Reaction pours in as FCA combats loyalty penalty in general insurance

Comments highlight a range of contrasting opinions

Reaction pours in as FCA combats loyalty penalty in general insurance

Insurance News

By Terry Gangcuangco

Following the release of the Financial Conduct Authority’s (FCA) final report on its general insurance pricing practices market study, Insurance Business has gathered comments from some of the leading names across the industry (and beyond) – highlighting a swathe of contrasting opinions on the move to combat the so-called “loyalty penalty.”

Association of British Insurers (ABI)
ABI director general Huw Evans said the trade body will be carefully considering the FCA’s package of proposals so that it can engage with the regulator on the most effective measures possible.

Evans commented: “The ABI agrees with the FCA that the household and motor insurance markets do not work as well as they should for all customers, and we continue to support the FCA’s work to address this.

“Insurers and brokers have already begun to tackle the issue of excessive price differences between new and existing customers through an industry initiative that has seen over 8.5 million pricing interventions across home and motor insurance worth £641 million.”

To ensure a balanced approach, the ABI executive added that it is vital that price comparison websites and insurance brokers are subject to the same level of supervision and monitoring by the FCA.

Meanwhile, for ABI regulation director Hugh Savill, the goal of the watchdog’s report is easy to understand and is shared by all, but he stressed that how to achieve it is more detailed and technical. “So the ABI and its member firms will work with the FCA to help make sure the proposals can deliver the stated aims,” said Savill, pointing to the importance of fair and effective implementation.

Offering its insights, investment bank Barclays had this to say in a note: “In our view, there are several implications for the sector: 1) new business pricing has to go up, as insurers will no longer be able to use discounts to attract new business with hopes to recover in future years; this will likely be most pronounced in home, while in motor this may help partly offset the frequency-driven softening during COVID;

“2) Insurers with the highest retention and largest back-books will see erosion of earnings power, as pricing for certain cohorts of loyal customers may need to be reduced; 3) lower levels of churn in the future may be negative for the motor/home insurance business of price comparison websites.”

Of the insurers it covers, Barclays said Sabre has the lowest retention at 30-40% while that of Direct Line stands high at the mid-70s level.

British Insurance Brokers’ Association (BIBA)
Supportive of the FCA’s desired outcomes is BIBA, whose chief executive Steve White noted: “Our broker members always aim to offer their customers insurance that meets their needs both in terms of price and cover. Their long-held concerns about dual pricing will be addressed by the FCA’s proposed measures and we look forward to working with the regulator constructively.”

White went on to describe brokers as natural innovators who will continue to use their entrepreneurial approach to be the ‘go-to’ business for customers seeking fair and good-value insurance.

As for the area of automatic policy renewal, which the FCA isn’t pushing to be removed, BIBA welcomed the proposal to make it simpler to opt out.

“We are pleased that the regulator agrees that for many customers auto-renewal is of value and can be an essential safety net for vulnerable customers if managed appropriately by the provider,” said the association. “Insurance brokers are typically closer to their customer than insurers and will be key to explaining how automatic renewal works and how customers can cancel the facility if it is not the right solution for them.”

By Miles
“A huge win for UK consumers.”

That’s how By Miles chief executive James Blackham sees the pricing remedies put forward by the FCA. Blackham, whose business provides pay-by-mile car insurance, has been actively advocating against the so-called loyalty penalty.  

In a statement, he asserted: “The loyalty penalty takes advantage of time-poor, trusting, and often vulnerable consumers. These [FCA] measures, when in place, will finally offer consumers protection at a time when it is needed most. And they will help restore trust, transparency, and fairness to the insurance industry.”

Chartered Insurance Institute (CII)
Commenting on the auto-renewal proposal, CII chief membership officer Keith Richards explained: “Auto-renewal provides significant benefits for consumers – it helps them from accidentally letting their cover lapse, which would expose them to catastrophic risks. As a result, we are glad that the FCA has not proposed to end this practice.”

As for the pricing remedy, Richards said the FCA’s solution against price walking – the practice of gradually increasing renewal prices over time – is “very much in line” with what customers have been seeking.

“We think the FCA proposal to ban price walking, along with the product governance proposals that it has suggested, are reasonable,” added the CII executive, who at the same time pointed to scenarios in which the insurer’s intention might not be to price-walk.

Richards illustrated: “There may be times when, for example, the nature of a risk changes, and an insurance company may need to reprice existing customers, while at the same time wanting to set a lower price in order to continue to attract new, lower risk customers.

“In this way, it would be trying to retain cover for as many existing customers as possible, while also providing a competitive rate for new customers, not because of price walking, but because of a genuine change in the nature of the risk. It may be useful for the FCA to consider producing governance standards that would allow firms to do this with proper regulatory supervision, without breaking the spirit of the rules.”
Now here’s a comment from a price comparison website.

Anna McEntee, director of insurance at, declared: “The FCA’s final report underlines a truth about insurance, that loyalty doesn’t pay. The requirement to charge the same price to a renewing customer as a new customer, along with the requirement to provide more clarity at renewal, will help to lift barriers to switching.

“These are welcome remedies at a time when having access to better deals and being able to save money is more important than ever. Household finances are under ever greater strain due to COVID-19, and a substantial proportion of households are still missing out on combined average savings for home and motor insurance of nearly £400 a year.”

Additionally, McEntee’s camp believes that more could be done to alert policyholders to potential savings.

“It is crucial that providers demonstrate transparency and try to educate and encourage their customers to take note of the fact that there may be more competitive deals available to them,” she said. “While the FCA’s remedies should help improve the pricing problem, the simplest and most effective way to get the best deal is to shop around.”

Consumer Intelligence
For data insight specialist Consumer Intelligence, the development comes as a “major reset” of confidence and trust in the financial services industry. Consumer Intelligence stated: “Up until today, every single player in the market has been hooked on introductory pricing – the crack cocaine of the insurance industry – insurers and consumers alike. 

“The industry has attempted to wean itself off in recent years by narrowing the gap between new business prices and the prices charged at renewal (known as price walking), but it clearly wasn’t enough.” 

Continuing with the addiction analogy, the data insight firm said the FCA’s remedy against the loyalty penalty will require companies to go cold turkey instead of going down the methadone route.

“This could be considered a win for consumers, and more so for vulnerable customers,” it commented, adding that the removal of price walking provides the opportunity to regain consumer trust for a sector that has struggled with its reputation. 

“With insurers no longer hiking premiums up at renewal, price will become only one of the deciding factors, rather than the deciding factor for consumers when purchasing insurance,” Consumer Intelligence went on to say. “Firms will have to start focusing on the value of their products, strength of their brands, and quality of customer service to win and retain customers.”

However, it conceded that premiums will absolutely rise. “In the current model, insurers offer heavily discounted new business prices to acquire new customers, but don’t make profit until year two or three of the policy. So naturally prices will need to even out to support the sustainability of the industry.”

For Pegasystems insurance director for EMEA (Europe, the Middle East, and Africa) Tony Tarquini, “there is far more to this situation than first appears.”

He said: “There are complex economics involved in selling insurance to consumers in the UK. There will be long-term pricing and coverage effects for both insurance firms and consumers if the FCA were to enforce blanket controls over pricing.

“Banning the raising of prices for renewing policyholders would provide significant opportunity for new entrants in the market to build market share at a loss through comparison websites at the expense of established insurance companies. Whether that is a good or a bad thing in the long term for the consumer, we will have to wait and see.”

Tarquini also drew attention to the issue of price versus coverage.

“The FCA makes no comment whatsoever about the content of insurance policies, simply the raw price,” he claimed. “Clearly the simplest way for an organisation to win new business is to reduce the cover down to the absolute statutory minimum.

“This may not be in the best interests of the consumer either as they may believe they are buying much more comprehensive cover than their policy actually provides, irrespective of what they need or even want. It is important that people understand the value and cover of the policy as much as the price.”

UK general insurance leader Mohammad Khan thinks the proposed remedies, while they will reward loyal policyholders, also have the potential to push insurance costs up for other customers.

“In particular, consumers who regularly shop around for motor and home insurance will likely see premiums rise,” noted the PwC executive. “For some young drivers who regularly shop around, their new annual insurance premium may rise by more than £50. 

“The proposed remedies will, however, have some time to be enacted – potentially by 2022 at the earliest – which means that customers who don’t traditionally shop around for insurance will not see the potential benefit of this for another two years.”

Khan added that the changes can have a significant impact on certain business models.

Urban Jungle
“Price walking is completely systemic in the insurance industry,” asserted Urban Jungle chief executive Jimmy Williams in response to the FCA report. “Many firms are doing it and we think it should stop, so we welcome the FCA’s call.”

The insurtech boss explained: “The reason it happens is that price comparison websites are so important to insurers. The only way to win on price comparison is to be the cheapest. It’s rational to do everything you can to be the cheapest provider at minute one, and layer on a load of hidden costs and price increases later.”

Meanwhile Williams, who is calling for greater transparency in the industry, warned of possible tactics aimed at circumventing the proposed reforms.

“The most likely to me seems that they will give away ‘free’ but meaningless cover to more loyal customers and use that to justify the difference between new quotes and renewal ones,” he said, while also urging the regulator to ban cancellation fees.

Willis Towers Watson
Broking giant Willis Towers Watson believes that the scale of the outlined change is not incomparable to that which was required of the insurance industry when the ruling against the use of gender in pricing was enacted in 2012.

“To that end, we would expect the insurance industry to rise to the challenge posed by the FCA over the coming months,” stated Willis Towers Watson. “It is also worth noting that although the main focus is on home and motor insurance, the product governance rules will also apply to wider general insurance and pure protection products.”

Commenting on the FCA paper, UK property & casualty pricing product claims and underwriting lead Graham Wright said one of the biggest challenges for both insurers and intermediaries is managing the implementation transition amid current market competitive pressures.

Adding to the debate is UK P&C consulting lead Stephen Jones, who declared: “As with any regulatory change, there will be winners and losers within the industry, and the winners will be those with the ability to flexibly adapt their pricing strategy.

“Critical to any effective adaption strategy will be strong portfolio management and governance, the need for greater operational efficiency, the ability to report clearly on the adherence to the remedy, and flexible deployment.”


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