The Financial Conduct Authority (FCA) has published the final report in its study of general insurance pricing practices (MS18/1). The final report follows a two year study into pricing in the general insurance sector in the UK. An interim report was published in October 2019 setting out interim findings. Alongside the final report the FCA has published a consultation paper on proposed market remedies (CP20/19).
The final findings of the two-year study set out in MS18/1 are that general insurance firms use complex techniques to identify which customers are more likely to renew their policy with them. Firms then increase prices for these customers at renewal. The result is that some consumers pay above the odds for cover. The FCA believes that these consumers are unaware that they are being charged more for their renewals in a practice known as ‘price walking’. Some firms have been found to actively discourage consumers from shopping around for better value policies and do not offer the best prices to those consumers who are less inclined to switch provider.
In MS18/1 the FCA publishes their analyses of the differences in pricing paid by customers who have held policies for more than 5 years and new customers in relation to different products. For example, a new customer for motor cover would pay an average of £285, while someone who had been with the provider for more than 5 years would pay an average of £370.
What measures will the FCA take to address the harm of price-walking?
The FCA has proposed a package of measures to stop firms systematically increasing prices in home and motor insurance (contained in CP20/19). The FCA states that the remedies aim to improve competition and lower average prices for consumers. Accordingly, the FCA will require that firms:
- offer a renewal price that is no higher than the equivalent new business price for that customer through the same sales channel,
- follow enhanced product governance rules to ensure that firms deliver fair value for customers in the target market, and
- follow rules making it easier for customers to stop a contract from auto-renewing.
The FCA will implement a strong supervisory approach to ensure compliance
The FCA plans to step up its oversight of firms to ensure that they comply with the rules introduced to reduce the loyalty penalty. This enhanced approach to supervision will include assessing whether there is appropriate pricing governance, ownership and accountability with the firm; verifying firms’ compliance with the specific rules and guidance arising from the market study; and ensuring that firms are actively considering the value that they provide to their customers and are continuously treating them fairly.
What happens next?
Stakeholders are invited to submit their comments on the proposals by 25 January 2021. A policy statement and final rules is planned for Q2 2021.