FCA targets home and motor insurance 'loyalty penalties'

Of the around six million customers who could be losing out, one in three have low financial capability or are otherwise vulnerable, according to the FCA. It has published an interim report (69-page / 1.9MB PDF) on its study of the UK general insurance market, including potential remedies to increase transparency and reduce prices for customers.

The FCA intends to publish a final report in early 2020, at which point it will consult on potential remedies.

Competition law expert Alan Davis of Pinsent Masons, the law firm behind Out-Law, said: "The FCA recognises that there is strong price competition for new business in both the home and motor insurance markets and there is no evidence that profits overall are excessive. The FCA also makes clear that discriminatory pricing, so that some consumers pay higher prices than others, is not of itself as a concern or unlawful generally. However, the FCA considers that some practices used by firms in the home and motor insurance markets which lead to them earning higher margins from some consumers are harmful".

"The FCA also notes that the industry has acknowledged the need to tackle concerns about pricing practices and has been taking some steps to do this. Nevertheless, it thinks that FCA intervention is also likely to be necessary," he said.

The FCA found that most insurers incorporate their expectations about whether a customer will switch once their contract expires or will pay an increased price into their pricing strategy. This is not made clear to the customer. Firms often sell policies at a discount to new customers and increase premiums at renewal, when customers are less likely to switch. Practices such as auto-renewal may be making it less likely that customers will shop around, even though many people who switch or who negotiate their premium with their provider can get a good deal.

Changes made by the FCA in 2017 to the rules around home, motor and pet insurance renewals have already delivered significant savings to customers, the regulator said. Improved communications at renewal to increase transparency about price increases and encourage customers to shop around have saved an estimated £185 million per year, according to analysis by the FCA (33-page / 485KB PDF).

Among the remedies that the regulator is proposing to tackle these issues is whether to limit or ban price increases for renewing customers, or restricting insurers' ability to consider the customer's likelihood of switching or negotiating as part of their pricing strategy. Alternatively, firms could be required to move customers, or just those customers who have renewed multiple times, on to cheaper equivalent deals automatically, or to contact customers who renew the same policy consistently to prompt them to consider other options.

Use of automatic contract renewals could be banned or restricted, particularly where there is a change in price; or made opt-in only. The FCA is also keen to ensure that it is as easy for customers to exit an insurance contract as it was to sign up. Firms could be required to improve their communications with customers to increase transparency, including by explicitly notifying them where their renewal price has increased because they have not switched for a number of years, or potentially publishing more information about their pricing practices or differences in prices between customers of equivalent risk.

The FCA is particularly interested in the potential benefits of innovation in the general insurance space, and hopes to explore this further later in the year. Developments such as open finance and the increasing use of consumer data have the potential to transform the way in which consumers interact with these products, including by making it easier to find better deals and switch to other providers.