The Financial Conduct Authority (FCA) is to investigate how customers are charged for their car and home insurance after initial research identified “potential consumer harm”.
General insurance (GI) represents a key part of the UK economy, generating over £78 billion in premium for UK insurers. Most UK adults (82 percent) have one or more GI products, with home and motor insurance the most commonly held policies.
But the FCA is concerned that consumers might be overcharged for their cover, with policies affected by a customer’s age, loyalty, postcode, marital status, employment and whether they are online.
Access to a computer is important leading up to the date of the renewal, as shopping around for alternative quotes can save policyholders hundreds of pounds.
Sticking with an existing provider can often lead to so-called ‘price walking’, with the cost of cover increasing every year, eventually making the policy more expensive than for a new customer. More costly for the consumer and more profits for the insurance provider.
The market study will give the FCA a deeper understanding of the scale of the problem, who it affects and what needs to be done in order to improve matters.
‘Potential consumer harm’
Andrew Bailey, FCA chief executive, said: “Our initial work has identified a number of areas of potential consumer harm. We want to make sure that general insurance markets deliver competitive and fair prices for all consumers.
“This market study will help us examine the outcomes from general insurance pricing practices and inform how, if necessary, we should intervene to improve the market.
“If change is needed to make the market work well for consumers, we will consider all possible remedies to achieve this.”
Tackling the loyalty penalty
In response, Gillian Guy, chief executive of Citizens Advice, commented: “We knew insurance companies were penalising loyal customers, but it is shocking that the FCA has found many companies don’t even seem to have oversight of how much they’re charging customers.
“The insurance industry has said they want to tackle the loyalty penalty – but it’s hard to see how they can achieve this when companies don’t even have these basics in place.
“The FCA is treating the loyalty penalty seriously by conducting this review and scrutinising firms through a market study. We now expect strong regulatory action to stamp out this problem and enforcement against firms who are overcharging loyal customers.
“This is symbolic of a wider issue across essential markets like mortgages, broadband, mobile and savings. The Competition and Markets Authority needs to look very carefully at this as they respond to our super-complaint on the loyalty penalty.”
The study will focus on the following key areas:
- The consumer outcomes from pricing practices
- The fairness of outcomes from pricing practices
- The impact of pricing practices on competition
- Remedies to address any harm that the FCA finds
People ‘are being ripped off’
Georgie Frost, consumer advocate at GoCompare said: “We welcome any investigation into this area because clearly something isn’t right and people feel they are being ripped off.
“Clearer rules and regulations will be better for everyone because we can’t have a system where it is the most vulnerable that are the hardest hit. Equally, some people who can switch aren’t doing so and we need to find out why and make sure they are fully engaged.
“It’s well-known that loyalty doesn’t pay when it comes to insurance. Just a glance at the feedback we receive from our customers shows that you can save hundreds of pounds on a policy without compromising cover.
The FCA is seeking input on the issues outlined in the market study by 3 December 2018 and will publish an interim report in summer 2019. The final report will be published by the end of 2019.
