The effect of general insurance pricing regulations

At the start of this year, new rules came into force in the UK to ensure fair pricing for consumers of personal lines insurance.

These new rules were developed by the FCA to ensure that insurance companies are delivering ‘fair value’ to all consumers of Home and Motor policies, including prohibiting the ability to discriminate the price between new and existing customers.

Additionally, the insurers will need to make automatic renewals an easy thing for the customer to opt out of should they choose to do so.

Prior to this change, many insurers offered favourable terms to new customers to attract new business. This encouraged customers to use price comparison websites or traditional personal lines brokers to source a cheaper policy from a new insurer looking to win new business.

The FCA believe that these changes will improve competition by making it fairer to consumers and with the by-product of increasing consumer confidence and trust in the insurance market.

What do these new rules mean for insurers and consumers alike?

Overall, the FCA expects average prices to drop, to the tune of a £4.2bn total reduction in the next ten years, providing increased value to the consumer. Customers loyal to specific insurers, who may have paid more for their insurance in the past, may now find that their insurance premiums will reduce as they will be offered the same price quoted for a new customer. To balance this out, those consumers that shopped around each year will see less price value in doing so, and overall are expected to pay more as the new customer discount is effectively removed.

Competition for new business will remain, however, it is expected that there will be increased attention on product features and service quality as the price differentials narrow. Pricing will remain a critical differentiator with low-cost operations continuing to appeal, but irrespective of this, there will be an increased emphasis on customer retention as the need to move each year will be reduced. Therefore, both distributors and manufacturers of Motor and Home insurance will now need to look beyond the implementation of these changes and consider their long-term customer acquisition and retention strategy.

For those insurers that previously provided low prices for new customers which then relied on higher prices for renewal customers, they will have to make some decisions on their value proposition and potentially their business model. It will involve changing their pricing strategy, which will mean being less attractive to new customers, but potentially more attractive to those customers who are loyal. These types of insurers could see a reduction in their business volumes with reduced margins. As a result, some insurers will be diversifying their distribution channels and increasing their direct engagement with customers to alleviate the margin pressures. As outlined in our UK Insurance Trends for 2022, insurers will be seeking new business models as the implications of this regulation unfolds.

For most organisations, there will be a major focus on developing the customer experience, providing choice, simplicity, and personalisation.

The companies that have already invested in improving the customer experience will be well placed. Especially if those experiences are performed digitally, delivering both improved customer service as well as lower operating cost. For others there will be a pressing requirement to improve their customer service proposition.

As pricing becomes less of a differentiator, a move away from the commodity-based approach, where the products look similar, could also evolve so that some insurers offer specialised products that suit the individual circumstances of the consumer.

What next?

These new rules will take some time to bed in. There is still room for interpretation in the definition of ‘fair value’ which means there could be an uneven approach across the industry. With more experience and involvement from the regulator, it is expected that this ambiguity will diminish over time.

For insurers, customer service, product specialisation and brand recognition will become more important. As a consequence, the successful insurers will be those that invest time and energy into:

• Ensuring the customer service proposition supports the preference of the consumer and that any digital engagement is a fit to the modern expectations in providing intuitive customer journeys that result in positive experiences
• Creating opportunities for meaningful engagement with their customers to demonstrate value and drive brand loyalty
• Considering opportunities to extend the distribution reach through partnerships within adjacent eco-systems
• Considering increasing marketing directly to customers should that emerge as a compelling route to market
• Developing the product flexibility and innovation suited to supporting individual customer requirements

For brokers and price comparison websites they will need to amplify their value to customers and prospects beyond pure price advantage, specifically by:

• Demonstrating value to customers beyond sourcing the best price, as price differentials are now less compelling.
• Furthering the development of services beyond those associated with new business and policy issuance as the economic value in sourcing the best price at renewal will diminish.
• Developing greater insights into their customers’ needs and expectations and dynamically offer solutions that match those individual needs to source tailored products suited to the personal requirements

In summary

The general insurance pricing regulations will influence the way insurers and brokers interact and engage with consumers. The incentive to differentiate through service is now very clear, both for insurers and brokers. Those that are already well placed and ready to grasp the opportunity to improve their value proposition and customer experience further will be successful; the companies that hesitate will be left behind and could be trapped on their own burning platform.