Matt Hall examines the FCA’s pricing practices rules and how will they impact customer experience
The UK Financial Conduct Authority (FCA) has published its policy statement formally confirming proposals for tackling price-walking.
The regulator says the new rules will “ensure that renewing home and motor insurance consumers are quoted prices that are no more than they would be quoted as a new customer through the same channel”.
As well as aiming to make it simpler for customers to stop automatic renewals if they wish to do so, the FCA is also introducing new product governance rules to “ensure that firms deliver fair value on all their insurance products”.
So, how significantly will the new pricing rules impact customers and the market more widely?
Questions are being asked as to whether these rules will actually achieve the outcomes the FCA are hoping for – will it secure better customer outcomes and reduce harm? Will it improve trust in the insurance profession?
We can put ourselves in the position of the consumer to consider those questions. If you told me, as a buyer of insurance, that these rules would ensure I wouldn’t pay more than a new customer if I stayed with my current provider, and if I did want to switch, I could do so more easily with less barriers, I would fundamentally view that as an improvement to my interactions with insurance products and services.
The CII maintains a Public Trust Index, which looks at how the behaviour and practices of our profession impact our trust and reputation. One of the fascinating elements of this research is what we call the opportunity gaps – how big is the difference between what we currently provide to customers and what they expect?
If a customer always has to fight for the best price and is not rewarded for their loyalty, we cannot possibly expect them to trust us
You might not be surprised to hear that the largest of these gaps is around loyalty and confidence. But what is particularly interesting is that what the pricing rules are aiming to achieve, many customers simply view as a minimum requirement.
For example, the research shows that the biggest opportunity to build trust is through offering discounts to loyal customers. Not only should they not have to pay more than a new customer to renew, but the customer expects a reward for their loyalty – they want to pay less than new customers, or alternatively they would expect to be rewarded in non-price related ways, for example with enhanced cover.
Rewarding new rather than existing customers has become so normalised in some lines of insurance that we can become disconnected from how it actually makes a customer feel. If a customer always has to fight for the best price and is not rewarded for their loyalty, we cannot possibly expect them to trust us.
The FCA has also placed much focus on the concept of fair value. Accurately capturing and measuring value, or the difference between cost and benefit, has always been a difficult challenge in any industry. Although price is clearly an important element of value, it is important not to get overly fixated on it. Fair value is a concept that needs to be considered throughout the term of a policy, not just the single point at which a customer purchases or renews.
We can look again to the Public Trust Index for insight. What we have seen in the past year is that price has fallen down the rankings of what matters most to customers when interacting with insurers, while elements such as the speed of claim settlement and being treated with empathy have all grown in importance for customers.
There have long been criticisms of how price-comparison websites encourage customers to look at price as the only indicator of value. Perhaps what this research indicates is that customers are starting to become more value-aware. They are willing to pay a bit more but they have high expectations around how quickly their claim is resolved. They expect to be treated with empathy and respect. The increase of flexible products and services could have a key part to play in this area.
The FCA estimates that about six million policyholders pay high prices and are not getting a good deal on insurance products and services. This estimate includes one in three people who have potential vulnerabilities, including reduced financial capability or lower income.
There remains a debate around whether the pricing practice rules will deliver better outcomes for vulnerable customers, with some commentators warning of the unintended consequences. Discourage price-walking and there is the risk of seeing prices increase for everyone. Should all consumers pay the price to protect those unable or unwilling to shop around?
If discouraging price-walking will not protect vulnerable customers, or will do so but to the detriment of others, then surely our profession must put forward and implement effective solutions. Those paying the highest prices exhibit various characteristics associated with lack of understanding, awareness or engagement. If we do not want the regulator to intervene further, we must find better ways to reach these customers with better communication and greater transparency, offering products and services that provide fair value to vulnerable customers.
Insurance is supposed to protect against loss. If we cannot find fair and effective ways to do that for those that need it the most, then we have problems that go far beyond pricing practices.
Matt Hall is strategy & operations manager of insurance societies & networks at the CII