Why FCA ban on ‘price walking’ may rebound on consumers

The Finan­cial Con­duct Authority’s crack­down on the prac­tice of ‘price walk­ing’ – also known as the loy­al­ty penal­ty – promis­es to cre­ate a fair­er indus­try by sav­ing con­sumers bil­lions of pounds. But ques­tions remain over its long-term impact. 

On 1 Jan­u­ary, the watch­dog intro­duced new rules ban­ning car and home insur­ers from quot­ing loy­al cus­tomers a high­er price for renew­ing their pol­i­cy than they would pay if they were a new cus­tomer. 

While price dif­fer­ences between new and exist­ing cus­tomers is a fea­ture of oth­er com­pet­i­tive mar­kets, insur­ers stand accused of using “com­plex and opaque” pric­ing prac­tices that have led to very high prices for some long-stand­ing cus­tomers. The FCA found that, on aver­age, new cus­tomers paid £285 a year for motor insur­ance, while exist­ing cus­tomers typ­i­cal­ly paid £370. The gap is even greater for cus­tomers in the home insur­ance mar­ket, with new cus­tomers tend­ing to pay £130 ver­sus the £238 price tag for loy­al cus­tomers. 

The rad­i­cal move by the FCA to end this imbal­ance is expect­ed to save con­sumers more than £4bn in insur­ance pre­mi­ums over the next 10 years. Yet crit­ics have raised con­cerns that the new reg­u­la­tion will see both exist­ing and new cus­tomers face high­er pre­mi­ums as insur­ers seek to bal­ance sales with mar­gins. 

Mal­colm Tar­ling, chief media rela­tions offi­cer at the Asso­ci­a­tion of British Insur­ers, says: “Every­one will be look­ing out for any unin­tend­ed con­se­quences. For exam­ple, where dif­fer­ent parts of the dis­tri­b­u­tion chain do not apply the rules in the same man­ner, lead­ing to some cus­tomers not receiv­ing the same out­comes as oth­ers.” 

But he says the price of home and motor insur­ance will remain a com­mer­cial deci­sion for indi­vid­ual insur­ers to take. “Home and motor insur­ance pre­mi­ums are cal­cu­lat­ed by insur­ers inde­pen­dent­ly, using a wide range of fac­tors,” he explains. “For motor insur­ance, your age, type of vehi­cle, dri­ving record and claims his­to­ry will typ­i­cal­ly be rel­e­vant.”

Premium increases 

Although the new rules are still in their infan­cy, data so far sug­gests that insur­ance cus­tomers are already fac­ing hefti­er pre­mi­ums as providers jos­tle to find their place in the new land­scape. 

Analy­sis from mar­ket research firm Con­sumer Intel­li­gence showed that 55% of motor insur­ance brands on price com­par­i­son web­sites sig­nif­i­cant­ly increased prices in Jan­u­ary. The results were even more pro­nounced across the home insur­ance mar­ket, with 70% of brands sig­nif­i­cant­ly increas­ing prices.

Con­sumer Intel­li­gence said the rules had led to the biggest month-on-month increase in home and motor insur­ance in Jan­u­ary in over eight years, with the aver­age pre­mi­um for home insur­ance jump­ing 9.1%, while motor insur­ance rose by 4.9%. 

For Karen House­a­go, head of insur­ance at Con­sumer Intel­li­gence, the sharp rise in prices sug­gests the major­i­ty of insur­ance providers made a one-step change to new busi­ness pre­mi­ums in order to be com­pli­ant with the new rules. 

House­a­go says: “It does appear that some providers either over or under-shot in their expec­ta­tions of mar­ket-lev­el infla­tion and have made adjust­ments sub­se­quent to their ini­tial pric­ing changes. How­ev­er, it is still a very com­pet­i­tive mar­ket and we are nei­ther observ­ing nor antic­i­pat­ing an upward spi­ralling of prices at the rates we saw in Jan­u­ary.” 

But she con­cedes that under­ly­ing pric­ing pres­sures are broad­ly upward: “We do antic­i­pate gen­er­al infla­tion in prices across both motor and home in 2022.”

Indeed, the ris­ing cost of motor repairs and parts, build­ing mate­ri­als and labour is plac­ing pres­sure on pre­mi­ums, with the aver­age amount paid for dam­age repair to pol­i­cy-hold­ers’ vehi­cles ris­ing by 59% between 2015 and 2020, accord­ing to the ABI.

Accord­ing to House­a­go, the changes will like­ly have a big­ger effect on insur­ers with larg­er back books and longer tenure cus­tomers than on those with small­er back books. The rules also pave the way for new play­ers and new insur­ance offer­ings to enter the mar­ket over the next 12 months. 

Building consumer trust 

The ban on price walk­ing inevitably rais­es the ques­tion of whether fur­ther reg­u­la­to­ry inter­ven­tion is like­ly. 

For House­a­go, avoid­ing fur­ther FCA scruti­ny will require insur­ers to be com­pli­ant not sim­ply with the new rules, but the FCA’s over­all ‘fair val­ue’ prin­ci­ple, which is designed to ensure insur­ance providers are focused on dri­ving the best cus­tomer out­comes through enhanced prod­uct gov­er­nance.

House­a­go explains: “One way providers can begin to demon­strate their com­mit­ment to cham­pi­oning cus­tomers is to start an open and trans­par­ent dia­logue about the changes and why they’re hap­pen­ing. We’ve seen a small num­ber of brands do this effec­tive­ly through their cus­tomer com­mu­ni­ca­tions since the begin­ning of the year, but this is not as com­mon prac­tice as we would have hoped at this point.”

One project has seen the ABI, togeth­er with insur­ance firms Avi­va, Direct Line Group, Roy­al Lon­don, RSA and Stan­dard Life, join forces with Plain Num­bers to help peo­ple who strug­gle with numer­a­cy to bet­ter under­stand cus­tomer com­mu­ni­ca­tions, in an effort to build trust and gen­er­ate bet­ter con­sumer out­comes. 

Phil Jeynes, direc­tor of cor­po­rate strat­e­gy at insur­ance bro­ker Reas­sured, says the key to build­ing con­sumer trust is trans­paren­cy through­out the under­writ­ing process and clear com­mu­ni­ca­tion about what the cus­tomer can expect in return for pre­mi­ums.

“Too often this gets mud­died by a ten­den­cy with­in the indus­try to wor­ry about nuances in the sales process which are large­ly irrel­e­vant to the end con­sumer – what they care about is clar­i­ty and val­ue,” he says.

“By stick­ing to these core prin­ci­ples, con­sumer trust will fol­low and it won’t be nec­es­sary for the reg­u­la­tor to imple­ment fur­ther leg­isla­tive change.”