.
More specialist insurance companies
The effective removal of "price walking" could prompt the merger of like-minded insurance companies and create more specialist groups. Due to the potential impact of increased scale/focus and more significant customer numbers, a relatively small increase in annual premiums could see a considerable increase in income. In theory, this could create further problems further down the line with a potential lack of effective competition in some areas.
If, for example, specialist insurance companies were attracting the lion’s share of home insurance business, then general insurers may withdraw from this market. Unfortunately, while the proposed changes to the insurance industry are a natural progression, there is always a flip side to the coin. How will the FCA retain competition within the sector?
Automation of the sector
The insurance industry and the property sector were long seen as the last bastions of tradition, the final bricks in the protecting wall against automation. The reality is that the use of insurance comparison software and Robotic Process Automation (RPAs) has been underway for some time. The rebalancing of future insurance sector income, and the reduced ability to attract new customers with promotional offers, will likely lead to greater automation.
As a consequence, it may be that we see an ever-growing divergence between the cost of insurance policies acquired online and those bought via brokers/telephone services. This then prompts the question of whether this is in some way discriminatory against those who do not have access to online services or prefer more traditional methods. Even though we have seen a considerable increase in Internet activity by those in retirement, many in late years struggle with eyesight issues and new technology.
Can we expect changes to other insurance product?
At first glance, many people were sceptical that the FCA's proposed changes only included car insurance and home insurance. It is important to note that these two sectors are the largest in the UK domestic insurance industry. As a consequence, they attract the attention of a significant number of insurance companies. We don’t see the same degree of loyalty penalties and new customer discounts in areas such as business insurance. However, that is not to say that the FCA will not implement similar changes to other insurance products in the future.
If we put aside the various insurance sectors/products, the idea that loyal customers effectively pay to subsidise new customers is wrong. This may be a policy that has been ongoing for many years, but that does not necessarily make it right. Often criticised for reacting slowly, the FCA will be conscious that changes of this magnitude need to be introduced gradually.
Customer service is at the heart of regulatory changes
We live in an era where both regulations and business practices are more transparent than ever. Even though the insurance sector has seen significant improvements in these areas, there are still many opaque and outdated pricing strategies in use. For example, we know that some insurance companies target particular groups of society, in the knowledge that they are unlikely to move insurance providers in the future. These are the perfect victims for "price walking", which has provided insurance companies with a vast war chest to attract new customers.
It is also important to note that those most impacted by “price walking” are customers who have been with the same insurance provider for between 15 and 20 years. This group, and those showing even greater loyalty, is likely to include a disproportionate number of people in retirement. Consequently, it would not be unfair to suggest that those in retirement have perhaps been more discriminated against than any other age group.
The regulatory march continues
Pensions, personal injury claims, and now the insurance sector, the regulatory march in the UK continues. These are areas of everyday life that had remained relatively untouched for decades. As mentioned above, at the heart of these regulatory changes is the need to improve customer service and competition.
There will be winners and losers in the early days of these proposed regulatory changes to the insurance sector. Those who regularly switch to cheaper insurance providers will see a significant increase in their cost. On the flipside, loyal customers should see a reduction in their relative insurance costs post-January 2022.
The fact the FCA will be closely monitoring the impact of these changes, and any adjustments to market practices, before a full review in 2024 should not be overlooked.