By Alex Johnson, Head of Insurance Solutions, Quantexa

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, each represent major changes with resounding repercussions.

These knock-on impacts are underpinned by three changing dynamics within the insurance industry at the moment; 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 optimise a holistic view of data to better understand its customers.

What is the dual pricing ban?

In September 2020, the FCA announced its new rules against general insurance price walking, otherwise known as dual pricing, leaving many insurance providers with a number of challenges. This follows the regulator’s market study into the pricing of home and motor insurance, which found that a whopping six million policyholders are charged a higher rate than new customers.

In these circumstances, 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, however the practice has received criticism for exploiting customer loyalty rather than rewarding it. With the price walking ban, said to be coming into full effect in January 2022, insurers are going to have to normalise industry pricing so new business prices rise to balance what’s happening at renewal.

Challenges 

Profitability is more important than ever for insurers, so currently the main challenge facing insurers is finding the profit from elsewhere. The obvious way to increase margin when they can’t exercise price control is to hollow out their product – a trend which has been prevalent in the market since comparison sites came onto the scene at the turn of the millennium. 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. But such value will be determined by comparison to the peer group – who will all be doing the same. Firms will also have to publish more data to indicate what percentage of premiums they are paying out in claims. But the competitive nature of the motor and home insurance markets means that firms are unlikely to be able to get themselves into a position where they’re making excessive profits.

Understanding customer risk is critical to fair pricing

The aggregators have disrupted the market so it is a race to the bottom to offer the best price. Understanding and pricing the customer is now critical to creating a fair price value.  There are three crossover aspects to ensure fairness:

1. An existing customer has to be analysed in the same way as a new customer. Insurers need to be able to create a single customer view regardless of whether that customer is coming from different channels or different portfolios. Linking the dots to identify the same customer throughout the insurance policy process will help support this decision making process.
2. The notion of fair value. Drawing on customer insights and customer attributes, insurers will have to make a lot more effort at following the customer journey in real time across different portfolios in order to determine a fair price.
3. Reporting back to the FDA. Insurers will have to provide the FDA with more transparent information around customer pricing. How can this be achieved if they are not meeting the needs of the previous two aspects?

Impact on customers

The real-life impact of these pricing interventions will be to widen the gap between consumers’ expectations and what their policy actually delivers. There’s a risk that consumers’ engagement with their insurers will suffer. Once insurance buyers understand that they are not being subjected to price-walking anymore, the incentive to shop around will fall away.

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 about how their cover is changing and doesn’t do everything it did when they first bought it.

Whilst this may not have a detrimental effect, some situations will drastically change as people get priced out of the market, leading to customers changing behaviours. 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.