The new year heralded the start of groundbreaking changes to the way insurers price home and motor insurance that could have far reaching implications across the insurance sector. Under a package of reforms imposed by the Financial Conduct Authority (FCA), which came into operation on the 1st January, insurers are now banned from offering new and renewing customers different prices. They must also make it much easier for customers to cancel automatic renewal of policies.
This means the business model that many insurers have embraced, of selling policies at a discount to new customers, while charging much higher prices for loyal customers is in theory no longer viable. However, there is a great deal of uncertainty about how these changes will playout and in what way customers will respond.
Winners and losers
On paper what should happen is that prices for loyal customers should fall while for customers who regularly switch, prices ought rise as insurers adjust premiums to reflect the new rules. Bad news for shrewd customers, but good news for many others, particularly older and vulnerable customers who are reluctant to switch and consequently pay over the odds.
According to latest data from our Financial Research Survey (FRS) although the variance in pricing between new and renewing customers has narrowed over the last year, it remains wide, especially across home insurance, where older loyal customers are playing upwards of 30% more than new customers.
Overall, across both home and motor insurance, because loyal customers make-up most of the market, the FCA estimate customers will save £4.2bn over the next ten years. The FCA also suggest that equalling prices for new and loyal customers could see customer switching levels reduce in the longer term that could have a significant knock-on impact for price comparison sites.
Although I broadly agree this with hypothesis, one key determining factors will be wider pricing trends. The market consensus, notwithstanding the impact from the FCA reforms, is that premiums in general are going to increase this year on the back of rising claims and inflation.
What we also know from the FRS is that customer switching activity is influenced by variations in price. When premiums fall, as has happened over the last two years, then customer switching declines, while when prices rise so does switching. So what is likely to happen now?
My view is that customer switching levels are likely to rise this year. Customers who routinely switch will continue to do so, and they will likely be augmented by others, if prices as expected rise. In the longer-term however it is harder to predict with any certainty what will happen.
What is certain though is that insurers will need to keep a very close eye on customer behaviour in the coming months.