FCA market study on pricing practices: Final report

September 25, 2020

On Tuesday, the FCA published its much anticipated Final Report into Insurers’ pricing practices in the general insurance sector. The report’s findings and proposed remedies have garnered widespread attention across the industry with many speculating about the potential impacts the new regulation may have on customers, aggregators and insurers alike. This article seeks to cut through the noise and provide a clear summary of the FCA’s proposals with some of Oxbow Partners’ views on its implications going forward.

An in-depth analysis of the Report’s implications has been carried out by our Market Intelligence team and provided to our regular subscribers. If you would like to know more about this please email us.

Background and Findings

The FCA’s GI pricing practices study began in October 2018 as a response to a super-complaint made by Citizens Advice surrounding loyalty pricing in general insurance. Gradual increases in renewal premiums (also known as ‘price walking’) penalised customer loyalty and incentivised regular switching. The FCA’s final report found significant evidence of this amongst personal lines; for instance, customers who held policies for over 5 years were paying on average £85 and £122 more for motor and home insurance respectively than new customers. In 2018 alone, 6 million policy holders are estimated to have overpaid by a total of £1.2 billion based on the average for their risk types. Despite this, many customers were unaware of the phenomenon and the FCA found that insurance companies had deliberately used certain practices to discourage shopping around such as making it difficult for consumers to cancel automatically renewing contracts.

What is being proposed?

In the face of these findings, the FCA has proposed a package of remedies which can be broadly broken down into three key areas:

1. In response to price walking:

• Require that all renewal prices for customers should be no higher than the equivalent new business price
• FCA to set out requirements on identifying closely matching products to determine the equivalent new business price
• Insurers will still able to offer a range of brands and products including different prices for different customers

2. In response to practices discouraging switching:

• Explicitly inform customers whether their policy is set to automatically renew
• Make it easy for customers to stop a contract from auto-renewing and make it easier for consumers to decline auto-renewal at the time of purchase and at renewal itself

3. Ongoing regulation and requirements:

• The new product governance rules will be expanded to all general insurance and pure protection products
• Introduce a reporting requirement for firms to report pricing data to the FCA including price differentials for new and renewing customers.

The FCA is also seeking views on its proposals by 25 January 2021 and intends to publish a Policy Statement and new rules next year along with its response to the consultation feedback in Q2 2021. These rules would then be planned to come into effect 4 months following the Policy Statement.

Significant impact expected

The FCA’s proposed remedies may sound deceptively straightforward on the face of them but the potential outcome for the market depends on so many factors that the impact is unlikely to be known for certain until the rules come in next year.

The changes proposed by the FCA could signal a paradigm shift in the personal lines market with insurers forced to compete on service, brand and other incentives rather than price. With COVID-19 and Brexit to contend with at the same time, this is undoubtedly a tough time to be in the insurance market.

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