The UK’s Financial Conduct Authority (FCA) is planning to make new rules and guidance that will require general insurers to include last year’s premium on their consumer renewal notices, in the hope that this will encourage consumers to shop around, instead of renewing automatically with their current provider.
General insurers will also be required to do more, if a consumer has already renewed on 4 or more occasions.
Consumer organisations have welcomed these proposals, but some insurance professionals are less enthusiastic (with good reason).
In “Consultation Paper 15.41** Increasing transparency and engagement at renewal in the general insurance markets”, the FCA proposed a new rule. If it’s made in its current form, the new rule will:
- Apply to every general insurer and general insurance broker carrying on business from a UK establishment, “when a renewal of a general insurance contract for a period of more than 12 months is proposed in relation to a consumer“; and
- Require the insurer or broker to give the consumer his renewal premium; and tell him:
- How much he paid last year;
- That he “should check that the level of cover offered by the renewal is appropriate for [his] needs“; and
- That he “is able, if he so wishes, to compare the prices offered by alternative providers“.
If the consumer has already renewed on 4 occasions, the insurer or broker will also be required to tell the consumer that “You have been with us for over five [sic] years. You may be able to save money if you shop around”.
The FCA’s objective is to nudge consumers into shopping around; and then into switching or negotiating, in the hope that consumers will “potentially achiev[e] lower renewal premiums while likely retaining similar coverage“. The FCA has chosen to do this because “a range of stakeholders … have told [it] about poor outcomes for consumers from renewal pricing practices in general insurance. These concerns have mainly been about the high premiums consumers pay at renewal when cheaper options are available, and a lack of transparency about price changes”.
Here are some of the problems with these proposals:
- Most (non-travel) general insurance consumer contracts last for a year. (Travel policies are often shorter.) If the rules only apply “when a renewal … for a period of more than 12 months is proposed“, they won’t apply very often. This seems to be a problem with the proposed rule drafting, rather than with the proposed policy, so we assume that it will be corrected before the rules are made;
- (If the rule is changed, as we expect), the FCA’s research suggests that:
- More policyholders will shop around before renewing a motor policy – but the number who actually switch to new a provider, or try to negotiate a better price, won’t change at all;
- More policyholders will shop around before renewing a buildings and contents policy, and the number who switch or try to negotiate a lower premium will increase, but only by 3.2 percentage points in a market where shopping around, switching, and negotiating are already common;
- Anecdotal evidence suggests that consumers are more likely to replace their goods than renew the insurance policy that protects them. This might partially explain why only 16% and 29% of consumers shop around for extended warranty and mobile phone insurance (respectively), when their first policy expires. If that’s right, it seems to suggest that the new rules won’t have much impact in these sectors either;
- The FCA’s cost benefit analysis suggests that:
- The cost of implementing its proposals will be (about) £133m;
- Firms’ annual compliance costs will increase by (about) £3.9m;
- Consumers will save between £64m and £103.4m a year, if it becomes more common to shop around, switch and/or negotiate on price – even if these improvements are as modest as the FCA’s research suggests;
- What the FCA’s cost benefit analysis doesn’t say is how much the FCA has already spent developing and consumer-testing these proposals, and what the net consumer benefit will be if the FCA’s costs, and firms’ implementation and compliance costs, are eventually passed on to consumers;
- Most consumers already know that if they shop around they might get a better deal on price, but some still choose not to do so. Whilst it’s true that giving this group of consumers last year’s price and the renewal premium might encourage them to shop around more often, it could just as easily discourage shopping around if (for example) the information shows that the renewal premium is only marginally higher (or is actually lower) than it was last year; and
- These proposals may also increase consumers’ price sensitivity at a time when most consumers already understand that shopping around can get you a lower price, but too few fully understand that a lower price can also mean less cover, and anecdotal evidence suggests that some consumers are already under-insured for this and other reasons.
You probably have other comments to make. If you do, the FCA’s consultation is open until 4 March 2016. All comments and feedback are welcome (firstname.lastname@example.org)