The FCA launched this market study in October 2018 with the aim of understanding whether pricing practices in the home and motor insurance sector negatively affect consumer outcomes and competition. It followed a thematic review of the general insurance sector in which the FCA identified a discrepancy between prices paid by new customers and renewing customers who had stayed with a provider for a long time, and it was concerned this might cause consumer harm. Such practices were also the subject of a super-complaint from the Citizens Advice Bureau to the Competition and Market Authority (CMA) in September 2018, which identified home insurance as one of five markets where such concerns were raised. This market study forms part of the FCA’s response to the CMA’s recommendation to take forward these issues.
The FCA’s interim report concludes that these markets are not working well for consumers, finding that 6 million policy holders paid high prices in 2018 at a total estimated cost of £1.2bn.
The key findings include:
- Firms engage in ‘price walking’ practices allowing them to raise prices for loyal consumers who renew with them each year.
- Policies are often sold at a discount to new customers, with premiums increasing on renewal. These increases are often targeted at those less likely to switch provider and the FCA found strong evidence this price discrimination was primarily based on consumer awareness, with the discrepancy rising to 6% points for home insurance consumers who were unaware (even with equivalent risk and cost to serve).
- Firms include their expectations of whether a customer will switch when setting a price (which is not made clear to the customer).
- 1 in 3 consumers who paid high prices showed characteristics of vulnerability and were less likely to understand the insurance market or the impact of renewing on their premium.
- These pricing practices are likely to lead to higher prices overall.
- A range of practices could make it more difficult for consumers to make informed decisions and switch provider, such as lack of transparency or disclosure of reasons for price changes, and auto-renewal.
The FCA considers that intervention is likely to be required to tackle these concerns and is considering an extensive range of remedies including:
- Stopping practices that could discourage switching – including a potential ban or restriction on the use of auto-renewal of insurance policies (which for example has been imposed in Italy), making auto-renewal opt-in only and making it easier to decline auto-renewing policies or exit a contract.
- Limiting pricing practices that allow firms to charge higher prices to consumers who do not switch, for example, by restricting or banning margin optimisation based on consumers’ likelihood of renewing. The FCA is proposing a ban or restriction on raising prices for consumers who renew year on year or requiring firms to automatically move consumers to cheaper equivalent deals.
- Requiring firms to be clear and transparent in their dealings with consumers - including improvements to the way firms communicate with their customers. The FCA is considering requiring firms to engage with customers to provide information about alternative deals and identify those who may need help in moving to better priced products with equivalent cover. The FCA is also deliberating whether firms should publish information about price differentials between their customers.
- Expanding or strengthening the FCA’s existing product governance requirements.
The FCA is also hopeful that Open Finance, based on the CMA’s Open Banking remedy introduced following its in-depth retail banking market investigation in 2016, to allow other third parties to access consumer data to offer innovative services, could facilitate the process of searching for and switching to better deals.
The FCA intends to publish a final report in the first quarter of 2020. In the meantime, firms should consider providing their views on the interim findings and potential remedies to the FCA by 15 November 2019.
The conclusions of the interim report are not unexpected. Perhaps the most concerning statistic is the extent to which vulnerable customers are paying higher premiums. Otherwise the report reflects many general regulatory themes of the moment: continued focus on fairness for consumers, vulnerability and the use of technology to innovate.
In fact, these themes are currently common to several UK regulators and likely to be of wider relevance and application than home and motor insurance only, even though the study forms part of the FCA’s follow up to the Citizens Advice Bureau ‘loyalty penalty’ super-complaint regarding home insurance. Ofcom is currently introducing a number of regulatory requirements on communications providers to address ‘loyalty penalty’ concerns, facilitate switching and improve the consumer experience. Following the CMA energy market investigation, Ofgem has been implementing a number of the CMA’s recommended measures to encourage switching and protect the most vulnerable in the energy sector. The reference to Open Finance echoes proposals for ‘Open Data’ which are being discussed as part of competition law reforms and the CMA’s ongoing market study in digital advertising and online platforms. Finally, the FCA’s focus on (vulnerable) consumers is consistent with the new CMA chair Andrew Tyrie’s calls for reform to the CMA’s powers and duties, which had been well received by Theresa May’s Government before the end of its term.
It is therefore likely that the FCA’s analysis and findings will have a degree of read-across in other financial sectors and also be of interest to other UK regulators. Firms would be well advised to be mindful of this growing scrutiny and the concerns raised, and consider whether they are engaging in similar practices.