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Pricing reforms reshape personal insurance market

Sweeping pricing reforms launched in January are reshaping the personal insurance market, with almost 800,000 fewer people expected to switch providers when they renew their motor cover this year, according to an analysis of the latest data.

The overhaul to UK car and home insurance regulation was designed to protect loyal customers — the majority of policyholders historically did not switch every year — by stamping out so-called price walking. This practice involved luring in new customers by discounting and then raising their renewal premiums each year.

Analysts at data provider Consumer Intelligence put the proportion of people switching their car insurance between April and June at 36.9 per cent of the market, down 2.8 percentage points when compared with the same period in 2019, the last full year before the coronavirus pandemic. The proportion of people switching home insurance fell 2.4 percentage points to 34.7 per cent.

“With more customers seeing either a decrease or no change in pricing at renewal, we’ve seen a significant reduction in shopping and switching,” said Karen Houseago, the analytics provider’s head of insurance.

Extrapolating the trend over the full year, using the latest policy numbers provided by the Association of British Insurers, that would be equivalent to nearly 800,000 fewer motor insurance customers and 420,000 fewer home insurance customers moving provider, according to FT calculations.

Line chart of Average annual premiums quoted on Confused.com, £ showing Car insurance prices are rising, but are below pre-Covid levels

As switching fell to the lowest level in more than a decade after the reforms, pricing data from the ABI found that the average motor insurance policy premiums for new customers rose 8 per cent year on year in the first quarter, while renewal prices fell 13 per cent. The trend continued at a more modest pace through the second quarter.

The Financial Conduct Authority, which brought in the new rules, acknowledged that the ban would mean higher prices for people that shop around regularly, as insurers looked to balance the impact on their profits — viewing this as a fair price to pay to protect loyal customers. Overall, home and motor insurance costs remain below pre-pandemic levels.

But the reforms came into effect against a deteriorating economic outlook and rising inflation that have led insurers to push through price rises to keep up with spiralling costs of claims, as replacement parts and cars grow much more expensive.

Direct Line, a FTSE 100 motor and home insurer, said prices for new motor customers had gone up by 15 per cent in the first half of the year. Chief executive Penny James said about 6 percentage points of that was due to new prices rising and renewal prices falling “as we level out the book”, and the remaining 9 points was due to inflation.

Critics of the reforms said that by hobbling the new business market, the FCA had weakened a key lever for families to reduce their household bills right when they need it most.

James Daley, managing director at consumer group Fairer Finance, said the rise in prices facing those shopping around had “been compounded by rising costs more broadly, piling additional pain on consumers at the time they could least afford it”. 

But Citizens Advice, which pushed for the changes, insisted the FCA had done “the right thing”, pointing out that the majority of policyholders did not switch every year.

“In the midst of a cost of living crisis, the last thing anyone needs is to be stung for being a loyal customer,” said Matthew Upton, its director of policy.

In a statement, the FCA said it would continue to monitor the impact the changes have had on the market. “We will always encourage customers to shop around to find the best deal,” it added.

Aviva’s chief financial officer Colin Simpson said rising inflation was also having some impact on switching. “I think what is happening is customers are getting a price increase, and they are saying, ‘you know what, I’m reading about inflation, and that feels about right’. And they’re not necessarily looking to shop around,” he said.

Though the ABI said it was still too early to “fully assess” the impact of the reform, it pointed to a growing gap between the average new customer price and the average renewal price for motor insurance. The new customer price was £105 higher in the first quarter and £129 higher in the second.

Spiralling inflation makes it difficult to judge whether consumers overall have benefited from the reform. The FCA said the changes would lead to greater efficiency in the market and would result in savings of £4bn over a decade. But industry executives always maintained that insurers do not make super profits, and the more likely result was a redistribution of insurance costs from renewing to new customers.

The cost of living crisis has switched the regulatory focus to low-income households struggling to pay the bills. Last month, the FCA called on firms to do more to help the most vulnerable customers after the regulator expressed concern that tighter budgets were forcing people to cut back on their insurance cover or even cancel it.

Houseago also saw this as a risk. “The proliferation of lower-value insurance products entering the market might mean that saving money will result in compromising on cover,” she warned.

Upton said there was an “obvious risk” people would opt out of insurance altogether as a result of the wider squeeze, adding: “It is essential that firms and the FCA do everything they can to keep prices down.”

The British Insurance Brokers’ Association, a lobby group, has repeatedly warned of the risk of people being left without the right cover. Aviva’s Simpson said this was an issue for home products in particular, adding: “We need to be super careful in that respect.”

James Dalton, the ABI’s director for general insurance, said its members could “sympathise with households who [were] facing difficult times”, but added that rising cost pressures were “becoming increasingly challenging to absorb”.

Further price rises could yet reverse the fall in people shopping around. “If inflation starts moving through the market, you might see an increase in switching,” Direct Line’s James said, adding: “It’s still early days.”

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