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Renewals Up, New Business Down – How The FCA Ruling Has Affected Home And Motor Business

Yochai Melochna

August 24, 2022

  • Governance and Compliance

On 1 January 2022, the controversial practice of ‘price walking’ became a thing of the past in motor and home insurance. For the many consumers penalised for remaining loyal to their providers or simply failing to look for a better deal at renewal, this was likely greeted by a collective “good riddance”.

Price walking is when insurers charge consumers more to renew their policies while offering bargain rates for new customers, effectively imposing an increasingly harsh loyalty penalty on long-standing customers. This had become extremely prevalent in motor and home insurance in the UK, exacerbated by the rise of price comparison websites (PCWs) encouraging shopping around for the latest hot deal. According to the FCA, insurers used sophisticated processes to target their best deals at customers who they thought were less likely to switch in future.

Over time, an alarming gap between the cost of buying a policy for the first time and renewing has built up. The FCA decided enough was enough and enacted rules on 1 January forcing motor and home insurers to charge the same for new business and renewals – a move it thinks will save UK consumers £4.2bn over the next 10 years.

According to Post Office’s Head of General Insurance Nick McCowan, the reforms have had the effect many anticipated – renewals prices have come down, while new business prices have come up. The price difference between new and renewal business has already shrunk significantly across the industry, he says, and insurers are no longer hiking renewal rates to fund bargain prices for new customers. “Without question, the new system of regulation is fairer for consumers,” he says.

However, McCowan says new business prices haven’t risen by the quantum many were forecasting. And while money has undoubtedly gone back to customers following the rule change, the savings have not been huge. “Motor and home are not lines that typically attract uncomfortable levels of margin so in aligning new business and renewal prices, only so much was ever going to be redistributed.

According to McCowan, attractive renewal prices and the removal of enticing deals for new customers has led to a notable drop-off in demand for new insurance policies while retention rates have risen significantly. “Price remains a very important factor in consumer buying decisions, but we are seeing less shopping around from customers looking to swap,” he explains. “Customers are staying with their existing providers at renewal in greater numbers than many anticipated – even with insurers who were at the sharp end of price walking. That presents a big challenge for lots of businesses like us who want new business growth.”

Delivering Value To Customers

While much of the focus around the FCA ruling has been on pricing, McCowan is keen to point out that ‘value’ is about more than just offering a good rate. “Real product value means getting the cover you need, and having your claim dealt with, paid for and serviced efficiently, effectively and quickly in the event of a loss,” he says. “I’ve been lucky to work for companies who have always taken these things very seriously, but not every insurance company has always offered these things.”

The concept of value is central in the FCA reforms, which in addition to price controls also include rules making it easier for consumers to cancel automatic renewals and require insurers to demonstrate their products deliver fair value to customers. The new rules may also see the end of incentives and inducements being bundled with new business as these would also have to be applied to renewal business, which is unlikely to be economically viable over the long term.

“Entrenching better behaviours across the market and creating a level playing field on pricing is a really good thing and customers will, I think, get even better products and services as a result,” McCowan says. He insists, however, the insurance industry always offered value to customers, even before the reforms. “Combined ratios in the high 90s or even over 100% in some years in motor demonstrate these products do service customers’ needs and pay claims,” he argues.

Inflation May Drive More Price Shopping

With the rule changes only six months old, it is probably still too early to fully assess the impact on the marketplace, though McCowan believes fundamental buying dynamics remain unchanged. “Customers are still shopping through PCWs for products they can afford, and PCWs are doing a better job of displaying product value and features to help customers make an informed choice,” he says.

“Inflation and the rising cost of living are likely to make insurance buyers more price sensitive and drive an increase in shopping in the months ahead,” he adds, “so we need to be ready to offer fair new business and renewal prices for a potentially larger group of consumers looking to save money.”

In a market and economy in flux, accessing the right data and tools to make prudent pricing and risk selection decisions has arguably never been more important. “This reinforces the need for better predictive models, market modelling and monitoring to allow you to trade competitively in this market,” McCowan says.

Insurance and external factors, from inflation to supply chain disruption to changing claims patterns, are converging to create a broader repricing of risk in motor and home insurance in the UK. In this complex environment, underwriters’ ability to accurately price and select risk will be put to the test – and be an increasingly key competitive differentiator in the wake of the reforms.

Whilst the Post Office’s experience may be echoed by other insurers, there are also other viewpoints. There is, for example, anecdotal evidence in the market both of prices rising and falling, while not all customers have benefited from improved renewal terms. The landscape is highly nuanced and rapidly evolving, and we will be exploring these issues in more detail in the coming weeks, including a white paper on the FCA reforms which is due for release in July.

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Yochai Melochna