How do Recent FCA Changes Impact Insurtechs?
Nick McCowan, Post Office Insurance’s Head of General Insurance, who uses Earnix’s AI-powered pricing solution, Price IT, explains the effect the FCA’s new rules on “Price Walking” are having on the insurance industry six months on. Aaron Wright, Director of Strategy, Earnix, offers an insurtech’s perspective.
On 1st January 2022, the FCA banned price walking in motor and home insurance. Price walking is when insurers charge consumers more to renew their policies while offering bargain rates for new customers, effectively imposing a loyalty penalty on long-standing customers. Over time, an alarming gap between the cost of buying a policy for the first time and renewing had increased. Loyal customers felt they had been treated unfairly and the FCA agreed. This had become exacerbated by the rise of price comparison websites (PCWs) encouraging shopping around for the latest ‘hot deal’. The FCA estimates the ban on price walking will save UK consumers £4.2bn over the next 10 years.
In addition to the FCA’s price walking bans, customers are now more focused on value and more conscious of the price they are paying for their insurance policies due to inflation, increased cost of living, and their own changed driving patterns as a result of working from home more. The formula an insurer sets to define the value of a policy may differ from the perceived value a customer places on the same policy, so value-added service is also coming into play.
“The key question insurance companies are asking themselves now, therefore, is, ‘How do we adjust our pricing approach to comply with the new regulation, and still achieve our company strategy?’” says Aaron Wright, Director of Strategy at Earnix, providers of composable, intelligent solutions for the insurance industry.
“Price remains a very important factor in consumer buying decisions, but we are seeing less shopping around from customers looking to swap,” Nick McCowan, Head of General Insurance, Post Office Insurance explains. “Customers are staying with their existing providers at renewal in greater numbers than many anticipated – even with insurers who were at the sharp end of price walking. That presents a big challenge for lots of businesses like us who want new business growth.”
“If winning new customers to combat churn is no longer an option, it is time for pricing strategies that provide long term value, which will increase customer loyalty and therefore longevity. This is achieved by providing personalised products which meet customers’ needs today, earning customer loyalty, and continuing to adjust offerings along with evolving customer life events,” says Wright.
Delivering value to customers
While much of the focus around the FCA ruling has been on pricing, McCowan is keen to point out that ‘value’ is about more than just offering a good rate. “Real product value means getting the coverage you need, and having your claim dealt with, paid for and serviced efficiently, effectively and quickly in the event of a loss,” he says. “I’ve been lucky to work for companies who have always taken these things very seriously, but not every insurance company has always offered this basic level of service.”
The concept of value is central in the FCA reforms, which in addition to price controls also include rules making it easier for consumers to cancel automatic renewals and require insurers to demonstrate their products deliver fair value to customers. The new rules may also see the end of incentives and inducements being bundled with new business as these would also have to be applied to renewal business, which is unlikely to be economically viable over the long term.
“Entrenching better behaviours across the market and creating a level playing field on pricing is a really good thing and customers will, I think, get even better products and services as a result,” McCowan says. He insists, however, that the insurance industry always offered value to customers, even before the reforms. “Combined ratios in the high 90 percent range, or even over 100 percent in some years in motor insurance demonstrate these products do service customers’ needs and pay claims,” he argues.
In a market and economy in flux, accessing the right data and tools to make prudent pricing and risk selection decisions has arguably never been more important. “This reinforces the need for better predictive models, market modelling and monitoring to allow insurers to trade competitively in this market,” McCowan says.
Wright comments: “One key tenant of predictive models is that machine learning allows them to adjust quickly to available data. Typical insurance data variables are only correlated to the risk they predict, causing them to lag environmental changes. Exposing these models to data which updates in real-time, such as customer driving pattern data, will keep companies in sync with economic and behavioral changes. Companies must be able to provide personalised interactions and monitor what is going on in the environment in as real-time as possible.
Updating your models, adjusting your pricing strategy, and making sure pricing matches the risk, is very important; the new FCA rules changes how you can do that. AI, machine learning, and personalisation provide the means for insurers to stay ahead of changing times, and Earnix can help support them in that.”
In this complex environment, underwriters’ ability to accurately price and select risk will be put to the test – and will be an increasingly key competitive differentiator in the wake of the reforms.
“There will always be something new coming along that forces companies to adapt if they are going to thrive and survive in a changing environment. Earnix provides the agility to support companies through economic and structural changes caused by external factors,” concludes Wright.
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