By 
Plans for a crackdown on rip-off premiums in the insurance industry could damage competition across the sector, investors have warned.
The Financial Conduct Authority (FCA) revealed it is planning to ban companies from unfairly hiking prices for existing customers, a practice known as “price walking” or the “loyalty penalty”, after finding that millions of people overpaid when renewing their insurance last year.
The regulator concluded that customers who were initially lured in by attractive “new business” discounts were regularly subject to rapid annual price increases, effectively punishing them for remaining loyal to their insurer.
The FCA said companies also targeted “vulnerable” customers who were less likely to shop around, including those on low incomes or with limited access to the internet.
It is estimated that millions of people could have saved more than £1.2bn – around 7pc of the £18bn home and motor insurance premium market – if they had been treated more fairly.
Rob James at Merian Global Investors warned that for insurers to make adequate returns on new business discounts, existing business had to be priced at a premium “to make the sums work”.
“It’s economics. If the insurance industry didn’t cover its cost of capital, then it would be unable to pay claims and would fail within a short period of time,” he said.
“The only way that the price playing field can be levelled is for new customers to get a worse deal, which would allow existing customers to reap the benefits through a lower price.
“But this upsets the competition apple cart. If prices on new business rise and those on renewals fall, as is implied by the above, then the attractiveness to shop around each year reduces.”
Brokerage Peel Hunt noted the FCA had stopped short of enforcing a price cap on the sector, but still aimed to put a stop to excessive renewal rates and the overcharging of existing customers.
However, analyst Andreas van Embden said the industry would be free to set prices for new customers based on their underlying risk characteristics.
“The regulator is taking a very balanced and considered approach. They are looking to make sure pricing is as transparent as possible without interfering in price mechanism insurers use,” added Mr van Embden.
He added that insurers such as Admiral and Hastings that use price comparison websites would take the changes in their stride. However independent brokers more reliant on “add on” products, such breakdown cover, to recoup new business discounts would be hit hard, he warned.
Chris Chapman, a partner at law firm Mayer Brown, said the changes were “a very significant regulatory development”, while MyPolicy Group chief Roger Ramsden said he thought the days of “arbitrary” annual premiums were “numbered”.
The watchdog will enter a six-week consultation period with insurers across the industry and plans to release a final report in the spring.
Shares in Admiral rose 0.74pc by afternoon trading in London to £20.50, while shares in Hastings were flat at 188.6p.
Comments