FCA’s ‘price walking’ regulation and the law of unintended consequences

As published in Insurance Age

In the 1970’s, US states began to require car passengers to wear seatbelts. Sounds sensible right? Unfortunately, immediately following this law there were more accidents, and though people were less likely to be fatally injured in an incident, the new safety mechanism of a belt led to more people adopting risky driving behaviours.  Great (and vital) legislation, but who could have foreseen that particular consequence?

In September, the Financial Conduct Authority outlined its proposal to tackle concerns about dual-pricing in the home and motor insurance market. Following a lengthy market study, it found that customers were not benefiting from fair pricing practices, with renewing customers often offered much higher premiums than brand new customers on a like for like quote.

As part of its proposal, the FCA demanded that brokers offer the same price to both new and renewing customers, which on paper sounds sensible and most importantly, fair.

The premise is that those customers who don’t tend to regularly shop round for the best possible insurance quote are not discriminated against or penalised for their loyalty.  If all goes well, this should mean that insurance customers won’t need to hunt around for the fairest price, brokers won’t frantically undercut each other to get new business and price comparison websites will have  a greater focus on quality of product rather than price.

That might happen. But as with the US seatbelt legislation in the 70’s there may well be some unintended consequences. Let’s consider five possible scenarios arising from banning the seemingly destructive practice of price-walking.

A vicious cycle?

Competition in any market is essentially good for customers as it drives prices down and forces providers to innovate to make sure their offerings stand out to potential customers. Once the FCA bans price-walking, in theory all customers will receive the best possible price meaning they will be even less likely to shop around. Could this lead to innovation in the industry being stymied as providers rely on price-alone to attract and keep customers?

(Don’t) Go Compare

If customers know that they’re getting the best price both first time and at renewal, we are likely to see fewer customers visiting price comparison websites to hunt for the best prices on their premiums.  The only problem with this is that price comparison sites need a good volume of  traffic to make money to support their marketing budgets, and without it  we could see them increasing their prices, a cost ultimately passed on to the consumer.

Fit for purpose?

If brokers are less able to win new business, some less professional ones  may seek to regain their financial advantage by offering new ultra-stripped down, ultra-cheap policies that look good to the customer on paper, and in their monthly or annual statement, but on closer inspection may not give an adequate level of cover, leaving them exposed. In this scenario the customer will need to be ever more vigilant about checking their policy summaries and exclusions to ensure that in the event of a claim they aren’t left vulnerable.

Price-walking through a loophole

Brokers with profitable back-books will understandably want to keep their historically profitable customers. To do this we may see them making older products unavailable or difficult to find for new customers.  This would then enable them to continue to offer a high price at renewal to existing customers whilst simultaneously launching insubstantially different policies for new business, technically price-walking as they could offer a near like for like product, but at different pricing levels.

Stalemate

Ultimately the market will see less churn, and I believe, less incentive for companies to provide excellent customer service to retain the business of their loyal customers. This could lead to less innovation to drive the industry forward in its quest to meet and exceed customer expectations, which given how far technology and our ability to provide exciting new digital solutions to customers, would be a great shame.

These scenarios could play out in front of us, or they might not, but one thing is certain, major regulatory change always has some unintended consequences.