MS18/1: General insurance pricing practices market study

Read the Final Report (MS18.1.3) (PDF)

Read CP20/19 (PDF)

Addendum December 2020 

We have identified an error in the code used to estimate the impact of the pricing remedy that leads to changes in estimated impacts of the remedy. These changes relate to both the estimated consumer savings and level of switching under the remedies. The estimated benefits to consumers over 10 years increase from £3.7bn to £4.2bn. We have updated Annex 2 of the market study and one paragraph of the final report to reflect the corrected code. We have also made consequential changes to the consultation paper that accompanied the market study. Changes made in the documents have been highlighted.

December 2020 update – data access request notification

We published a notification in November explaining we had received a request for access to some of the data and analysis that informed the interim and final reports for the market study. Since then, we have received several further requests for access.

After considering these requests, we are disclosing some data to the advisers of one party under a confidentiality agreement. We are balancing our public law obligations on the procedural fairness of our consultation with the need to protect confidential and commercially sensitive information. 

We are only disclosing the data to those who have demonstrated they would be at a significant disadvantage in preparing their response without access to it. All disclosure will be subject to strict conditions of a confidentiality agreement. This includes:

• only making the data available to nominated independent advisers who will not be able to share the data with their principals
• placing both the independent advisers and their staff under a strict confidentiality agreement
• requiring that, as part of the agreement, the advisers and their staff must not use the information for any other purpose than to inform the consultation response

We have spoken to other parties who requested access to the data. We think we will be able to address their specific questions on the analysis set out in the final report and the CBA without disclosing the data.

We have communicated our decision directly to the firms who provided us with the data. If you have any queries about the disclosure, please contact us at [email protected].

Context for our work on general insurance

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

We have been focusing on the general insurance sector over recent years. We carried out a thematic review showing that consumers who stayed with their provider for a long time generally paid significantly more for home insurance than newer consumers. Following this, we issued a Dear CEO letter and carried out follow up supervision to ensure that firms improve the governance, control and oversight of their pricing practices. We are continuing our work to assess whether firms are consistently delivering the changes required following implementation of the Insurance Distribution Directive and our subsequent guidance on this and product value.

Others 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 one of 5 markets included in the super-complaint. We continue to work closely with the CMA on our response.

Our market study

In October 2018, we published the terms of reference for our market study into general insurance pricing practices. We launched the market study to understand whether pricing practices in home and motor insurance support effective competition and lead to good consumer outcomes.

We published our interim report in October 2019, which set out our interim findings. We found that 6 million policy holders paid high prices in 2018 – if they paid the average for their actual risk they would have saved £1.2 billion.

We considered the consultation feedback to the interim report and carried out further work. We confirmed the key findings set out in the interim report as final and in September 2020 we published our final report.

Our final findings

Firms use complex techniques to identify consumers who are more likely to renew with them. Firms then increase prices to these customers at renewal each year, resulting in some consumers paying very high prices. Many of these consumers are unaware of this, mistakenly believing that their provider is offering them a competitive price at renewal. In addition, some firms use practices that can discourage consumers from shopping around, including by making it more difficult to cancel automatic renewal. And, firms do not always offer regular switchers their lowest prices.

We analysed the prices paid by new customers and those who have been with the same provider for more than 5 years. The differences in prices paid for a typical risk, on average are:

• New customers pay £285 for motor insurance while customers who have been with their provider for more than 5 years pay £370.
• New customers for buildings insurance pay £130 while customers who have been with their provider for more than 5 years pay £238. 
• New customers for combined buildings and contents insurance pay £165 while customers who have been with their provider for more than 5 years pay £287.
• New customers for contents only insurance pay £56 while customers who have been with their provider for more than 5 years pay £138. 

10 million policies across home and motor insurance are held by people who have been with their provider for 5 years or more.

Tackling the harm we have identified

We propose a package of remedies to stop firms systematically increasing prices in home and motor insurance for loyal customers in the future, as well as ensuring that firms in the general insurance market focus on providing fair value to all their customers, and increasing trust in general insurance markets.

We expect our remedies to improve competition, with consumers being able to rely on the price they pay when they take out a new insurance policy being more reflective of what they will pay in future. This should lead to lower overall costs for supplying insurance, more intense competition and ultimately lower average prices paid by consumers.

Stopping price walking

We are proposing a pricing remedy which would apply to retail home and motor insurance products. It would require firms to offer a renewal price that is no higher than the equivalent new business price for that customer through the same sales channel. This aims to prevent firms from price walking customers and tackle high prices for existing customers who have already been price walked.

Firms will still be able to offer different prices to different consumers. They will also still be able to offer a range of brands and types of products to consumers at different prices and through different channels. This will help to ensure that consumers still have a range of choices in the market. It also means firms can still compete to attract customers from rivals, which will benefit consumers who shop around and switch regularly.

We estimate that average prices will fall by £3.7 billion over the next 10 years as a result of our proposed pricing remedy.

Delivering fair value for consumers

The pricing remedy will be accompanied by enhanced product governance rules to help ensure that firms deliver fair value for all consumers. We want to drive changes in firms’ behaviour by requiring them to consider how they deliver fair value in their insurance products. This includes when the product is first offered to the customer and over the longer term for renewals.

Tackling barriers to switching

We also set out our proposal to ensure that firms make it easy for customers to stop a contract from auto-renewing and to make it easier for consumers to decline auto renewal for policies, both when they purchase and at renewal. We have seen practices that make it difficult for consumers to cancel automatically renewing contracts. This can deter them from switching to better deals with other suppliers.

Implementing a strong supervisory approach

We are committed to putting in place a strong supervisory approach to ensure firms comply with any rules we implement. Our supervisory strategy will be centred on 3 elements:

• assessing whether there is appropriate pricing governance, ownership and accountability within relevant firms
• verifying firms’ compliance with the specific rules and guidance arising from the market study
• ensuring that firms are actively considering the value they provide to their customers and consistently treating them fairly

The complexity of insurance pricing makes it difficult to identify firms failing to meet our expectations and comply with the relevant rules. To help us do this we are proposing to require firms to report data on their pricing.

Improving information about the value of general insurance products

Alongside this report, we are publishing final rules on the reporting and publication of value measures data and value measures product governance rules. This data will provide an important indicator on how insurance products are performing. Making this information available to firms, as well as the media and consumer groups, should help deliver better outcomes in the market. The data will also give us an additional tool to help supervise firms.

Next steps

We are publishing the final report alongside a consultation paper to further explain our final findings and proposed remedies.

We are asking for comments on our proposals as set out in our consultation paper. Please send us your comments by 25 January 2021. We will consider all the feedback we receive and intend to publish a Policy Statement in Q2 next year including our response to the feedback.

Annexes to the Final Report

• Annex 1: Detailed feedback on our Interim Report and our response
• Annex 2: Simulation of remedy impact
• Annex 3: Analysis informing the proposed pricing remedy

Interim Report

In October 2019, we we published our interim report which sets out our views based on our work to date on whether pricing practices for home and motor insurance lead to consumer harm, who is affected, and, if required, what action is needed to improve the market.

Show interim report (PDF)

Annexes to 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
Annex 5: Consumer research technical report
Annex 6: Future trends in general insurance pricing research report

Terms of Reference 

In October 2018, we launched this market study to understand whether pricing practices in home and motor insurance support effective competition and lead to good consumer outcomes

Show terms of reference (PDF)