The Financial Conduct Authority’s (FCA) latest findings into the general industry sector confirmed what many of us have known of years. Loyalty does not pay, or in the words of the FCA “insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch”. Which essentially means if you don’t regularly switch insurer you will be charged higher premiums.
The problem is despite relatively high consumer awareness about this issue, a substantial number of us still renew year after year without even bothering to compare prices. What’s more, although this number has decreased slightly in recent years, according to our Financial Research Survey (FRS) across motor insurance around 30% of customers still auto-renew, while this number jumps to more than 40% for home insurance. These customers basically don’t want to switch despite many of them probably knowing that they could get a better deal if they did.
As a result, the FCA also confirmed that after implementing a range of demand-side remedies to reduce customer inertia, including compelling insurers to disclose prior year premiums on renewals, a range of supply-side measures are now being seriously considered.
These include putting limits on price increases for loyal customers, as well as restricting the use of factors such as the likelihood of a customer switching when setting premiums. Facilitating auto-switching services and other insurtech innovation is also the FCA’s agenda. The hope is that these measures will foster increased customer activity and prevent excessive dual pricing.
All of which prompts the question, how will customers and insurers likely respond to these potential remedies?
The general insurance sector is cyclical with pricing tending to move in cycles based on how much capacity insurers have and wider sector issues (eg: legislation changes, weather conditions etc). It is also highly commoditised, with close to 80% of customers picking a provider based on cost of policy according to the FRS. Customer activity is therefore linked to pricing. Rising prices tend to lead to greater activity and vice versa. Consequently, any measures that the FCA introduce need to be viewed against this backdrop.
This is borne out in the figures. The introduction of renewal transparency in April 2017 initially coincided with an upward pricing cycle, which probably contributed to why customers' activity increased. The pricing cycle turned downwards at the end of 2017 and customer activity has subsequently levelled-off.
My abiding impression therefore is that the market cycle still largely dictates customer activity. As a result, any demand-side remedies the FCA implement need to be targeted, while the unintended consequences of intervention need to be carefully considered.