FCA report: General insurance is "not working well"

It’s not pretty.

This morning, the Financial Conduct Authority (FCA) released its interim report on its market study into the pricing of car and home insurance in the UK market and its verdict can leave nobody in doubt about its perspective – competition, it says, “is not working well for consumers.”

The regulator outlined a host of concerns on how pricing in the market leads to consumers not wanting to switch or negotiate with their provider – in fact, it estimates that around six million policyholders “pay high prices and are not getting a good deal on their insurance.” If they paid the average premium for their risk, then they could collectively save £1.2 billion a year. Even more worryingly, the regulator estimates that this figure includes around one in three people who are potentially vulnerable.

“This market is not working well for all consumers,” said Christopher Woolard, executive director of strategy and competition at the FCA. “While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects around six million consumers.”

Here is what the FCA found, as per its report:

• “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 even some people who switch pay higher prices.
• “From the FCA’s consumer research, 1 in 3 consumers who paid high premiums showed at least one characteristic of vulnerability, such as having lower financial capability. For consumers who bought combined contents and building insurance, lower income consumers (below £30,000) pay higher margins than those with higher incomes.
• “People who pay high premiums are less likely to understand insurance or the impact that renewing has on their premium.
• “Most firms, when setting a price, include their expectations of whether a customer will switch or pay an increased price. This is not made clear to the customer. 
• “Firms engage in a range of practices to raise barriers to switching.
• “Many consumers who switch or negotiate their premium can get a good deal.”

In light of its findings, the FCA has set out what it described as a “package of potential remedies” to address the problems – calling on the insurance industry to work with it to resolve the issues.

It suggests it has already improved transparency on renewal since introducing new rules in 2017 but now is examining remedies to “tackle high premiums,” potentially including banning or restricting practices such as raising prices for consumers who renew year on year; “stop practices that could discourage switching,” including possibly restricting the way that firms use automatic renewals; and making “firms be clear and transparent in their dealings with consumers.”

In the longer term it also wishes to harness the benefits of innovation to positively benefit the markets.

At Insurance Business we are expecting a flood of reaction to these initial findings and we’ll bring you the industry’s responses later today.