Six months since the FCA abolished the cost of home travel and car repairs, Yochai MelochnaEarnix’s Head of Customer Success found his customer using Earnix’s AI pricing strategy, Price IT – Nick McCowan, Post Offices The Director of General Insurance, to find out how the changes have affected the market so far.
On 1 January 2022, the controversial practice of ‘price walking’ became a thing of the past in car and home insurance. For many buyers who were punished for being loyal to their patrons or simply failed to seek a better way of renovating, this may have been greeted with a “good riddance”.
Price gouging is when insurers charge consumers more to renew their policies while offering higher rates to new customers, resulting in a severe loyalty penalty for long-time customers. This became more common in UK car and home insurance, fueled by the rise of price comparison websites (PCWs) promoting the purchase of the latest products. According to the FCA, insurers used proactive measures to engage with customers who they thought were unlikely to change in the future.
Over time, the difference between the cost of buying a policy for the first time and the renewal has increased. The FCA decided enough was enough and introduced rules on 1 January to force car and home insurers to charge the same for new business and renewals – a move they think will save UK consumers £4.2bn over the next 10 years.
According to Post Office General Manager of Insurance Nick McCowan, the changes have had the effect many people expected – renewal rates have fallen, while new business rates have risen. The cost gap between new and renewal business has already narrowed across the industry, he says, and insurers are no longer hiking renewal rates to raise money for new customers. “Undoubtedly, the new legal framework is good for consumers,” he says.
However, McCowan says new business rates have not risen as much as many had predicted. And while money has undoubtedly returned to customers following the regulatory changes, the savings have not been significant. “Automobiles and housing are not lines that typically attract fixed rates so when combining new business rates with renovations, there is a lot that will be redistributed.
According to Mr McCowan, attractive renewal rates and the withdrawal of attractive business deals for new customers have led to a drop in demand for new insurance while retention rates have risen sharply. “Price is still a key factor in consumer decision-making, but we’re seeing fewer purchases from customers who want to switch,” he explains. “Customers are having a lot more coverage for renewals than many expected – even with insurers that were at the lower end of the price range. This is creating a huge challenge for many businesses like us looking to grow new business.”
Providing value to customers
While much of the FCA’s decision has focused on pricing, McCowan is keen to point out that ‘price’ is more than simply providing a good price. “Real value means getting the cover you need, getting it paid for, covered and serviced efficiently, effectively and quickly in the event of a loss,” he says. “I have had the opportunity to work in companies that always consider these things very important, but not all insurance companies offer these things all the time.”
The idea of value is central to the FCA’s reforms, which in addition to price controls include easier rules for consumers to stop automatic extensions and require insurers to demonstrate that their products offer good value for customers. The new rules may also see the end of the incentives and incentives included in the new business because these should also be used for business restructuring, which may not be economically beneficial in the long run.
“Establishing good values in the whole market and creating a good place to buy prices is a very good thing and the customers, I think, will find the best products and services,” says McCowan. He insists, however, that insurance companies always provide benefits to customers, even before the changes. “Combination in the 90s or more than 100% in some car years shows that these products help customers and pay,” he argues.
Falling prices can lead to more purchases
The rule change is only six months away, so it may be too early to see how it will affect the market, although McCowan believes that the buying situation will not change. “Customers are still shopping through PCWs for products they can afford, and PCWs are doing a good job of presenting value and products to help customers make a decision,” he says.
“Inflation and rising costs of products can make insurance consumers more cautious about prices and increase inflation in the coming months,” he adds, “so we must be ready to offer new business and renewal rates to meet a large group of consumers who want to save money.”
In an increasingly dynamic market and economy, getting the right information and tools to make smart pricing and risk decisions has never been more important. “This reinforces the need for good predictive models, market analysis and analysis to be able to trade competitively in this market,” says McCowan.
Insurance and external factors, from rising inflation to supply chain disruptions to changing attitudes, are changing to shape the return on investment for motor and home insurance in the UK. In this difficult environment, the ability of underwriters to correctly price and choose risk will be tested – and become a very different competitor in following the changes.
Although the experience of the Post Office can also be reported with other insurers, there are other considerations. There is, for example, constant evidence in the market of prices going up and down, while not all customers have benefited from the terms of renewal. The landscape is highly dynamic and changing rapidly, and we will be exploring these issues in more detail over the coming weeks, including a white paper on the FCA’s changes due to be released in July.