For more than a decade, UK insurance companies in the home and motor insurance markets have been engaging in the practice of ‘price walking’.
This is a strategy in which insurers price not only according to risk, but also according to a customer’s willingness to pay, measured by their tendency to switch to a new firm if the price is raised at annual renewal.
This disparity between new and existing customers was particularly acute for older consumers who were less likely to have the IT skills to shop around for insurance regularly and with confidence.
In 2018, two insurance trade associations, representing insurance companies and brokers, published a code designed to address these issues.
Despite these measures, the UK’s insurance conduct regulator, the Financial Conduct Authority, intervened in 2020.
The City watchdog announced its intention to introduce a new requirement for insurers to ‘require firms to offer a renewal price that is no higher than the equivalent new business price for that customer through the same sales channel’ in the retail home and motor insurance market at the same level as the rates for new customers.
These rules came into force at the beginning of 2022 but as headlines in national newspapers show – consumers are less than convinced that the profession is no longer penalising those who fail to shop around.
The Chartered Insurance Institute’s Public Trust Index started collecting data on consumers’ views on renewal pricing in 2018.
The results over the different waves of surveys for the index demonstrated consistent concern over renewal pricing, relative to other key factors.
For retail consumers, it is clear the 2018 code agreed by the insurance bodies had little impact on the reputation of insurers over the two years.
It is also clear that the introduction of the FCA’s new rules has not had a huge impact either.
Since the introduction of the FCA’s rules, the opportunity scores for loyalty have not improved.
There could be three reasons for this.
Firstly, the FCA rules have not had time to bed in.
Secondly, claims inflation is putting upward pressure on prices, increasing premiums for both new and existing customers, leaving existing customers with an impression that nothing has changed.
The third reason the FCA rules have failed to turn around the public’s perception of whether the profession can be trusted is because the regulator’s requirements simply do not go far enough to address consumers’ expectations of rewards for loyalty, rather than simply an absence of penalties.
Throughout the last four years, responses to the CII’s Public Trust Index have shown that existing customers not only want fair treatment in relation to new customers, but they also want better treatment than new customers, as reward for their loyalty.
For example, in the last wave of the survey the statements that had the two biggest gaps between expectation and reality were: ‘My premium doesn’t increase because I’m not a new customer anymore’ and ‘I got a discount for staying with the same company.’
As Alan Vallance, the Chartered Insurance Institute’s new chief executive, pointed out at our recent Shaping the future of insurance conference, insurance professionals should see the price walking rules and the FCA’s Consumer Duty as an opportunity for them “to take greater control of our destiny.”
With the new Consumer Duty, the FCA has said it wants to measure outcomes rather than inputs.
This means that professionals who can demonstrate the value they are providing for consumers could win the freedom to do what works rather than being micro-managed by prescriptive regulation.
I think there is a real opportunity here for us to take greater control of our destiny, prove the value of the profession for the consumers and corporates it serves, or be passive and wait for the regulator to act.