Are insurance prices fair?
Who really benefits from insurance companies pricing strategies? Customers might feel they are getting a good deal on insurance prices; perhaps that renewal came within a few pounds of last time and it’s convenient to remain loyal – we’ve all been there. The reality though can be quite different. For car insurance, less than half of drivers check last year’s premium even though most insurers put last year’s premium on the renewal form and are required to ‘encourage’ customers to ‘shop around’ every 4 years.
In a May 2017 money article in The Guardian, journalist Patrick Collinson reported:
Don’t change insurer regularly? It could be costing you more than £1,400
Households that fail to move their home and car insurance regularly are overcharged by more than £1,400 a decade, according to new research.
An audit of 9,000 motorists and 8,000 homeowners by research agency Consumer Intelligence found that after three years the typical driver was overpaying by £75 and the homeowner by £66.
Loyal customers who stay with their insurer year after year are the ones who lose out most, particularly on home insurance. After nine years, home insurance customers who stay loyal are typically overcharged £127, while drivers are paying £116 too much.
In the first year the differences are small – £37 for home and £63 for car insurance. But they escalate over time and within ten years someone who has failed to switch either type of policy will be paying just over £1,400 more than someone who switched every year.
This insurance pricing practice has not yet changed and has been highlighted in a ‘collective complaint’ made in 2018 by consumer protection organisations.
The FCA have certainly taken notice; following initial work on insurance pricing packages, they have set out a series of measures to address the conduct of firms, conduct a market study on general pricing packages, and a broader look at the fairness of pricing across financial services. Their concern stems from the potential for harm to consumers, particularly those who are vulnerable. The FCA have already seen non-compliance with their rules on transparency of renewals.
The FCA are inviting engagement from stakeholders on their fair pricing work to help inform the market study, with work set to conclude in late 2019. Andrew Bailey, the FCA’s Chief Executive, wants the work to examine the outcomes of general insurance prices and pricing practices, and if necessary, inform the FCA how best to intervene. At Services Family, we think this is great news for customers; loyalty shouldn’t cost you more.
Why do prices need checking?
Insurance works by spreading the claims risk across a large portfolio of policies but, if the portfolio is very large, this can mean that lower risk customers pay an unfair premium to ‘subsidise’ higher risk customers and, the wider the risk the more ‘unfair’ your premium might be when calculated as part of a large ‘portfolio’. Once again generalised information about you as a customer is rearing its ugly head!
What should we all do?
It pays, or saves, to spend a few minutes checking your quote on a comparison site for other insurance prices. Even if you just phone your existing company and say that you’ve seen a cheaper quote online – they will usually make you an offer lower than the renewal quote to keep your business.
At Services Family, we think that new digital technologies can better manage smaller insurance portfolios and that our pricing will better match your risk.