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The Financial Conduct Authority (FCA) has recently published an interim report on its market study into the pricing of home and motor insurance. The final report – which is expected in Q1 2020 – looked at the current pricing practices of insurers and what needs to be done to make pricing fairer for all consumers.
Actuarial & Pricing recruitment specialist Austin Brislen recently sat down with pricing expert Steven Ward to discuss the new interim report. Steven has worked in General Insurance for over 25 years and shared his thoughts on what this could mean for the industry, consumers and job market.
The Interim FCA report has identified pricing practices, widely used across the market, which they consider to be detrimental to loyal customers. Insurers often sell policies at a discount to attract new customers and increase premiums when customers renew, targeting increases at those less likely to switch. Firms also engage in a range of practices that could make it more difficult for customers to make informed decisions and could raise barriers to switching.
This means that customers who switch or negotiate their premium can get a good deal, but those that fail to shop around, or are unable to do so are often out of pocket through higher prices at renewal. The FCA regard the practice of ‘price walking’, where insurers increase their margin and thus the renewal price year on year, as unfair, particularly where it targets loyal and/or vulnerable customers. The FCA is also looking to regulate the barriers consumers often face when switching at renewal, such as the use of auto-renewal.
The car and home insurance markets are very competitive for new business, with price comparison sites in particular focusing on the lowest prices offered. This encourages insurers to offer discounts to attract new customers. The new business will often be sold with a small or negative margin, giving customers very good deals. Prices are increased at renewal as a result of removing the new business discount and to achieve a sustainable pricing level.
Typically, new business discounts are funded from the margin insurers make on renewals, giving an acceptable return across the whole portfolio. However, the margins insurers apply at renewal are not the same for all customers. The process of optimisation sets renewal prices to maximise growth or profitability, taking into account customer characteristics that identify how likely they are to renew at different price levels. Customers who are more price sensitive are likely to pay less, while those who are less price sensitive are likely to pay more. It is this practice that can penalise loyal customers if appropriate rules are not applied.
In these circumstances, customers that are able to switch insurance providers regularly will benefit at the expense of customers who stay with their insurer for a number of years for whatever reason, be that an inability to shop around or loyalty.
The FCA is considering a number of options to address these unfair practices. This is likely to reduce or remove price discrimination at renewal based on a customers’ likelihood to renew. It may also result in a narrowing of the differentials between new business and renewal pricing to address the concerns regarding ‘price walking’.
As Steven explained:
“The main changes the report is likely to bring about will be to stop companies applying higher margins to loyal customers at renewal and using them to subsidise more price sensitive customers. We may also see higher new business prices if companies are restricted in the price increases that can be applied at subsequent renewals.”
Given that we may see a harmonisation of new business and renewal rates at some point in the future, companies that rely on offering substantial discounts to attract new customers will have to review their pricing strategy, and look at other ways they can differentiate themselves from their competitors.
But what can insurance firms do to differentiate themselves? This is a hard question to answer. In essence, most companies offer similar products, and it can be very hard to stand out, however there are a number of ways that this could be achieved.
Firstly, greater transparency could be an excellent way of winning trust amongst consumers. Some companies are already starting to offer multi-year fixed price deals or renewal price guarantees to reward loyal customers. We may see more of these type of propositions coming to the market.
One thing that is certain as a result of the market study is that insurance firms of all shapes and sizes will need to put greater emphasis on pricing governance and fair treatment of customers. This is not a new requirement, but the FCA feels it has not had the attention that it should have had. Steven expects that the FCA will be looking for greater transparency of customer outcomes and companies will be expected to evidence that they are treating all customers fairly.
This may call for more talent in this space to help insurers navigate the new regulations. Steven explained. “Candidates that have a good understanding of the regulatory framework will be increasingly important as pricing professionals will be required to explain how their proposals satisfy the new requirements. I advise any pricing professionals currently looking for new opportunities in the market to up-skill on the market study and new regulations to ensure they have a good working understanding of what constitutes fair pricing.”
In terms of talent demands within the insurance sector as a whole, I believe it will largely be business as usual, with a possible increased need for candidates with experience or knowledge in governance. One change I do foresee happening however is a much greater push towards candidates with a multidisciplinary skillset, i.e. pricing and data science are becoming a lot more closely aligned, and Steven agrees.
“Insurers are already looking to make greater use of data science skills within pricing and this will continue to be the case. Any FCA remedies are likely to refine existing practices, rather than making wholesale changes.”
From a pricing perspective it will be a case of evolution rather than revolution. Companies are already reviewing their pricing practices and making changes where required to come in-line with FCA expectations, so I think these changes will be somewhat organic and bedded in during 2020.
It is still a little unclear what the final report will say, so it is hard to predict what the future looks like. What we do know is that the FCA has not been prescriptive in how insurers should behave, which gives some room for interpretation. When asked about what will happen after the report is released, Steven said:
“Some insurers will be more in-line with the FCA's requirements than others, although I expect they will all have room for improvement in different areas. However I do believe that discounts will continue to be offered to attract new customers, and those discounts may be subsidised by existing customers to some extent, but I expect existing customers to get a fairer deal at renewal.”
The element of competition within the General Insurance market in my opinion is essential, and if we regulate the sector too much, we could see some of the innovation that the market has produced start to be stifled. I therefore hope that the FCA remedies help to protect consumers who need protecting, without removing the element of competition. I also think that a greater awareness of the need for consumers to shop around on a regular basis would help ensure they are getting a good deal.
What do you think the new FCA regulations will mean for the pricing sector? Let us know in the comments below, or get in touch with me to discuss.
Alternatively, if you are looking for a new opportunity within the pricing sector check out our latest jobs here.