Price Walking

James Stewart Policy Manager

In response to concerns that customers who have taken out car or home insurance have “price walked” in to higher premiums, that is they have been tempted by a cheap initial premium only to find that, at renewal, their premium increases without their knowledge, the FCA has introduced a rule that requires home and motor insurance renewal premiums to be set at a price that is no higher than would be offered to an equivalent customer at new business.

This is referred to as the equivalent new business price (ENBP). An Insurer cannot therefore discriminate against a customer on the grounds of how many years a customer has held their policy with them (i.e. tenure). Insurers in these markets will no longer be able to dual price and gradually increase premiums over time at renewal until they bear no resemblance to the premium that would be offered if the same customer was a new customer.

Although it is too soon to know for sure how this move will affect prices – will Initial pricing go up or renewal premiums go down, at least the FCA guidance should create a more competitive Insurance market, less dominated by comparison websites whose whole ethos is around finding the cheapest price.

Elsewhere in the rules, both manufacturers and distributors will be required to consider whether the products they either manufacture or recommend to customers represent fair value and retain evidence of the analysis. This analysis will be necessary for each insurance product distributed by the intermediary, including pure protection products.

Firms will be expected to follow the Treating Customers Fairly guidelines for products, which means we will be expected to know the target market for each insurance product, the characteristics of that product and how these meet the needs of the firms’ target market. By knowing who, what, why and when for the product we will be expected to be able to demonstrate fair value outcomes and be able to evidence the right outcome has been achieved.

“Embedding the relationship between the overall price to the customer and the quality of the product(s) and/or services provided”

Although fair value is not defined by the FCA, value is defined as ‘the relationship between the overall price to the customer and the quality of the product(s) and/or services provided’. So for example, using the Defaqto Compare Tool to demonstrate the difference in price between a five star product and a two star product would be a potential source confirming that the price and product quality delivered a great outcome to the customer.

For Advisers there is now a greater sense of a level playing field with the Price Comparison websites. Whilst we still await the practical adoption of the new rules, and we see which way prices go, now would be a great time to address any changes in the Sales Process so that you take advantage of the ability to compete in what is a competitive market.