31 October 2018
What will the FCA's insurance market study mean for insurers?
The insurance industry is about to come under intense scrutiny. Today's announcement that the FCA is launching a market study into the home and motor markets - with a particular focus on pricing - is sure to spark some nerves amongst many of those in the market. And rightly so.
Under Andrew Bailey and Chris Woolard, the FCA appears to have an increasing appetite to do whatever it takes to sort out long standing problems in our financial services markets. And while supply-side remedies such as price capping were once unheard of, we've now seen three policy initiatives in as many years which have suggested taking a more interventionalist approach to right some wrongs.
A review of pricing practices in the insurance market is long overdue. And what the regulator appears to be most interested in is the age old issue of dual pricing - something once again brought to regulators' attention by the Citizens Advice super-complaint, and an issue that is rarely out of the personal finance news pages.
A problem that stretches beyond financial services
It's a problem that persists in lots of markets - new customers getting a better deal than loyal ones. Essentially, the only way to ensure you're getting a decent deal these days is to be constantly switching. To be good consumers, we now need to dedicate ever larger chunks of our lives to switching everything from our broadband, to our energy, to our insurance to our savings - every single year.
The savings market is an interesting case study if you want a clue where the FCA's current thinking is on the issue of dual pricing. In its recent discussion paper on price discrimination in the savings market, it settled on a preferred remedy of forcing all companies to introduce a basic savings rate - onto which all customers would be moved 12 months after opening an instant access account. The FCA may yet back off this plan - but it demonstrates its current willingness to intervene on the supply side if it feels the detriment is great enough.
The answers in the insurance market are more complex. In home and motor insurance, pricing is personalised, so there's no possibility of introducing anything similar to its proposals in the savings market. It could, however, cap price rises - to prevent firms offering loss leading rates in year one in the hope of recouping revenues by hiking rates in years two, three and beyond. Or it could look at facilitating long-term insurance contracts - which allow customers to lock in for longer.
Could better disclosure be a better remedy?
Personally, I'd like to see the focus first being on making it easier for customers to compare based on quality - not just price - when they're buying. After that, I'd like to see firms have to go much further to help customers understand how much they could save by switching. Better disclosure all round would solve many of the problems in this market in our view.
Improving disclosure has of course been within the industry's gift to pursue over the past few years. Unfortunately, when the FCA mandated firms to start putting last year's prices on customers' renewal letters, many firms tried to bury it - demonstrating that if disclosure remedies are going to work, they have to be more prescriptive and more tightly enforced.
And sadly, the failure of recent enhanced disclosure remedies increases the chance that the regulator will now look for a more heavy-handed solution. As ever, the industry may have missed an opportunity to save itself.
Although the FCA papers published today don't talk as much about it, perhaps the wider seismic changes that could result from this piece of work are related to a consideration of what factors insurers use to set their prices. As I've written many times before, the insurance industry has moved miles away from its origins based around the concept of pooled risk. Today, companies are competing to get the edge by providing ever more personalised pricing. And for every winner, there tends to be at least two losers.
Back to the future
The big question for the industry is whether the FCA has the appetite to push the market back in the direction it came from. Is insurance just a commodity, which requires more standardisation and commodity-style pricing. Or is the race to get an edge on individual pricing a legitimate one - in which case the end game will need to be more like Flood Re, with government-backed support for the risks that the industry don't want to touch.
Either way, this is an important juncture for the industry - and it's up to insurers to persuade the regulator and government that their current ways of working offer value. On this front, I'm not sure the industry yet has a convincing narrative.
We'll be launching our own research into the pricing debate in the New Year.