Loyal insurance customers set to benefit from UK shake-up

The start of 2022 will see a fundamental shift in the car and home insurance market for UK consumers: under new rules, providers will be forced to offer existing clients the same terms at renewal as they would receive as a new customer.

The move is intended to eliminate a controversial practice known as price walking, where insurers profit from customers’ apathy by pushing prices substantially higher from one year to the next. 

Prices for new customers are expected to rise when the new rules come into force, but beyond that — as insurers large and small overhaul their strategies — no one is quite sure how the wider market will move.

Some insurers may seize the opportunity to grab market share by pushing through smaller rises for new business than their competitors. In car insurance, the effects of Covid-19 have made the outlook especially uncertain.

“There’s been a huge amount of noise from the insurers and brokers about what will happen, but ultimately we don’t know for sure,” says Adam Powell, chief operating officer at Policy Expert, which provides both home and motor cover.

What is the point of the reform?

The new regime, detailed by the Financial Conduct Authority in May and beginning in January, is intended to remove one of the “loyalty penalties” paid by UK consumers.

Citizens Advice made headlines three years ago with an estimate that sticking with the same provider cost each consumer almost £900 a year across five markets — home insurance, mobile, broadband, savings and mortgages. 

Some cases were especially egregious. The consumer body cited the example of Diane, a septuagenarian from Kent who had home and contents insurance with the same provider for more than 10 years. In 2018, she received a renewal letter bumping her annual premium from £1,500 to £3,500. After going through the Yellow Pages, Diane found insurance elsewhere for £958.

Bar chart of Annual cost of insurance for typical risk, £ showing Long-term insurance customers in the UK have been penalised

The differential pricing model that the FCA is now stamping out has “really influenced the industry”, says Oliver Kent-Braham, co-founder at motor insurtech Marshmallow. 

“Because customers, rightly or wrongly, are so focused on price, the whole industry [moved] towards that model of charging less on day one, and slightly more on renewal.”

The FCA’s ambition is to create a fairer market, where it says customers will “no longer need to search, switch or negotiate at every renewal to avoid price walking”. 

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In July, the Central Bank of Ireland made its own set of proposals to abolish price walking. Under its suggested rules, discounts for new customers will still be allowed — as long as they are “clearly disclosed” — but the price offered to existing customers at the second yearly renewal must match that offered at the first year’s renewal.

Who are the likely winners and losers?

The UK consumer “who diligently shops around every year, and spends that hour of their time shopping around, is probably less likely to benefit from these reforms, as opposed to a consumer who hasn’t switched their home insurance for seven years,” says James Dalton, director of general insurance policy at the Association of British Insurers, which supported the new rules.

Insurance experts generally predict a rise in new business prices for both home and motor cover effectively to compensate for the lost future revenue. The regulator itself accepts that some groups may face price increases as a result of its intervention, highlighting “price-sensitive consumers, including younger customers” — though it estimates that a fairer and more efficient market will lead to savings overall

Price walking increases were more extreme in home than motor insurance, according to the regulator’s analysis last year. The average buyer of building and contents insurance that had stayed with the same provider for more than five years was paying almost three-quarters more than new customers. Car insurance, by comparison, was 30 per cent more expensive for the long-term customer. As a result, the January rise in the cost of home insurance for new customers could be bigger, analysts at RBC Capital Markets have argued.

Insurers stress that they do not make excessive profits in these business lines from differential pricing. Given that, the rebalancing of prices in the UK on what are “reasonably low margin” products will inevitably create winners and losers, says Scott Egan, UK & International chief executive at insurer RSA.

“There is a danger in all of this, that we create between ourselves as an industry and the regulator an expectation, from the consumer, that somehow their insurance is going to be cheaper,” he adds. “And obviously, everyone would probably like that to be the case, but unfortunately the economics are such that it is not going to happen.”

In motor insurance, there are a lot of conflicting forces pulling on prices, complicating predictions. The cost of car insurance hit a five-year low in the second quarter, after insurers passed on the benefit of a fall in claims during Covid lockdowns. This is expected to reverse as economies open up.

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At the same time, rules designed to rein in whiplash claims, which came in to force in May, are expected to have a downward effect on premiums. All told, the market faces “one of the most turbulent times in its history”, broker Willis Towers Watson commented in July.

Will the new rules reduce shopping around?

The FCA’s own model suggests its intervention will lead to less switching, as the financial incentive to check for lower prices elsewhere reduces. This should be more efficient, it added, since switching “is costly in terms of consumer time and firm resources”.

“If someone does think ‘I don’t want to spend 20 minutes going through a comparison site’, then they should be offered a fairer deal, which we think is good for consumers,” says Kent-Braham. But he balances this against another item of the reform, that will make it easier for price comparison websites to contact customers at the time of renewal, giving them “a communication channel they didn’t have before”.

Companies behind comparison websites are bullish, with GoCompare saying in May that it predicted more people will switch insurers after the reform comes into effect. It cited a rule tweak intended to make it simpler for customers not to auto-renew, and a general repricing of different risks that it thinks will create a “wider disparity” between providers, pushing people to shop around.

One school of thought is that shopping around is a behaviour too entrenched to disrupt. Around three-quarters of motor insurance customers use a price comparison website when their policy comes up for renewal, and more than 60 per cent of home insurance customers, according to data from Consumer Intelligence. 

There is always the opportunity that another provider will give you a better price for your specific risk and needs. But analysts at Barclays said the new measures, overall, should reduce incentives for switching, with the exception being after events such as accidents or house moves that substantially change a person’s insurance profile.

Price walking has been especially prevalent in buildings and contents insurance, even allowing for increased risks such as floods © Christopher Furlong/Getty

Will people focus less on price?

The new rules also require that certain incentives such as policy add-ons and vouchers be reflected in renewal prices. So freebies — with a few exceptions such as soft toys — must be replicated within pricing models. This could mean companies become more judicious in the add-ons they provide.

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The “real prize” of the reform, according to the ABI’s Dalton, is a market where people continue to shop around, but focus on value rather than price.

“Too many people know they need to buy car insurance, for example, find the product that is the cheapest and buy it, without asking themselves — do they need breakdown cover, do they want windscreen protection, do they want key cover?”

In the coming days, analysts and investors will be scouring insurers’ half-year results commentaries for hints on their strategy. The big unknown is the response of the consumer. If customer churn reduces, RBC points out that insurers that rely on price comparison websites will pay less in commission, allowing them to keep a lid on prices.

What should I do to prepare?

There is a limit to what insurance customers can do in advance to protect themselves from this market shift, consumer advisers say, especially given the cancellation fees for exiting policies before renewal.

But for those whose car or home insurance comes up for renewal before the end of the year, it is more important than ever to shop around for the best deal to avoid being a victim of last-minute price hikes, says James Daley, managing director of consumer group Fairer Finance.

“There’s anecdotal evidence that some insurers are trying to squeeze through a very significant price uplift before the rules change,” Daley adds. “You just want to be absolutely clear that you are not in that situation.”

After the January shift, Daley recommends that consumers focus especially on picking an insurer that suits their particular needs and “has a good track record on paying claims, resolving complaints and keeping their promises”. Insurers themselves are already putting emphasis on their particular services and extras.

The uncertainty over what will happen come January adds weight to the argument for comparing prices, says Matthew Upton, Citizens Advice’s director of policy.

“It’s very difficult to tell what will happen to prices when the new rules kick in, so our advice to people would be to shop around when you can to make sure you’re on the best deal.”



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