The Financial Conduct Authority (FCA) has published an interim report on its market study into General insurance pricing practices (MS18/1.2). A market study was launched in October 2018 by the FCA to understand whether pricing practices in home and motor insurance support effective competition and lead to good consumer outcomes. The market study followed a thematic review that had identified that consumers who stayed with the same insurance provider for a number of years on average paid significantly more for home insurance than new customers. The home insurance market is one of five markets included in the 2018 super-compliant about ‘loyalty penalties’ submitted to the Competition and Markets Authority by Citizens Advice.
The key findings of the interim report include:
- had the six million policyholders who paid high premiums paid an average rate they would have saved £1.2bn;
- although long-standing customers pay more on average, loyalty is not always what differentiates premium rates;
- one-in-three consumers in the FCA’s research who paid higher prices showed a characteristic of vulnerability;
- when setting a price, firms include expectations of whether a customer will switch product;
- firms make profits from activities other than underwriting, such as add-ons, premium finance, fees and charges or investment income; and
- firms engage in practices that could make it more difficult for consumers to make informed decisions and could raise barriers to switching.
The FCA believes that intervention is likely to be required in addition to industry action. The FCA will continue to work to address problems to ensure that firms improve governance and oversight, deliver change required by the Insurance Distribution Directive and improve transparency at renewal. It is also considering the following supply-side remedies:
- limiting pricing practices that allow firms to charge higher prices to consumers who do not switch, for example, restricting or banning margin optimisation based on consumers’ likelihood of renewing;
- automatically switching consumers paying high prices to lower priced products that provide equivalent cover;
- requiring firms to give customers more information about alternative deals and identify those who may need help in moving to better priced products with equivalent cover;
- strengthening product governance requirements; and
- requiring firms to provide data tracking on how they are improving pricing practices.
Stakeholders are invited to provide responses to questions in relation to the finding and proposed remedies. Responses should be received by the FCA by 15 November 2019.