The Price Walking Dead: FCA Reforms Don’t Need to Be Deadly

OK, it's a tenuous link to zombie series The Walking Dead, but so-called 'price walking' may become the stuff of folklore as new FCA rules are due to kick in and remove the practice from the UK general insurance market.

Anyone in the UK who has taken out General Insurance policies knows the drill pretty well by now. You use comparison sites or brokers to compare a range of policies, navigate through a load of data capture and finally click through to purchase a level of cover at a price that grudgingly seems competitive. The only way for insurers to win on comparison sites is essentially on price (think of the marketing message, 'You could save up to £254 on your car insurance').

Then, a year later, your 'loyal' custom is rewarded by a price increase of 10-30% and you either can't be bothered to spend the time to go through the whole rigmarole again, you just forget about the admin, or you roll with inertia and the policy auto-renews. Many firms use analytics and decisioning to target the best deals at customers who they think will not switch in the future and will therefore pay more. The practice is known as price walking.

Doesn't exactly seem the most customer-centric approach, does it?

And the FCA agree: 'We found that firms use complex and opaque pricing techniques for home and motor insurance to identify customers who are more likely to renew with them. Firms then increase prices for these customers each year at renewal, in a process known as 'price walking'. This results in some customers paying high prices relative to their cost to serve. …While lower prices are available for customers if they regularly switch or negotiate with their existing provider, price walking distorts competition and leads to higher overall prices for customers.'

To remedy this the FCA are introducing rules to ensure that 'when a firm offers a renewal price to a customer, this should be no greater than the equivalent new business price (ENBP) for a new customer'.

General Insurance is a hugely competitive market and the ENBP effect has largely been driven by the need to attract customers as something of a loss leader and then generate margin in years 2 to 3. With tight timescales to implement (1st Jan 2022 for pricing and auto-renewal remedies) the move is causing some consternation across the industry. As Insurance Times noted, 'This is going to be a bumpy ride for insurance brands and consumers alike in the short term.'

There is also a suspicion that some firms may continue to find equally sophisticated ways of stealthily continuing price walking type tactics, for example, by providing 'free', yet ultimately meaningless, policy add-ons.

But the reforms should be seen and received in a positive light by insurers.

• They can get the right balance in pricing and lifetime value from the very start. Using sophisticated analytics such as mathematical optimisation and prescriptive analytics will help them take the right actions to offer personalised pricing with the greatest likelihood of customer take up.
• The focus should shift away from the costly acquisition of new customers toward looking after the investment by building trust and loyalty with existing customers. Again, using advanced analytics, coupled with omni-channel communications and a digital decisioning platform will help to optimise each customer interaction
• The shifting approach to retention, coupled with the right digital interactions, plus a smooth and empathetic claims process, will drive lifetime value and incentivise cross-sell to other lines

So, there's no need for insurers to shuffle, shamble, drag their feet and groan their way to meeting the new rules. There are many reasons to be optimistic about these changes. Leading insurers will embrace the opportunity to introduce centralised decisions across the enterprise and really achieve customer centricity.