As we enter the new year, a major change in how the motor and home insurance markets work has now been implemented by the FCA.
If you’ve been keeping an eye on the news over the holidays you’ll have seen coverage of changes that we’ve been talking about for some time - the abolition of dual pricing (also known as price walking) across the motor and home insurance markets.
First, a quick reminder. Dual pricing is where insurance providers artificially lower their acquisition pricing to win new business, to then ramp up the prices at renewal time in order to try to recoup their acquisition losses and move to profit.
So why did the FCA ban this? Well, on the face of it, low prices are attractive to insurance buyers, assuming that they are prepared to switch providers every year to continually take advantage of these prices. However, not every customer did this for various reasons, which means that those who were loyal to their provider ended up paying more than they should.
This was known as the loyalty penalty. The FCA didn’t like this, and so ordered it to end.
On the face of it, this all looks to be about insurance pricing, but it is actually more than that.
Part of the FCA’s issue with dual pricing was to do with the massive industry that grew to exploit and proliferate it.
The role of price comparison websites (PCWs / aggregators) in this saga has been well documented by us and others, but in short, it was in their interests for people to switch every year as their entire commercial model was built around the sizeable annual commission they received for facilitating this. Cue the massive multi-million pound advertising campaigns with cuddly toys, pizzas, cinema tickets and so on that the PCWs tempted us all with as a way to stimulate yearly switching.
The FCA questioned the value that aggregators were adding to insurance distribution with their new fair value test, and this raised some fundamental questions about the PCWs’ role in insurance distribution and their role in dual pricing:
- Was the annual switch actually benefitting the big 4 PCWs more than anyone else?
- Did it deliver profit for these businesses at the expense of fair outcomes for consumers and high quality, fairly-priced products from insurance providers?
- Did it encourage the hollowing-out of insurance products (i.e. reducing product coverage) in order to hit expectations of ever-lower prices?
- Did the relentless PCW marketing machine unfairly create divisions across the UK, with those who could least-afford to be penalised actually paying the most for their insurance at the expense of aggregator profit?
2022 - a new dawn for personal lines insurance
As we enter 2022, the pressing need for consumers to switch insurance providers every year specifically to save money is gone. Those who find a provider that matches their needs can happily stay loyal to them if they wish, safe in the knowledge that their renewal prices will be no different from those offered to new customers.
There will undoubtedly be some normalisation of pricing in 2022 as customers acclimatise to this new pricing regime, but beyond the initial shock, a much fairer insurance landscape will exist for all.
Of course, smart consumers will (and should) continue to shop around from time to time, but now with a focus more squarely on value and product fit as opposed to constantly chasing cheap. It is up to the insurance industry to make this happen.
As insurance providers move away from price as their sole selling point, actually meeting the needs of consumers via differentiated propositions will emerge across the market. Motor and home insurance will become less commoditised as providers establish their own market niches, serving creatively-constructed products to dozens of segments of diverse insurance buyers. Just as Waitrose and Lidl are differentiated in retail, and Rolls Royce and Dacia are in automotive, insurance will start to see a return of well-constructed segmentation and proper underwriting.
What next for aggregators?
2022 heralds the start of a very different time for PCWs. No longer can the “switch and save” message be the sole focus of their marketing activities and, as drivers and home owners get used to the new insurance landscape, a different level of insurance buyers’ expectation will spread across the market. It will become very difficult for consumers to have the wool pulled over their eyes in exchange for a stuffed animal, or to succumb to the charms of an opera singer for no real benefit.
Aggregators will need to re-focus their businesses around value - helping their customers to buy the right products, and not just the cheapest. It might sound easy, but for businesses whose entire existence is predicated on a model of annual switch-driven commission, it is hard to underestimate the potential business impact.
Of course not all insurance distributors were obsessed with price. At Honcho our mantra has always been on helping our customers to buy the right insurance, not just the cheapest. And as 2022 kicks off, this mission remains the same.
Happy new year to all of our customers, shareholders and friends across the industry.