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Singular solution on dual pricing

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The UK Financial Conduct Authority (FCA) interim report into home and motor insurance pricing pulls no punches.

The key issue of the report is dual pricing – an issue that Australian insurers have also been taking flak on recently.

In essence, the FCA has raised some serious concerns about insurers’ tendency to give a better financial deal to new customers, while charging established customers extra on renewal.

Competition is not working well for UK consumers, it says, with 6 million people paying over the odds at a total cost of £1.2 billion ($2.18 billion) a year.

The solution, according to the FCA, is simple – ban it.

NSW Emergency Services Levy Monitor Allan Fels has been highly critical of the practice – what he calls a “loyalty tax” – which he claims has risen to as high as 34%.

The FCA report says high premiums could be tackled by “banning or restricting practices like raising prices for consumers who renew year on year or requiring firms to automatically move consumers to cheaper equivalent deals”.

For the FCA, an aggravating factor is that many of those targeted for higher premiums are vulnerable.

“From the FCA’s consumer research, one in three consumers who paid high premiums showed at least one characteristic of vulnerability, such as having lower financial capability,” it said.

“For consumers who bought combined contents and building insurance, lower income consumers 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.”

The FCA also says insurers include their expectations of whether a customer will switch or pay an increased price when they set premiums, and that this is not made clear to the customer.

“Firms engage in a range of practices to raise barriers to switching,” it says.

The Insurance Council of Australia (ICA) has staunchly defended the rights of its members to offer what it describes as “new customer discounts” which enhance competition.

But the response from the Association of British Insurers (ABI) to the FCA report is rather meek in comparison, although it does warn against “unintended consequences”.

“Millions of insurance customers get extremely good deals by shopping around regularly, but we agree that the household and motor insurance markets could work better for consumers who do not shop around at renewal,” the ABI said.

“This is not an issue unique to insurance, but we are the only sector to have taken voluntary steps to address the issue and these are bearing fruit already.”

Further consultation with UK insurers will now take place on proposed solutions.

In addition to the proposed ban, the FCA talks about stopping “practices that could discourage switching”, including restrictions on automatic renewals.

It also flags possible improvements to transparency and is “considering whether firms should publish information about price differentials between their customers”.

Whether similar measures will be considered here by the market regulator, the Australian Securities and Investments Commission, remains to be seen.

But ICA is sticking to its argument that there are legitimate reasons for “introductory pricing”, although a spokesman told it will discuss the FCA report with members to assess local implications.

One thing is for sure – we haven’t heard the last of the “loyalty tax” argument from Professor Fels or consumer groups. They have been emboldened in the wake of the Hayne royal commission, and like add-on insurance it’s an issue on which they won’t let go.