Insurers braced for "loyalty penalty" crackdown

A most interesting article in the Financial Times today - see our report alongside. See our earlier NEWS items on the "loyal stuffee" topic. More

Comment from the V8 Webmaster
Insurers have openly said that customers who shop around can get better deals - suggesting the market is competitive and providing lower priced cover for those customers who check offers in the marketplace. But those customers are consumers who accept that an annual shopping expedition is an essential activity if they are going to get a good deal on their renewal. But the insurers comments we have seen imply that those customers who can't be bothered to get off their backsides and shop around, miss an opportunity for a better deal. But that seems little more than the insurers' brazen unspoken acceptance of their taking advantage of customers who do not - or the insurers' "loyal stuffees"!

One surprising comment in the FT article mentioned alongside was "insurers are keen for the regulator to look at the whole market - not just the loyal customers who pay more, but also the new customers who shop around and benefit from discounting. An insurer said "we are very supportive of anything that drives transparency and switching behaviour". That seems to underline the acceptance of switching or "churning" as the way the industry will continue to operate.

Will the regulators' measures really crackdown on the exploitation of "loyal stuffees"! We will have to wait and see.

"Big data" - current usage of the term tends to refer to the use of predictive analytics, user behaviour analytics, or certain other advanced data analytics methods that extract value from data for use in adapting business models.

"Price walking" - see a BBC article available online. More

Posted: 190111
Insurers braced for "loyalty penalty" crackdown was the headline for an article in the Financial Times today which reported the "industry's pricing practices face reform while the cost of car and home claims has risen". The article notes "the way insurers decide what to charge loyal customers for home and motor cover is set for a shakeup this year as regulators complete an investigation into the industry's pricing practices".

The FT article continues with "the outcome of a study by the Financial Conduct Authority (FCA) could force many of the country's biggest insurers to tear up their business models and stop the widely disliked practice of overcharging loyal customers to fund discounts for newcomers. The FCA is not the only watchdog to take an interest in the so-called loyalty penalty that costs consumers £4bn a year in excess charges for financial services, broadband and mobile phones". Duncan Minty, an advisor on insurance ethics, said "the Government, the Competition and Markets Authority (CMA), the FCA and civil society are all saying the same thing - pricing practices have severely damaged trust in insurers".

FCA probe comes at a difficult time for the insurance industry
The FT article adds "prices for motor insurance have been falling since the middle of 2017 after Government legislated to cut the cost of payouts for personal injury claims caused by car accidents. Home insurance insurance prices peaked in the middle of 2018, but competition has been growing. At the same time, claims costs have been rising. Cars, now filled to the brim with electronics, are more expensive to repair than they used to be. The weakness of Sterling makes imported car parts for repairs more costly. The consultancy EY expects both motor and home insurance industries to be loss making at underwriting levels in 2019. Against this backdrop, insurers will have to respond to the FCA's probe into how they decide what to charge their customers, whether those methods are fair and the impact their decisions have on customers".

Emerging trends
Duncan Minty feels the regulator should widen the investigation "as it would be shortsighted if they didn't. They may decide to fix the problem now but they should look at emerging trends", adding, "one of those trends was price optimisation, or using big data to work out exactly how much a customer was prepared to pay for cover. These practices are banned in some US states". Matthew Upton of Citizens Advice said regulators should focus on "price walking" - "gradually increasing the price of cover every year. "The average home insurance customer who has been with the same insurance company for five years is paying 69% more than a new customer".

Price regulation could damage a competitive market
Duncan Urwin said the "FCA would stop short of outright price controls. If you start being a price regulator, you risk damaging the competitive nature of the market". Interestingly the chief executive of a leading insurer commented "the right outcome would be remedies that shine a light on which customers are being taken advantage of, and force management teams to address that. What's particularly important is insurers can still compete for new business". But surely the reality is one insurer's "new business" is another insurer's former customer who is prepared to shop around in the market place.