Be prepared for new rules or face penalties, insurers told by the Financial Conduct Authority
On the 26th August 2021 the Times published an article in its Business pages:
“The City regulator has fired a warning shot at the insurance industry over concerns that companies are ill-prepared for strict new rules on motor and home cover that are due to come into force in a matter of weeks. The Financial Conduct Authority said yesterday that it was ready to take regulatory action against insurance providers that fell short of its standards and risked harming customers.”
This follows an article published by the FCA on 28 May 2021
The FCA has implemented a package of remedies to improve competition and protect home and motor insurance customers from loyalty penalties. This includes new rules so that renewal quotes for home and motor insurance consumers are not more expensive than they would be for new customers.
These measures address the issues identified in the FCA’s September 2020 market study, which found that millions of home and motor insurance customers lose out if they renew repeatedly with their current providers. In 2018, 6 million loyal policy holders would have saved £1.2 billion had they paid the average price for their actual risk.
Many firms increase prices for existing customers each year at renewal – this is known as price walking. This means that consumers have to shop around and switch every year to avoid paying higher prices for being loyal.
It also distorts the way the market works for everyone. Many firms offer below-cost prices to attract new customers. They also use sophisticated processes to target the best deals at customers who they think will not switch in the future and will therefore pay more.
The FCA’s new rules will stop firms price walking. Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer. It is likely that firms will no longer offer unsustainably low-priced deals to some customers. However, the FCA estimates that these measures will save consumers £4.2 billion over 10 years, by removing the loyalty penalty and making the market work better.
In addition to the new rules on pricing for home and motor insurance, the FCA is also bringing in new rules to:
• give most consumers easier methods of cancelling the automatic renewal of their policy,
• require insurance firms to do more to consider how they offer fair value to their customers, and
• require home and motor insurance firms to report data to the FCA so that it can supervise the market more effectively
Sheldon Mills, Executive Director, Consumers and Competition at the FCA commented on the new rules:
‘These measures will put an end to the very high prices paid by many loyal customers. Consumers can still benefit from shopping around or negotiating with their current provider – but won’t be charged more at renewal just for being an existing customer.
‘We are making the insurance market work better for millions of people. We will be watching closely to see how the market develops in the future and to ensure firms continue to deliver fairer value to consumers.’
The pricing, auto-renewal and data reporting remedies come into effect on 1 January 2022. The rules on systems and controls, product governance and premium finance take effect from the end of September 2021.
Alongside today’s FCA Policy Statement, the FCA has also published research on how incentives affect consumers’ choices, focusing on purchases of motor and home insurance made through price comparison websites. The research was undertaken to inform our approach to the new pricing rules.
The FCA will continue to monitor the market closely to ensure firms are ready to implement the pricing changes on time. The FCA will also review the effects of the remedies over the course of 2022, ahead of a full evaluation in early 2024.