MS18/1: General insurance pricing practices market study

Read MS18/1.2 interim report (PDF)

Read MS18/1.1 terms of reference (PDF)

Background to our work on general insurance

General insurance products are important for consumers and provide them with protection when things go wrong, for example if they have a car accident or their house is damaged.

The general insurance sector has been an area of focus for us over recent years. For example, we have introduced new rules implementing the Insurance Distribution Directive and to increase transparency and engagement at insurance renewal. We also carried out a thematic review showing that consumers who stayed with the same provider for a long time paid on average significantly more for home insurance than newer consumers.

Our market study

We launched this market study in October 2018 following our thematic review to understand whether pricing practices in home and motor insurance support effective competition and lead to good consumer outcomes. We were concerned about the potential harm to consumers from pricing practices.

Stakeholders have also raised concerns about outcomes from general insurance pricing practices. In September 2018, Citizens Advice made a super-complaint about loyalty pricing to the Competition and Markets Authority (CMA). Home insurance was 1 of 5 markets included in the super-complaint. The CMA published its response in December 2018. It recommended that we look at ways to tackle ‘price walking’ and other harmful business practices in home insurance.

What we found

We found that the home and motor insurance markets are not working well for all consumers. While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects around 6 million consumers.

Our other key findings are:

• Insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch.
• 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.
• 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 our 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.
• 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.

Next steps in tackling our general insurance pricing practices concerns

Industry has acknowledged the need to address concerns about pricing practices and has been taking some steps to do this. However, we think that our intervention is also required. In the immediate term, we continue working to address the problems uncovered including:

• Ensuring firms improve the governance, control and oversight of pricing practices.
• Deliver the changes required from firms following implementation of the Insurance Distribution Directive and other policy work.
• Continue improving transparency and engagement at insurance renewal.

We are also considering a range of industry wide measures to reform these markets so they work well for consumers in the future. Our interim market study report sets out these remedies.

We are grateful for feedback received from industry, consumer organisations and individuals to our interim report. We are considering this feedback carefully, and continuing our assessment of potential remedies to address the harm highlighted in our interim report. It is complex to identify remedies that both address the harm we have identified and achieve our wider aim of ensuring that competition works well and delivers long term good value for all consumers in future. We are completing detailed analysis of these issues.

Ensuring firms improve the governance, control and oversight of pricing practices

We have also considered all the information received regarding firms’ pricing practices and the resultant consumer outcomes from a supervisory perspective. This includes the information obtained through our follow-up work with a sample of firms further to our Dear CEO letter, which focused on pricing governance, differential pricing and discriminatory pricing. This work found that many firms still have further work to do to meet our expectations regarding their pricing practices and the governance in place around this. Where appropriate we have sought to intervene using the full range of our regulatory tools. We will continue to take a robust supervisory approach to address concerns about firms’ pricing practices.

Helping consumers purchase good value general insurance products

It is important that customers purchase good value general insurance products. Value is driven by price and the quality of the product. Consumers should be able to trust that firms will provide them with a quality product that delivers on reasonable expectations of performance. We are carrying out work in several areas to help consumers purchase good value general insurance products.

Other rules and guidance on which we have consulted recently include:

• Non-Handbook guidance on the general insurance distribution chain. Following a thematic review into distribution chains in the general insurance sector, we consulted on guidance to clarify our expectations of firms implementing the Insurance Distribution Directive. This guidance sets out our expectation that firms should consider product value and the impact that distribution arrangements have on the value for the end consumer. We published the finalised guidance in November 2019.
• In January 2019, we consulted on rules requiring firms to report general insurance value measures data to us for publication. Following feedback to the consultation, we are conducting further analysis to develop our proposals. We are keen to ensure that our work on value measures aligns with any remedies being developed through the general insurance pricing practices market study. We expect to publish any value measures policy statement to coincide with the final report of the general insurance pricing practices market study. Value measures continues to be an important area for us and, in the interim, we have launched a fourth pilot of value measures data.

Evaluating our previous actions on general insurance pricing

Evaluations of our previous actions are important for future decision making because they help us understand and learn what interventions work and do not work, and why this might be. 

For example, we previously introduced rules to increase transparency and engagement at renewal in general insurance markets. These rules aimed to encourage some consumers to check their insurance cover and pricing and shop around for the best deal at each renewal. We have published an evaluation of this intervention alongside our market study interim report. Our central estimate of consumer savings is £185m per year due to this intervention.

Annexes to the interim report

• Annex 1: Consumer outcomes technical annex 
• Annex 2: Business models and financial analysis technical annex 
• Annex 3: International comparisons 
• Annex 4: Consumer research report
• Annex 5: Consumer research technical report 
• Annex 6: Future trends in general insurance pricing research report