The focus of the Market Study is pricing practices in home and motor insurance, looking specifically at three key areas:
- the harm from pricing practices and what drives this;
- the fairness of pricing practices; and
- the impact of pricing practices on competition.
In short, the FCA found that its analysis "raises significant concerns that [the home and motor insurance markets] could work better and are not delivering good outcomes for all consumers". Its key findings on pricing practices in these markets include:
- insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch;
- longstanding customers pay more, on average, but loyalty is not the only issue; high prices were paid by some consumers who had been with their provider for less than 4 years;
- 1 in 3 consumers in the FCA’s consumer research who paid high prices showed at least one characteristic of vulnerability;
- firms engage in a range of practices that could make it more difficult for consumers to make informed decisions and could raise barriers to switching;
- many consumers who switch or negotiate their premium can get a good deal; and
- the costs to firms of attracting new business is £2.3bn per year and this is borne by all consumers through higher prices.
Potential remedies under consideration
Accordingly, in light of its findings:
- In the immediate term the FCA has stated that it will continue work to:
- ensure firms improve the governance, control and oversight of pricing practices;
- deliver the changes required from implementation of the IDD; and
- continue improving transparency and engagement at insurance renewal.
- It is also considering a range of industry wide measures to reform these markets, which broadly fall into the following three key areas:
- Pricing practices that take advantage of consumers who are less likely to switch, such measures may include:
- strengthening product governance rules.
- requiring firms to engage with customers to give them information about alternative deals; and
- restrictions on use of particular factors in setting prices and determining margins;
- automatic switching of consumers paying high prices to lower priced products with equivalent cover;
- limiting pricing practices;
- Practices that encourage consumers to renew and may discourage shopping around and switching to get better deals, such measures may include:
- a ban or restriction on the use of auto-renewal; and
- making auto-renewal opt-in only.
- Addressing areas of ineffective competition, such measures may include:
- requiring firms to be transparent about pricing strategies and reasons for price increases; and
- requiring firms to publish information about their price differentials between customers.
The FCA is seeking feedback on its consultation by 15 November 2019.
Thereafter it aims to conduct further analysis, including of potential remedies and their associated costs and benefits before publishing the final market study report, which it expects to be in Q1 2020 (alongside a consultation paper on any proposed remedies).
In the meantime, firms should make sure that they are prepared for any remedies the FCA proposes in Q1 2020 by reviewing their governance, control and oversight procedures in respect of pricing practices, as well as pricing practices themselves, particularly for those customers who display characteristics of vulnerability. Regardless of what the FCA’s specific proposed remedies may be, it is clear that in future it will be looking for evidence of improved practice by firms in this area.
Please do reach out to Hogan Lovells if you would like advice in relation to the potential consequences of the FCA’s findings for your business or any other assistance.
Authored by Victor Fornasier, Jamie Rogers, Lydia Savill and Ellie Rees