Loyal insurance customers set to benefit from UK shake-up

04 August 2021 | David Young

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

Loyal insurance customers set to benefit from UK shake-up

So reports Tech Register reports saying that 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.

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.

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".

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.

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.

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.

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".