FCA's reform of insurance pricing – is home and motor insurance just the beginning?

On 22 September 2020 the FCA published its final report on General Insurance Pricing Practices (available here), building on the interim report published in October 2019. The core message of the final report is clear. ‘Lifetime value pricing’ aimed at gaining customers through introductory discounts and recovering initial losses over time by increasing margin does not necessarily reflect the true long-term cost of insurance policies. This is a feature of general insurance pricing practice.

The FCA discusses ‘price walking’ in the report. New customers are typically sought through lowering prices for core home and motor insurance policies. To recover these initial costs, firms increase the customer margin, in other words, price of the policy, at renewal. But even after recouping the initial discount, the price paid by the customer on each renewal continues to increase.

The report focuses on the potential for such pricing practices to create distortions of competition within the market. Price discrimination based on a consumer’s willingness to switch insurance providers in fact strengthens competition, as firms can target lower prices towards customers who may be more inclined to switch to a rival provider. However, the FCA believes that the positive effect on competition is somewhat offset by the additional time, effort and cost which shopping around for new policies imposes on consumers and firms themselves – and such extra costs for the firm can ultimately lead to poor value deals even for regular switchers. The FCA thinks that the effect on competition is negative in these instances, as firms cannot compete for customers who do not shop around.

The FCA states that it should be made clear to customers who renew each year that they have been price walked over time. In 2017, the FCA attempted to combat this by implementing rules to increase engagement with customers at renewal - under these rules, firms must set out the price the customer paid in the previous year alongside the new quote upon renewal. This report also introduces a proposed remedy package to support these rules. The first of these is a pricing remedy. The FCA proposes that, when a firm offers home or motor insurance renewal prices to a customer, the renewal price should not be higher than the equivalent price offered by the firm for new customers. If the product on offer is new, the FCA proposes the firm identifies existing products in the market which closely match their own in order to determine the equivalent price for new consumers. Secondly, the FCA proposes to enhance and expand the scope of the existing product governance rules, including by ensuring the proposed new product governance rules apply to all general insurance and pure protection products. The FCA further proposes introducing a requirement for firms to report data on their pricing – currently this would not be reported publically. Finally, for all types of general insurance, the FCA is proposing requirements to: (i) ensure firms explain to customers if their policy is to renew automatically; (ii) make it easy for customers to stop the auto-renewal; and (iii) allow consumers easily to decline the auto-renewal of policies at the time of purchase and renewal.

The FCA is seeking views on its proposals by 25 January 2021. Feedback will then be considered ahead of the publication of a Policy Statement.

While the FCA so far has concentrated on remedying these pricing practices in the home and motor insurance sector, this report is in line with the FCA’s general focus and broader direction of travel in the regulatory market. This report is also only one announcement amongst a string of FCA commentary and publications demonstrating its increasing focus on consumer protection. This is even more stark in the current COVID-19 landscape, as discussed in our previous blog post.