James Daley

By James Daley

The FCA finally published its long-awaited update on its work in the general insurance market last month – lining up a range of possible interventions designed to tackle the issue of dual pricing, or the loyalty penalty as its often referred to in the press.

It’s not something that’s unique to the insurance market. Shopping around to avoid your price being hiked up has become a part of every day life in everything from gas and electricity to breakdown cover to cable television.

But in the world of insurance, the sums of money involved can often be greater and, thankfully, we have a regulator with the powers and inclination to try and do something about it.

A ban on dual pricing remains on the table

The FCA has shown an increasing amount of appetite for heavy-handed supply-side market interventions over the past few years (the short-term credit market being the most obvious example). And in line with that direction of travel, the regulator has left the idea of almost a complete ban on dual pricing on the table.

Although it would allow firms to offer a discount to customers in their first year, it wouldn’t permit them to increase prices – beyond removing the introductory discount – in years two and beyond.

Personally, I think this may be a bit too strong an intervention at this point. It will certainly push prices up for new customers, and I think there’s much more that could be achieved by introducing a more effective disclosure regime.

At the moment, firms have to write to you to let you know about your renewal. But how about also requiring them to text you and email you as well? Renewal letters could also be much more effective at making it clear how much you’re missing out on by not shopping around.

If this strategy were implemented effectively, we should reasonably be able to get to a point where those who choose not to switch are the inactively inert customers – people who know they could move, but can’t be bothered.

This does leave a set of customers paying more than they need to. But presumably they will be those who can afford it – and who have taken the decision that it’s not worth their time or effort to pursue the available savings. That leaves cheaper prices on offer for those who are more price-sensitive.

A cue for the enforcement team

The FCA hits on a couple of other suggestions that I certainly hope it does follow through this. First up is a move to ban margin optimisation for existing customers. This is the practice of using data to work out customers’ propensity to switch, and then pushing through larger price increases to the customers who are less likely to leave.

Frankly, I find it hard to see how this practice meets the FCA’s existing principles of regulation – and even less so the Insurance Distribution Directive’s requirement to act in your customers’ best interests. So perhaps what’s needed here is some enforcement action.

The FCA is also considering banning auto-renewal of insurance. I’m not so sure about this, as the consequence of not renewing can be that you end up with no insurance. In car insurance, that could leave you outside the law. And in home insurance, it leaves your biggest asset at risk.

Nevertheless, I agree with the idea that companies should get customers to take an active choice on auto-renewal. According to our research, around 50% of motor insurers and over 80% of home insurers don’t clearly explain auto-renewal and give you an easy way to opt out.

I’d like to see clear out opt-outs – accompanied by a requirement to communicate louder and more frequently with customers at the time of renewal if they have opted out.

Although it keeps lots of reasonably strong policy ideas on the table, the paper doesn’t actually go very far in indicating what it favours. So at this point, everything is still up for grabs for the industry.

I know Brexit is taking up a lot of time in the FCA, but I hope it can push on, decide on its course of action and get it implemented next year. Although change is always painful, these changes will ultimately be good for the market. Fairer, more transparent pricing will ultimately help rebuilt trust between consumers and insurers.