Accountability for fair pricing lies squarely with firms and not with their regulators, argues IDO CEO Peter Thompson
With the recent news that the CMA has set up a regulator working group
to oversee the recommendations made following the Citizens Advice Loyalty Penalty super-complaint, and with the FCA’s General Insurance Market Study due to report its interim findings later this summer, the ongoing dual pricing debate remains a key focus for the industry, regulators and parliament – not to mention customers, many of whom have come to believe that loyalty never pays when it comes to retail insurance.
We fully support the aims of the Market Study in attempting to tackle this issue at a sector level; however, we need to be mindful not to inadvertently reduce choice for some customers when considering potential remedies.
It is well known that competing pressures in the marketplace drive many players to discount heavily to acquire new business in the first year, and then cross subsidise that acquisition activity and create profitability through higher prices for renewing customers. This lifetime value approach has been market practice for many years and pre-dates the advent of price comparison sites.
BGL is perhaps uniquely placed in the UK marketplace, serving millions of intermediated motor and home insurance customers through our compare
.com and BGL Motor and Home businesses. Large numbers of these customers will shop around every year, meaning that many policies do not break even for product providers due to intense competition and discounting practices in year one. Market-wide data shows that around half of new customers will move providers by first renewal. It is therefore important that firms can attract customers who will value the overall proposition and quality of our customer journey more than simply price in order to create good retention and a reasonable rate of return. This last point is relevant as any sector needs sustainable businesses that can compete against one another for customers.
For many such customers, loyalty is a choice, particularly since the gap between new business and first year renewal pricing has narrowed in the last couple of years. Research shows that for many customers, price is not the deciding factor; they stay because of the quality of the customer journey and the service they receive at all stages of the product lifecycle. After all, this is a product which customers hope never to have to use, but need to be reassured that we are there for them in a time of need. Other customers, and I suspect some of those reading this article, balance the value of their time with the fact that they are happy with the status quo, and choose not to invest time and energy in switching.
If there is regulatory intervention to reduce the gap between new business and renewal pricing, consumers who do not switch may enjoy slightly lower premiums in early years. However, this is a zero sum game and it will be at the expense of those customers who currently shop around every year, who will be fundamentally disadvantaged in this scenario. Given vulnerable customers can be found in both switching and non-switching customer groups, this presents something of a catch-22 situation for us to collectively resolve.
When considering potential remedies, we need to tread a careful path if it is not to disrupt the balance in one of, if not the most, competitively priced and transparent retail insurance markets in the world. Price comparison sites are an integral part of this market and have increased customer mobility and choice whilst offering insurers a very cost-effective marketing channel where they only pay for actual sales. Reducing competition to the point that prices flatten out and there is less overall difference will mean that the market will polarise between specialist niche providers and the largest market players leveraging their economies of scale. In this scenario, there is a risk that larger firms exert disproportionate dominance on the market, reducing competition and driving greater customer inertia. The likely outcome is far less switching than today, increasing the margin opportunity for the fewer, larger players, and ultimately leading to a position where they are able to increase prices. Ultimately, a less dynamic and less competitive market can only be to the detriment of all customers in the longer term.
Our own model is to balance the needs of our customers and shareholders in this highly competitive market by having internal Pricing Principles, approved and monitored by our Board, which ensure that the profit generated from individual policies is subject to a commission cap both in percentage terms and an absolute upper cap.
Accountability for the prices that a firm offers its customers, and the way it treats those that are vulnerable, rests squarely with each firm and not its regulators. With the Senior Managers and Certification Regime (SMCR) being implemented later this year for intermediaries, and already in place for underwriters, the senior leadership of each firm, including the Board, must to be clear about exactly how they make their profits as they are individually accountable for the manner in which they do so. This can only be for the long-term good of all our customers and a litmus test for the overall purpose of SMCR.