The Financial Conduct Authority’s (FCA) dual pricing rules reflects an evolving understanding among regulators of behavioural biases – factors that mean that none of us are as rational in our decisions as we like to think.
These are measurable biases such as ‘optimism bias’ – the belief that bad things are much less likely to happen to us – and ‘status quo bias’ – our tendency to stick with what we’ve got rather than make an effort to change.
Together, they make us more likely to chase lower prices when we buy insurance, but then they make us more likely to put up with higher prices when it comes to renewal – until we realise that we are paying several times more than we could have paid if we had shopped around. These biases have undermined healthy competition and made regulation inevitable.
The impact on trust of a market skewed by these biases can be seen in the CII’s Trust Index – a survey of 1,000 consumers and SMEs that has been tracking consumers’ attitudes to renewal pricing in both the individual consumer and SME markets since 2019.
We measure the gap between consumers’ trust in insurers on different key indicators, on a scale of plus or minus 30. As a rough guide, where the gap is measured at three or below, trust is high; and where it is measured at eight or above, urgent corrective action is required. Anywhere in the middle indicates room for improvement, but not the kind of crisis that will reach the front page of newspapers or generate a Twitter storm.
Between 2019 and 2021, the expectation gap for treatment of loyal customers has stayed stubbornly in the ‘urgent corrective action’ zone for retail insurance products like motor, home and travel insurance. However, during the same period the expectation gap has stayed out of the ‘urgent action’ zone for SMEs (there has been a slight uptick in the latest figures for both SMEs and consumers – probably because of the recent publicity around the FCA’s new rules and the existence of the ‘loyalty penalty’).
One key reason for this difference has been around the much higher level of intermediation in the SME sector. Brokers have been able to demonstrate to their SME clients that they are looking after the issue of renewal pricing more effectively than the comparison websites that dominate the retail market.
Encouragingly, experience in the SME sector shows that consumer trust can improve around renewal pricing, and that the FCA’s new rules can make the same difference for personal lines. However, it does not mean that insurers can sit back and wait for the FCA’s rules to fix it.
The same behavioural biases that made consumers over-optimistic about the risk of high renewal prices could also make them over-optimistic about the level of cover that very cheap policies can give. This could lead to a race towards ‘hollowing out’ cover, as insurers compete more keenly on price, leading, in turn, to poor outcomes for consumers with inadequate cover – and a loss of trust.
That is why our Public Trust Index also measures protection (how appropriate a policy is), confidence (whether or not consumers and SMEs think the policy will pay out) and respect (how consumers and SMEs who make a claim are treated).
These scores have generally been acceptable to good for both consumers and SMEs. In future, we will carry on looking at scores for loyalty, protection, confidence and respect to make sure that both consumers’ experience of renewal pricing improves, and that any improvement is not replaced by ‘hollowing out’.