An end to the “loyalty penalty”?

The motor insurance sector has faced a number of challenges and changes recently, but none as big as the regulatory change that will have an impact on pricing structures across the industry.

One of the many indirect knock-on effects of the Covid-19 pandemic has been a low number of car insurance claims. The lockdowns meant there were fewer vehicles on the road, which in turn meant fewer accidents and fewer claims.

Naturally, this meant customers began to question whether they were getting the best value for their insurance premiums, and the sector faced scrutiny into whether prices were reflecting the insurance companies’ reduced exposure.

But the motor insurance sector also stepped up to meet the challenges of the pandemic. When the industry faced calls to refund customers who could show they were driving significantly less, many insurers rose to meet those calls. As well as offering refunds, insurers also worked with customers who faced challenges in meeting premium instalments due to a reduced income.

Some insurance providers offered free coverage to NHS volunteers or decided not to charge extra to commuters driving to and from work to avoid public transport.

Facing an unprecedented event, the industry responded quickly and sympathetically. Today, of course, the pandemic is still not over, but as we leave the lockdowns behind the insurance sector is still facing big changes.

Prices are at the lowest they have been for five years, with the latest figures from Q3 last year showing the average premium costs only £429 according to the Association of British Insurer’s (ABI) latest Motor Insurance Premium Tracker, a reduction of 7% on the previous year.

Laura Hughes, ABI’s manager, general insurance, said of the falling prices, “Motorists continue to see the benefits of fewer claims made during the pandemic lockdowns.”

However, insurance may be about to experience the biggest change in pricing structures the industry has ever seen.

A new pricing structure

On the 1st of January this year the FCA brought into force new rules on pricing for motor and home insurance. The new rules ensure that renewing home and motor insurance consumers are quoted prices that are no more than they would be quoted as a new customer through the same channel. This will mean that the days of extremely cheap prices to get customers through the door, followed by higher renewal prices, are over.

The regulator has acknowledged, “We expect that our remedy package will probably lead to some consumers paying higher prices if they currently benefit from significant new business discounts as inducements to switch.” (FCA Market Study, September 2020).

“Regular switchers gain and can potentially sustain low (even below cost) average prices, while customers who do not search or negotiate pay higher prices on average and so cross-subsidise the switchers. Our proposed remedy would eliminate this cross subsidy and so may lead to higher prices for regular switchers.”

The insurer has to offer customers renewing an existing policy a deal as good as they would offer to an equivalent new customer, bringing an end to the “loyalty penalty” for customers that don’t shop around when renewing their insurance.

This is a fundamental change that will have a huge impact, with the market consisting of 27 million private motor insurance policies.

Since the new pricing regime came into force at the beginning of the year, insurers have still been free to set their own prices, but those prices must now be consistent for new and existing customers.

Insurance vendors have been working around the clock to be ready for the new regulations, and over the next few months, the FCA will be closely monitoring the industry to make sure they are implemented.

“We support these reforms, and are pleased that the FCA has acted to bring them in across the home and motor insurance markets," says Malcolm Tarling, chief media relations officer at ABI. “While the FCA recognises that these changes could lead to price rises for some who shop around regularly, all customers should get fairer outcomes in the UK’s competitive home and motor insurance markets. These are very significant changes and insurers will work with the FCA to ensure as smooth a transition as possible for their customers.”

Changing prices

For consumers, this does not mean an end to shopping around for the best deal, but what they are looking for will change. Rather than searching for the biggest discount, buying insurance will be about judging the suitability of the product, and making sure it meets the customer’s needs.

It is a huge shift for the industry. Never before have all insurers had to change their pricing structure simultaneously.

What will be interesting is seeing what happens to prices during the first and second quarters of this year. Prices may rise slightly, particularly for new customers, but over the last 18 months, the market for private motor insurance has still been ultra-competitive. While the days of extremely cut-price rates for new customers may be over, this may be reflected in slightly cheaper prices for customers overall.

Premiums are not the only prices the insurance sector needs to concern itself with. The cost of the claims themselves has been rising. To a certain extent, this is to be expected – newer vehicles feature more high-tech systems, with more expensive components, which means repairs and replacements cost more. In the past, a smashed headlight could be replaced relatively cheaply, but today it would need a sealed unit replacement that will come in at several hundred pounds.

Cars have a lot of computerised systems that are costly to replace, and supply chain issues around semiconductors are also having an impact.

There will also be new challenges around the kind of vehicles being insured. E-scooters are legal to use on private land and as part of a number of limited trials around the UK, but they are illegal to use on public roads. That these scooters are seeing increasing use illegally is an issue particularly because there is no way to insure them, and if they ever do become legal to use the insurance market will need to develop to serve them.

However, the motor insurance market has always been competitive and despite cost pressures and the impact of potential pricing changes, it should continue to be so.