Insurance. Home insurance. Car insurance. And specifically, the small print of what happens when said insurance policy is due for renewal. I’ll admit this post might not sound like it’s going to be that exciting. But these are the two most common insurance policies held by a household which can cost well over a thousand pounds per year. And that’s not to mention how important they are given what they protect people against – misfortune and calamity.
Let’s start with the backstory. Over the last few years, The Financial Conduct Authority (FCA) has been closing in on what's often called ‘price-walking’. Put simply, price-walking is where a customer has been enticed to a new provider based on a low ‘first-time’ price, but then, when the customer renews their policy (often with payment taken automatically) the price is increased and the customer pays much more than they did before.
The FCA is now seeking to outlaw this activity. Good news. But this is potentially a much bigger change than it appears. Why? Often, insurers don’t make money on that first year policy – it is a loss-leader. It relies on customers, knowingly or otherwise, accepting the price increase after the first year. (Having said that, the insurers may lose on the policy but then make money on some of the ancillary products sold alongside the policy, e.g. legal cover or the loan given to the customer to pay monthly or similar). But either way, this has the potential to make quite a big difference to insurance pricing by disrupting the current equilibrium where new customers get a good deal while existing customers get an increasingly bad deal the more years that they have been with an insurer. All that is supposed to stop.
Just to highlight how egregious this behaviour can be, think of a young-ish driver who insures a new car with an insurance company. They drive carefully and they don’t have an accident that year. Then the auto-renewal price goes up, despite the driver being older and more experienced, while the car that they are driving (unless it’s a DeLorean DMC-12) is probably a year older and less valuable. The customer perceives the increase as inflation, since prices do go up every year, despite the fact that in this situation the risk has gone down.
To give a very specific real example, I have a friend who had been with the same home insurance provider for the 8 years since they had moved into their current home. Despite there being no material change of circumstances in that period – still the same family, but no burglaries, no subsidence, no big changes in valuables and so forth – over the period the home and contents price had climbed, through price-walking, to over £1700 per year. Equivalent cover was available for a lot less than half of that price. That just feels scandalous!
So, is what the FCA is proposing a good thing? I think it’s broadly sensible, and about time that this kind of intervention was made. Certainly, an auto-renewing policy shouldn’t be increased way above inflation – that’s just exploiting inertia and mechanics such as direct debit (which were supposed to make things easier for customers by stopping them from missing payments). And as for the cynical practice of price-walking, the regulation is welcome. It’s one thing to have an introductory or trial price, but it’s another for prices to go up and up by more and more each year while a customer isn’t paying attention.
So, what will insurers likely do next? This is the material question, and it isn’t entirely clear how things will be policed. It feels likely to me that new customer prices will go up, and existing customer prices will either stay the same or come down, to meet in a new equilibrium. Which would end up punishing customers who had ‘played the game well’ by changing every year, but would feel somewhat fairer. However, there are some other possibilities. Insurers have multiple brands, and they might end up with some more expensive brands that milk existing customers, whilst trying to still recruit new customers through another, cheaper brand. They then might try to move those customers across to the existing brand, or play games with add-ons to try to make up for the price impacts. Some insurers might try to find other ways to price discriminate that isn’t along the new/old dimension, but gives the same output. There might be other things going on that we can’t foresee (often what results from new regulation).
Whichever way you look at it, whenever your next renewal point comes up, it’s worth paying close attention. Likely insurers won’t behave in identical ways, and as new norms are forming, pricing might be just a little bit volatile – so paying attention and being willing to switch is as important as ever. If risk models do change, then the insurer that might have been cheaper for your particular car/driver combination might not be the same going forward. Whatever happens, the burden remains on households to figure out if they are getting a good deal in the new world.
It’s also worth noting that we might not immediately know what’s happening and who is doing what. Historically, the regulator doesn’t police things instantaneously – my understanding is that they take 6-month chunks of data, and then do analysis, so anyone breaching the new rules might not actually be held responsible for a number of months.
As a closing thought, it’s interesting to think about which other markets might benefit from this kind of regulation. What is particularly problematic about these markets is that the price-walking seemed to be infinite – for the same risk, your price could be increased every year. Imagine what this kind of regulation would do to the energy space, as an alternative to the cap? What we need is protection for households, and also to reduce the headspace that folk need to give over to figuring out what is right for them. And that is a very hard thing to regulate for…
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