UK insurers and the £1.2bn cost of loyalty


When it comes to insurance, customer loyalty does not pay, in fact it costs to the tune of £1.2bn a year.

So this month, UK regulators unveiled a range of proposals designed to stamp out the so-called “loyalty penalty” — the practice of charging existing customers far more than newcomers for their motor and home insurance.

If implemented, the Financial Conduct Authority’s proposals would force insurers to radically alter their business models and the way they price their policies. For years, they have used excess profits made on policies sold to loyal customers to fund discounts for new clients on price comparison websites.

The regulator estimates that 6m people are being overcharged, a third of whom are classed as vulnerable in some way.

“The remedies are quite interventionist,” said Chris Sandilands, partner at consultancy Oxbow Partners. “Many [insurers] were hoping they wouldn’t be.”

The FCA’s suggestions include restrictions on the way insurers set prices and forcing them to automatically move loyal customers to cheaper deals.

One of the most controversial ideas is a ban on policies that automatically renew after a year. Some insurers regularly charge more to customers on automatic renewal.

Insurers say that banning auto-renewal would have damaging results. “In car insurance we worry about the potential consequences of the number of uninsured cars on the road,” said Toby van der Meer, chief executive of insurer Hastings. “There is a risk of significantly lower insurance penetration because people might choose not to automatically renew and then forget about it.”

The changes are likely to create winners and losers, but industry analysts are divided on which companies will fall into each category.

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According to Graham Coutts, a director at Fitch Ratings, the winners could be companies such as Hastings and Admiral, which are focused on winning new business via price comparison sites. Anything that encourages switching, he says, will benefit them.

Some insurers look less well placed, according to Mr Coutts. “Companies such as Aviva, Axa and Direct Line have larger legacy books. They have big household books where there are stickier customers and a large percentage of business that renews each year.”

So far, share prices seem to support this theory. Since the FCA revealed its proposals, share in Moneysupermarket and fellow price comparison site operator GoCo have risen, while Hastings and Admiral have done better than most other listed insurers.

Direct Line is down 3 per cent while Saga has fallen by more than 10 per cent. Analysts say that Saga, which sells insurance to the over 50s, probably has a large number of customers who renew every year and do not shop around much, and so could be hit harder by the changes than rivals.

But others believe that the price comparison sites, and the insurers that are very active on them, could be the losers over the long term.

Industry executives say that cutting prices for loyal customers would mean raising prices for newcomers. Customers could end up paying the same amount regardless of how long they have been with an insurer. That could reduce the incentive to switch.

“If there is less switching, the market shares of the insurers become more stable and life becomes harder for the challengers who use the price comparison sites,” said Mr Sandilands.

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The lack of switching, he adds, could eventually lead to less transparency and higher prices for everyone.

However, the price comparison websites firmly believe the changes will work in their favour.

“We’re still expecting a dynamic insurance market where we have a role to play in helping consumers to choose more easily,” said Nigel Pocklington, chief commercial officer at Moneysupermarket. “We expect the initial measures to clamp down on auto renewals, improve price transparency, and make it clearer and easier to switch. That’s probably a positive for price comparison sites.”

Not all of the FCA’s proposals will necessarily be put into action. They are open for comments until mid-November, and the regulator will announce the final rule changes in the first quarter of next year.

Insurers are hoping that they can use the next few months to discuss the changes.

Michael Sicsic, a former head of general insurance at the FCA who now works for Huntswood, an advisory firm, said: “You open a big Pandora’s box if you start to regulate the pricing model . . . I expect the industry will push back on unintended consequences.”

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