New rules banning insurers from quoting customers a higher price for renewing their home or motor insurance than they would pay if they were a new customer have come into effect from 1 January. The FCA’s reforms follow a review that uncovered that many insurers were increasing prices for renewing customers year-on-year – a practice known as price walking.
The FCA expects the new rules to save consumers £4.2bn over the next 10 years. It says that as well as leading to higher prices for loyal customers, price walking distorted the way the whole insurance market worked, with many firms offering below-cost prices to attract new customers, who then paid more over time if they renewed their insurance. Insurers used sophisticated processes to target their best deals at customers who they thought were less likely to switch in future.
Sheldon Mills, executive director for consumers and competition at the FCA, said: “Our interventions will make the insurance market fairer and make it work better. We are keeping a close eye on how insurers respond to our new rules, to ensure that the benefits of a better insurance market are delivered to consumers.”
The immediate impact of the rule change has not seen drastic effects so far, but future volatility is possible, said Bethan Faultless, head of UK personal lines pricing at Willis Towers Watson. She added: “The significant volatility widely anticipated for average premium changes in the immediate days following the introduction of the FCA new pricing rules has yet to materialise, while motor prices have so far remained relatively stable throughout the first few days of January.”
Faultless believes that this stability is likely to be short-lived, however, making way for increased volatility in premiums once insurers have returned from the Christmas break. The pricing rules which came into effect on 1 January apply to renewal notices going out after this point. If a consumer’s renewal notice went out in December and their policy renews after 1 January, the rules would not apply.
“How insurers react or over-react to the new rules through price changes and product differentiation will be decisive in determining just how bumpy the upcoming weeks and months become,” said Faultless. “Most of this turbulence will manifest over the next three months, although ongoing uncertainty is expected to endure throughout 2021 before settling towards the end of the year. Meanwhile, the COVID-19 pandemic will continue to put insurers under considerable pricing pressure as wholesale society changes evolve and disrupt the market, compounded by inflationary pressures already being observed on claim amounts.”
The FCA’s package of reforms which have come into effect this month also includes new rules to give consumers easier methods of cancelling the automatic renewal of their policy, and to require insurance firms to demonstrate that their products deliver fair value to customers.
YOU MIGHT ALSO LIKE