4 October 2019Insurance

6m customers overpaying for insurance – Financial Conduct Authority

Some six million customers are overpaying for their insurance, according to the UK’s watchdog, the Financial Conduct Authority (FCA), which has proposed tough new measures to address the issue.

The FCA has announced the findings of its market study into insurance, launched in October 2018. The FCA said it launched the study because it was “concerned about the potential harm to consumers from pricing practices”.

The FCA said it found that the “home and motor insurance markets are not working well for all consumers”. It said that while a large number of people shop around, many loyal customers are not getting a good deal.

Insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch, said the FCA. It said 6 million policy holders paid high or very high prices in 2018: if they paid the average for their risk they would have saved £1.2 billion. It said that longstanding customers were paying 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 four years.

The FCA said that one in three consumers in its consumer research who paid high prices 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, said the FCA.

The industry has acknowledged the need to address concerns about pricing practices and has been taking some steps to do this, said the FCA, but added: “However, we think that our intervention is also required. In the immediate term, we continue working to address the problems uncovered.”

The FCA said it was considering limiting pricing practices that allow firms to charge higher prices to consumers who do not switch, for example, restricting or banning margin optimisation based on consumers’ likelihood of renewing. It is also looking at automatic switching of consumers paying high prices to lower priced products that provide equivalent cover.

The FCA said it was looking to ensure firms improve the governance, control and oversight of pricing practices. It also wanted firms to continue improving transparency and engagement at insurance renewal.

The FCA is inviting feedback on its interim market study report by November 15 and said it will take these views into account in its final market study report.

David Williams, managing director, underwriting & technical services, AXA Insurance (UK), said: “Like the FCA, we believe that transparency is crucial and technology can play a role in tackling the issue of dual pricing. We will give the regulator our feedback on its proposals. Our focus will be on avoiding unintended consequences and making sure remedies fully benefit consumers. We believe any solution needs to be driven by the whole market.”

Jane Portas, Insurance Partner, PwC, said: "The FCA has concluded 6 million consumers in the general insurance market are getting a raw deal, a third of which are vulnerable customers. The remedies proposed in today's report are wide ranging and of significant impact if they go ahead. They impact pricing, renewal processes, enhanced communication and transparency requirements and expanding pricing and product governance requirements."

"After a long wait, the range and depth of potential action will be a worry for the industry. The FCA calculates 6m consumers are getting a bad deal with a cost of £1.2bn annually if they were to pay average premiums. This is more than enough to justify tough proposals."

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