The Financial Conduct Authority (FCA) has published its interim report of its market study into the pricing of home and motor insurance. The FCA found that competition is not working well for all consumers in these markets. It sets out concerns about how pricing in these markets leads to consumers who do not switch or negotiate with their provider paying high prices for their insurance.

The FCA estimates that around 6 million policyholders pay high prices and are not getting a good deal on their insurance. If those customers paying high premiums paid the average premium for their risk they could save around £1.2 billion a year. This affects all types of customers. The FCA estimates this includes 1 in 3 people who are potentially vulnerable.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said “This market is not working well for all consumers. While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects around 6 million consumers.”

“We have set out a package of potential remedies to ensure these markets are truly competitive and address the problems we have uncovered. We expect the industry to work with us as we do so.”

In particular, the FCA found that:

  • Insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch.
  • Longstanding customers pay more on average, but even some people who switch pay higher prices.
  • From the FCA’s consumer research, 1 in 3 consumers who paid high premiums showed at least one characteristic of vulnerability, such as having lower financial capability. For consumers who bought combined contents and building insurance, lower income consumers (below £30,000) pay higher margins than those with higher incomes.
  • People who pay high premiums are less likely to understand insurance or the impact that renewing has on their premium.
  • Most firms, when setting a price, include their expectations of whether a customer will switch or pay an increased price. This is not made clear to the customer.
  • Firms engage in a range of practices to raise barriers to switching.
  • Many consumers who switch or negotiate their premium can get a good deal.

The FCA is undertaking a range of activities in order to address the problems it has identified. Through new rules introduced in 2017, the FCA has already improved transparency on renewal for general insurance policies which has delivered significant savings to customers.

The FCA will also continue its work to ensure firms improve the oversight of their pricing practices and deliver the changes required following other recent policy changes.

The FCA is also considering remedies to:

  • Tackle high premiums for consumers – this could include banning or restricting practices like raising prices for consumers who renew year on year or requiring firms to automatically move consumers to cheaper equivalent deals.
  • Stop practices that could discourage switching – including restricting the way that firms use automatic renewal.
  • Make firms be clear and transparent in their dealings with consumers – including improvements to the way firms communicate with their customers. The
  • FCA is also considering whether firms should publish information about price differentials between their customers.
  • Harness the benefits of innovation in the longer-term, so that general insurance markets benefit positively from technological developments including Open Finance.

The FCA has set out its interim findings and potential remedies. It intends to publish a final report and consultation on remedies in Q1 2020.

Commenting on the FCA’s report Gillian Guy, Chief Executive of Citizens Advice, said “Last year we submitted a super-complaint showing loyal customers are being penalised hundreds of millions of pounds a year on their home insurance alone. It’s great to see the FCA acknowledged that the insurance market isn’t working for consumers and pledging to crack down on the loyalty penalty.”

“We’re especially happy to hear the regulator say that everything is on the table to make sure customers are getting a fair deal. This includes tackling gradual year-on-year price increases and making companies automatically switch their customers to better deals. At the moment these are just proposals. The FCA must now follow through on these bold ideas to stop loyal insurance customers being penalised.”

Roger Ramsden, CEO of MyPolicy Group, said “Insurance pricing, particularly when it comes to motoring, should be based on the individual’s usage and behaviour, nothing more. The FCA’s £1.2bn saving estimates underline how broken the current pricing model really is. In motor insurance, the risk and, therefore, price of every mile driven depends on where, when and how it is driven – yet motorists are still being bucketed into arbitrary risk buckets, often paying premiums that in no way reflect their driving behaviour.”

“It is great to see that the FCA is considering a move that would require firms to provide data tracking to improve pricing practices for customers. MyPolicy Group collects, analyses and interprets motorists’ driving data and provides accurately-priced premiums based on mileage, driving behaviour, routes and times of travel. Motorists have a right to pay a price that better reflects their actual driving and mileage. The days of arbitrary annual premiums are, thankfully, numbered.”