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Blog: Renewal pricing – are insurance firms considering their vulnerable customers?

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It’s widely known (and well-publicised in the media) that when the renewal letter for your home or motor insurance policy arrives, the quoted rate will invariably be higher than last year. 

Renewal pricing attracted the attention of the FCA, who introduced new requirements in April 2017 to improve the quality of information that insurers provide at renewal. This included requiring insurers, after the fourth annual renewal, to take extra steps to encourage their customers to shop around.

They were also required to publish last year’s premium on the current year’s renewal notice, to highlight any increases in premiums to the customer.    

It’s fair to note that, since then, all signs suggest that renewal transparency has helped encourage greater levels of shopping around, but it hasn’t so far translated into the expected numbers of customers actually switching providers.

FCA will sharpen its focus in 2018 / 19

Unsurprisingly, the FCA has again set out its intention to tackle the issue of competition in its Business Plan 2018/19, stating that it will “continue work on pricing practices in retail general insurance…[and] will conclude the first phase of our diagnostic work to give us a better understanding of retail general insurers’ and intermediaries’ pricing practices and how these affect household insurance customers”.

Some customers, in particular those deemed to be vulnerable, are less likely to be ‘engaged’ with the financial services they obtain, and less likely to shop around. Therefore, they may not be get the best deal. It’s arguable that, due to lower levels of engagement, renewal practices may not deliver fair outcomes for these customers, and firms should be considering whether they need to do more.

The FCA has already encouraged firms to consider renewals alongside their ‘smarter communications’ initiative. In addition to smarter communications, it would also encourage firms to review whether their current approach produces the right outcomes for their vulnerable customers.

Trade groups taking action

Now insurance trade bodies (the ABI and BIBA) are tackling the issue of excessive premium differences between new and existing customers by releasing a set of ‘Guiding Principles and Action Points’ for firms to incorporate into their renewal pricing procedures for key personal product lines such as home, motor and travel insurance.

The key commitments that they are asking both insurers and insurance brokers to make include:

  • That ABI and BIBA members will take action so that customers’ tendency not to shop around at renewal will not lead to excessive pricing differences that unfairly penalise long-standing customers
  • The ethos and approach to better outcomes for long-standing customers will be given board or senior management-level priority, and formally incorporated into firms’ procedures for determining the premium at renewal
  • ABI and BIBA members should make clear in written, online or verbal customer communications that the new customer premium only applies for that year, and subsequent renewal premiums may be higher
  • ABI and BIBA members should review their pricing approach for customers who have been with them longer than five years and assess whether this approach delivers fair outcomes

Meeting with the guidance principles

The ABI and BIBA launched the initiative on 8th May 2018 and have stated that they “fully expect to start seeing an improvement in the outcome for long-standing customers”. They will produce a report (in no more than two years’ time) demonstrating the actions taken by the industry and the success of the initiative.

This work builds on the regulator’s recent general insurance value measures pilot and the transparency at renewal initiative and is the next key milestone for firms to work towards.

The opportunity to work collaboratively with key industry trade bodies is a positive step forwards for firms in this area.

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