FCA pricing review: What is a new business price?
October 5, 2020 Chris Sandilands
Last week, our Market Intelligence team issued a note to subscribers about the impact of the FCA’s recent report about pricing practices in the UK general insurance market. Our summary of the FCA’s key findings can be found here (and to find out more about subscribing to our research service please contact the team).
Our note on the FCA pricing review argues the clear and simple headline remedy masks a huge amount of ambiguity that will need to be interpreted by both the regulator and market participants.
One such area is the definition of ‘new business price’, which we discuss in this post.
On the face of it a new business price is simple – what would you charge the customer if they came to you from a different provider? The reality is much more nuanced.
We would argue that for any individual customer there could be multiple new business prices. Discrimination across distribution channels is one variable – and the FCA has explicitly said that new business and renewal prices must be aligned only within that channel. (Nonetheless, this introduces some complexity to insurers: how do they monitor and define a price offered to a broker who sells through both PCWs and direct.)
So far so good, but let us think about one channel for a moment. Imagine a customer is offered a new business price for motor insurance by an insurer. Based on previous experience, the customer calls up and asks for a better price, which the insurer agrees. So, what is the new business price: the price that was first offered, or the price that was paid? If it is the latter, how does the insurer ensure that the renewal premium is compliant? The actual price paid is unknowable until after the event, and therefore cannot be extended to the renewing portfolio.
Of course, this problem could be avoided by preventing insurers from giving discounts on their ‘list prices’, but then we are in the perverse situation whereby the regulator is preventing customers from getting better prices. Yet if ad hoc discounts are allowed, then they could be a backdoor to legitimising new business discounts again.
Second, there is the challenge of continuously changing prices. Insurers change their (new business) prices for motor insurance and home insurance continuously on PCWs, whereas renewal premiums are static once issued. If a renewal quote is issued a month before renewal, it is almost certain to differ from the new business price on the day of renewal. The FCA could determine that this is reasonable so long as pricing was aligned when the renewal quote was issued, but customers could be confused if they check a PCW during the renewal window and see that new business prices are lower than their renewal offer. In the eyes of the consumer, nothing would have changed.
We expect many grey areas to remain even after implementation of the new rules, and it will take the market a few years to settle down. In our client note we outline three scenarios for that future state based on the possible responses of different insurers.
In any case, insurers will need to develop a number of capabilities to succeed:
- Strong and well-respected brand and high level of service
- Pricing sophistication to allow for flexible and individualised pricing
- Diversified distribution strategy to attract new customers
- Targeted non-insurance benefits package to differentiate products.
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