The times they are a-changing
There’s no doubt about it, some major changes are occurring in the general insurance sector. Last year we were talking about the continued rise of aggregators, big data and the internet of things with its undoubted potential to disrupt the sector.
This year, while all these things will remain relevant, the immediate focus of the sector has shifted towards managing the fallout from the FCA’s current market study into pricing practices, and assessing how customers will respond to this.
The FCA has repeatedly raised concerns about insurance pricing with the latest market report the culmination of repeated attempts to ensure fairer prices for consumers. Of particular concern is the widespread practice of insurers charging longstanding loyal customers significantly higher prices than new customers – so-called ‘dual pricing’.
After several years of demand-side remedies, including price transparency at renewal, all the signals now suggest that the FCA is gearing-up for more interventionist supply-side remedies to tackle this issue head-on. In fact, it seems all options are now on the table with Andrew Bailey, Chief Executive Officer of the FCA recently stating: “If change is needed to make the market work well for consumers, we will consider all possible remedies to achieve this.”
Supply-side remedies to prevent excessive dual pricing, or even stop this practice altogether, would probably be welcomed by many customers. Although it generally pays to switch insurance provider every year – and shopping around is widely advocated by consumer champions – actual switching across general insurance, although high compared to other sectors, has essentially been static for years.
According to our Financial Research Survey (FRS), large numbers auto renew. Across motor insurance around 30% customers auto renew, while this number jumps to more than 40% for home insurance.
It is well established that consumers are not engaged by general insurance, due in large part to a lack of confidence and poor understanding about the nature of the products. There are also few triggers to prompt greater engagement. But customers are extremely price led, especially when initially purchasing cover, with upwards of three-quarters picking a product based on cost. As a result, most insurers are still competing aggressively to acquire new customers by effectively offering teaser rates that are loss-making in the hope that initial losses will be recouped through increased renewal pricing.
Making loyalty pay
Breaking this cycle won’t be easy. However, there are signs that some insurers are beginning to adjust their business models with the aim of shifting the focus from price to value.
Aviva has recently launched a Renewal Price Guarantee whereby existing customer will not be charged more than new customers. Moreover, Saga has gone further and has started offering a Fixed Price Promise for its standard home and motor insurance policies. This allows customers to fix their price for three years subject to claims and changes in Insurance Premium Tax.
Although it’s early days, how customers and insurers respond to these new propositions – as well as any direct intervention from the FCA – could fundamentally change the nature of the sector in the coming months.
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