Insurance is one of those odd products that the purchaser never wants to use. As a result the cost of insurance is seen more as a tax than a benefit.
Given that most customers don’t actually ‘use’, or claim on, their insurance each year, there isn’t an objective measure as to the value of the service. If a new provider therefore wants a customer to switch it needs to offer a lower price. There isn’t really any other reason for a customer to shift provider.
This has led to an industry with high churn rates where consumers shop around looking for cheap prices and the rise of price comparison websites.
Of course, for the insurer that wants to make an adequate rate of return on capital, if new business comes at a discount, then existing business must be priced at a premium in order to make the sums work.
This isn’t necessarily unfair. It’s economics. If the insurance industry didn’t cover its cost of capital then it would be unable to pay claims and would fail within a short period of time.
It is of course true that if an industry has different prices for different customers, then those paying the higher prices will be paying more than the average. The FCA has put the aggregate figure for this at £1.2bn. It isn’t possible for the industry to reduce prices by this much, as the aggregate profitability of the industry is of about the same order.
The only way that the price playing field can be levelled is for new customers to get a worse deal (i.e. pay higher prices) which would allow existing customers to reap the benefits through a lower price.
But this upsets the competition apple cart. If prices on new business rise and those on renewals fall, as is implied by the above, then the attractiveness to shop around each year reduces. Why spend time on price comparison websites if the net gain is diminishing?
So the FCA is facing a tension between its two objectives – treating customers fairly and stimulating competition. In an industry with a product that nobody wants to buy, that is a tough balancing act.
Next up, 2022’s big story: Whatever happened to the price comparison websites?