The UK’s personal insurance market will undergo a big shake-up next month, as a sweeping overhaul of pricing rules looks set to disrupt a sector serving millions of customers.
A new regime imposed by the Financial Conduct Authority will stamp out a practice known as price walking, where insurers profit by luring in new customers with low prices and ratcheting up renewal premiums.
Instead, providers will have to offer an existing policyholder at renewal the same price they would have received as a new customer. The regulator has estimated this will save customers £4bn over a decade.
The changes affect the two core areas of general insurance: motor, which according to industry data accounts for 27m policies across the UK, and home, with 18m.
“It’s a huge moment,” said Matthew Upton, director of policy at Citizens Advice, which triggered the changes with a formal complaint three years ago. It highlighted that people were paying almost £900 each in “loyalty penalties” across five markets including insurance and broadband.
Upton said that the existing “tease-and-squeeze” model — whereby insurers offered new customers low prices and then ramped up premiums over time — had contributed to a “breakdown in trust” between consumers and the sector.
Mark Christer at consultancy Capco said the new rules represented “the biggest change in pricing that has ever happened in the personal lines insurance market in the UK”.
Analysts said it was hard to predict the lasting effect of the changes on the market, although they anticipate new customers will have to pay higher premiums as insurers look to offset the hit to future profits. The impact could be tempered if some companies decide to use it as an opportunity to grab market share.
“There will be a period of volatility around pricing as insurers work out what the new market price is going to settle at,” said Paul De’Ath, head of market intelligence at consultancy Oxbow Partners.
The effect is expected to be most dramatic in home insurance, as the difference in price between new and renewing customers had been higher than in the highly competitive motor insurance market.
But any big jump in premiums for new home insurance customers was unlikely to be sustained long-term, De’Ath said, as it would “be competed away by those [companies] with more efficient business models”.
Some analysts believe pricing volatility across home and motor policies will settle down by the second quarter, others expect it could last longer.
James Dalton, director of general insurance at the Association of British Insurers, said the “once-in-a-generation” challenge for companies was that everyone was “having to do the same thing at the same time”.
Jason Windsor, Aviva’s chief financial officer, told the Financial Times he anticipated a “bumpy” first quarter for these segments of general insurance. Like executives at rival insurers he predicted that factors other than price, particularly customer service, would become more important.
The changes have piled further uncertainty on a sector still dealing with the effects of coronavirus restrictions. The good news for customers is that the pandemic has pushed down the cost of insurance. Car insurance is at its cheapest in six years after insurers reduced premiums to reflect the lockdown-related drop in claims.
But insurance broker Willis Towers Watson has warned that a mixture of the new rules and supply-chain problems in areas such as auto repair has made the outlook for pricing “extremely uncertain”.
Earlier this month, the ABI warned policyholders that despite the changes their renewal premiums could still increase. Pricing is based on a variety of factors including claims made in the period, changes to your individual risk profile and the cost of repairs, the ABI said. They advised anyone renewing to shop around.
The new rules also make it easier for customers to cancel the automatic renewal of their policies. But the ABI said before opting out, customers should “think about any factors that may contribute to you forgetting [to renew]”, such as being away on holiday or busy at work, given the risks of becoming uninsured.
The new rules have not been welcomed by everybody. James Daley, managing director of consumer group Fairer Finance, said those who have benefited from shopping around “will be in for a nasty shock” from the expected price rise. “It’s a heavy handed intervention which wasn’t justified by the levels of detriment in the market,” he added.
The FCA has conceded that younger customers, who are typically considered higher risk by insurers, could be more affected by price increases as a result of its intervention.
For those that have pushed for reform, the priority will be to make sure insurance companies implement the changes. Citizens Advice’s Upton said it would be “putting a lot of pressure on the FCA to make sure firms do comply”.
As part of the change, the regulator has required insurers to provide more data so it can monitor compliance. The FCA said that it would keep a “close eye” on how insurers respond and would hold them to account, as it strives to ensure a fairer market. “Firms can still offer customers cheaper and better deals, but people won’t have to switch just to avoid a bad deal,” it said.
Without the impetus of a loyalty penalty, analysts will be watching the reactions of consumers closely. Regulatory modelling suggests that switching will fall. That would deal a blow to one of the core sources of business for price comparison websites. But some caution that the impact on the online intermediaries — used by the majority of insurance customers — would take time to play out.
De’Ath said he believed that customers who always shop around would be “most aware” of the changes and would intensify their efforts, knowing that a good deal might be harder to find.
“Over time, there could be some reduction in switching,” he added. “But that will be a slow burn over a number of years rather than any kind of big bang.”