UK motor and home insurers have downplayed the impact of new legislation aimed at ending the practice of "price walking", where loyal customers are charged higher premiums than new customers.
This is despite the country's Financial Conduct Authority (FCA) insisting it represents a serious problem and that ending the practice will save consumers £4.2bn ($5.7bn) over 10 years.
This disconnect is a symptom of the challenges of implementing the legislation, according to Peter Kelly, managing director at FTI Consulting.
The FCA updated its rules (PS21/11) this week – the second revision since they were finalised in May – and published a Q&A in a bid to help insurers interpret the regulations.
Kelly said the FCA rules were trying to "strike a balance between not being prescriptive on what insurers do, and having some certainty in achieving the outcome they want. That's a difficult balance to strike."
The rules also leave plenty of ambiguities for insurers to negotiate, according to Kelly
"For example, the FCA talks about individuals, cohorts and portfolios, and it's not entirely clear what rule applies to which grouping," he said.
Nicole Austin, senior director at FTI, said companies could choose to follow the spirit of the law, but that will lead to a spectrum of interpretations.
She said these "range from the narrow (avoiding inconsistent individual customer pricing quotations over a limited time) to the broadest (assuring similar profitability across the entire back book, especially by tenure)".
Insurers could choose to follow the letter of the law, which allows "significant leeway for them to largely continue pricing as they've always done," she said. But in such a situation, their reporting to the FCA would show pricing discrepancies, putting the regulator in a difficult position.
"Could the regulator argue that even though an insurer has followed their specific pricing remedies, it didn't have the result intended, so that is considered to be contravening the rules? This might be difficult to police and enforce," Austin noted.
Kelly said FTI, which has worked with insurers and price comparison websites on this topic, had observed difficult internal debates within insurers, with different functions – such as pricing and risk management – emphasising different aspects of the legislation.
"If you look at the regulations, it would be very hard to be in consensus," he added.
Kelly warned if the FCA finds its rules are not producing the desired outcome, it could prompt more drastic interventions and lead to highly regulated pricing, as seen in the US motor sector.
As it is, FTI's modelling of possible future scenarios shows that one likely outcome is a reduction of choice for higher-risk customers, i.e. those with convictions and poor claims history.
Kelly explained higher-risk customers get fewer quotes than lower-risk customers – some high-risk drivers will be restricted to just one or two underwriters – and the prices have a wider spread.
If a low-risk customer loses access to their two lowest-priced quotes, due to conservatism on the part of insurers, the third quote might only by £10 higher. But a high-risk customer might end up paying hundreds more – or find no quotes at all.
New entrants to the market, unencumbered with a pricing legacy, could have a significant advantage over established insurers. However, Kelly said the advantage would only last a year, and generally he was not bullish on the opportunity for new entrants.
