Consumer Intelligence welcomes the announcement from the FCA today as a major reset of confidence and trust in the financial services industry.
Up until today, every single player in the market has been hooked on introductory pricing – the crack cocaine of the insurance industry – affecting insurers and consumers alike.
The industry has attempted to wean itself off in recent years by narrowing the gap between new business prices and the prices charged at renewal (known as price walking), but it clearly wasn’t enough.
Rather than providing methadone to treat the industry’s addiction, today’s ruling from the FCA requires firms to go cold turkey – completely eradicating the practice of introductory pricing and the loyalty penalty. This could be considered a win for consumers, and more so for vulnerable customers.
The industry has always struggled with a bad reputation, and this has only worsened since the pandemic hit. Our research shows that consumer perception of insurers has remained rock bottom since March. The removal of price walking provides the industry with an opportunity to regain consumer trust.
With insurers no longer hiking premiums up at renewal, price will become only one of the deciding factors, rather than the deciding factor for consumers when purchasing insurance. Firms will have to start focusing on the value of their products, strength of their brands and quality of customer service to win and retain customers.
Our data tells us that today’s intervention will not impact all insurers equally. Currently in the motor insurance market, we see premiums rise by an average of 2.54% at renewal. In home, it stands at 12.67%. Home insurers will need to radically rethink how they do business.
As a result, one thing is absolute - premiums are going to rise. In the current model, insurers offer heavily discounted new business prices to acquire new customers, but don’t make profit until year 2 or 3 of the policy. So naturally, prices will need to even out to support the sustainability of the industry.
In the long term the announcement will increase confidence in financial services, however it is going to be a rocky year as the insurance industry and their customers wean themselves off the crack cocaine that they have been so accustomed to.
A brand already winning in this space is Admiral. Admiral’s move to automatically give motor customers back £25 during lockdown has been handsomely rewarded by a surge in brand loyalty and renewals.
This time last year Admiral’s customers were amongst the most fickle of the bunch, with 85.9% shopping around at renewal, above the market average of 83.1%. Only 14.1% renewed without shopping around, compared to a market average of 16.9%.
But data from our Insurance Behaviour Tracker tool reveals a step change. As many as 21.4% of Admiral customers renewed their car insurance without shopping around in the four months to July.
The insurance add-ons market is a rich source of income for the UK motor insurance industry, but with changing regulations, differing consumer behavior and a wide range of insurer strategies at play, it is becoming increasingly difficult for insurers to determine the best approach to market for add-on policies.
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