Changes to FCA Insurance Pricing

New rules come into force from the 1^st January 2022 for insurance in the UK and will have a major impact on motor and home insurance. The primary objective of these new rules is to ensure customers who are renewing their policies receive a quote no more than they would be quoted as a new customer through the same channel. Policyholders must also be allowed to cancel the auto-renewal of their policy during the duration of the policy and insurers must make the method for this easy and accessible. This has a big impact on insurance pricing, where traditionally, premiums have increased with policy duration.The main purpose of these changes is to ensure that new and existing customers are treated fairly. It is in response to findings by the FCA that 6 million policy holders overpaid on insurance in 2018, with an estimated overpayment of £1.2bn. The rules specifically aim to increase fairness by:

1. Promoting competition by ensuring consumers have a realistic picture of the long-term cost of their chosen product when purchasing and incentivising firms to compete for consumer business on this basis;

2. Protecting consumers through ensuring that they are placed in a position where they can understand the long-term cost of their product.

There are several key assumptions made including those regarding the sales channel. Chief amongst these are that the channel must be assumed to be the same as when the customer first purchased the policy. There are allowances made for where the channel no longer exists - the insurer must assume the channel for the renewing policy holder is their “most commonly used” channel by new business customers for the same product. The new rules also explicitly state that each intermediary chain, price comparison website or affinity/partnership scheme through which it sells policies may be treated as separate channels.Concerns have been raised by many insurers in the space about these new rules – some arguing that it will lead to overall price increases for consumers in order to balance the losses of lower renewal prices.Whether this is the case is yet to be seen and will be covered in our future monthly series where we take a deep dive into the changes and insurer responses between now and 2022. We will be doing this in conjunction with GoCompare.