The FCA proposed possible new rules to address dual pricing after research for an ongoing report found many customers overpaid for cover by not switching
Potential remedies proposed by the Financial Conduct Authority (FCA) to solve the impact of dual pricing on home and motor insurance customers are likely to “shake up the industry”, according to management consultancy giant PwC.
The UK regulator today released several plans it may pursue in the near future to tackle pricing practices it found to be discouraging policy switching – a route it said could save consumers an aggregated total of £1.2bn a year.
Plans include banning insurers from raising prices for existing customers at renewal, restricting the use of automatic renewal and forcing insurers to publish pricing disparities between customers.
PwC UK general insurance leader Mohammad Khan said: “Potential remedies to pricing and renewal processes can impact the industry hardest.
“The most significant are restricting or banning pricing optimisation linked to how likely consumers are to renew; requiring automatic switching to lower priced products offering the same level of cover; and banning auto renewal or making it opt-in only.
“Some of the proposed remedies are likely to shake up the industry, the FCA recognises supply-side remedies are likely to create winners and losers, but seem to be willing to take such risk and monitor the situation closely once the remedies are in place.”
FCA announces potential remedies to dual pricing issue
The FCA’s potential remedies came as part of an interim report of its market study into pricing practices within the general insurance market, which will be published in full during the first quarter of 2020.
According to the report’s current findings, insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch.
This means longstanding customers pay more on average, but the FCA claims even some people who switch pay higher prices, with one in three high-premium customers showing at least one characteristic of vulnerability – such as having lower financial capability.
FCA executive director of strategy and competition Christopher Woolard said: ‘This market is not working well for all consumers.
“While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects around six million consumers.
“We have set out a package of potential remedies to ensure these markets are truly competitive and address the problems we have uncovered – we expect the industry to work with us as we do so.”
ABI keen to work with FCA to address customers impacted by dual pricing
The ABI responded to today’s reforms with a willingness to work with the FCA on its potential remedies, admitting that for customers that don’t actively seek out a better policy, the industry could do better.
“We welcome today’s report from the FCA, and the industry will continue to work constructively with the regulator to ensure that the market works better for customers.
“It is important that any unintended consequences are carefully considered to ensure that a fair and balanced approach is achieved for all customers.
“Millions of insurance customers get extremely good deals by shopping around regularly, but we agree that the household and motor insurance markets could work better for consumers who do not shop around at renewal.
“This is not an issue unique to insurance, but we are the only sector to have taken voluntary steps to address the issue and these are bearing fruit already.”
Bans on automatic price rises could hurt price comparison websites as a sales channel
Software company Pegasystems, which has AI-driven products related to the insurance industry, believes a blanket ban on raising the price of policies at the time of renewal would hurt insurers by limiting the value of price comparison websites as a distribution channel.
EMEA director of insurance Tony Tarquini said: “It would be extremely detrimental to insurance firms if the FCA were to enforce blanket bans on automatic price rises.
“The primary way insurers secure customers via comparison websites is via new customers-only pricing.
“With these comparison sites creating a market where consumers will always go for the lowest possible price, this has cultivated a situation where insurers always lose money in the first year of the deal.
“To recover these losses the only way is to raise the cost of insurance in later years.”