The end of dual pricing

The insurance market’s rising volatility has culminated in a perfect storm. Even without the pandemic, the regular reforms sweeping the insurance sector, namely the FCA’s ban on general insurance price walking and the Ministry of Justice reforms. They each represent major changes with resounding repercussions. These knock-on impacts are underpinned by three changing dynamics within the insurance industry at the moment. And those are, the move to digital, the reduction of risk and borderline profitability consolidation and finally data augmentation strategies. Each of these market shifts highlights the growing need for insurers to optimize a holistic view of data to better understand its customers.

In September 2020, the FCA announced its new rules against the dual pricing. This had left many insurance providers with a number of challenges. Dual pricing is essentially the sale of motor and human insurance to new customers at a lower price than that of pre-existing customers. This is common practice in the insurance sector to obtain new business. This will come into full effect in January 2022. And then, the insurers are going to have to normalize industry pricing so new business prices rise to balance what’s happening at renewal.

Profitability is more important than ever for insurers. The obvious way to increase margin when they can’t exercise price control is to hollow out their product. Cover levels will fall, excesses and admin fees will rise. New exclusions will be introduced. Claims processes will be tightened. The FCA plans to head this off by forcing companies to produce reports which prove they are offering fair value to their customers. And that value will be determined by comparison to the peer group. The aggregators have disrupted the market. Hence, it is a race to the bottom to offer the best price There are three crossover aspects to ensure fairness such as, analyzing an existing customer in the same way as a new customer, the notion of fair value and reporting back to the FDA.

The real-life impact of these pricing interventions will be to widen the gap between consumers’ expectations and what their policy actually delivers. A market with high levels of switching keeps companies honest. But if customers no longer feel they even need to open their renewal packs, they’re unlikely to catch the memo. This may not have a detrimental effect. Some situations will drastically change as people get priced out of the market, leading to customers changing behaviors. Creating a holistic view of all customer transactional and documental data that can then be augmented at scale will not only allow insurers to meet all three aspects of fair pricing, but also allow insurers a deeper longevity to understanding the customers to future-proof all decision making.