Insurers are sneaky – the FCA must keep a close eye on how they react to price hike bans

Some good news at last: the insurance industry has been told it’s no longer going to be allowed to rip millions of people off.

The Financial Conduct Authority, in a stinging final report into the general insurance market (for which read home and contents, motor etc), says it’s planning to outlaw “price walking”.

This is the deeply cynical practice whereby insurers steadily “walk up” the price of the policies bought by people who stick with them. Think of it like shooting loyal soldiers in the back.

The practice is responsible for a loyalty penalty the FCA puts at a staggering £1.2bn a year.

It says insurers have developed sophisticated techniques so they are able to identify the people most likely to stay put with a view to soaking them. In some cases, the likelihood of a customer walking plays a more important role in the prices they are quoted than the risk they represent to the insurer.

It goes without saying that people in vulnerable groups tend to be more likely to find insurance intimidating and less likely to make use of the switching services that are available. An estimated six million people pay over the odds, by an average of £200 each when compared to the average they should pay based on their risk profile.

Critics might say switching services are quite easy to use. More fool those who can’t be bothered to spend 20 minutes on the phone to save a bundle.

But tech can be highly intimidating to some people, and, according to the regulator, insurers have a nasty habit of making switching more difficult than it should be.

The figures produced by the FCA make it quite clear that the label “market failure” is entirely appropriate for general insurance.

Assuming a similar risk profile, a new customer could expect to pay £285 for motor insurance compared to £370 for someone with the same insurer for five years. For buildings and contents, it’s £130 vs £238. There are several more examples like that in its report.

If you want to understand why a significant number of people don’t think it’s much of a crime to defraud their insurers, those numbers are your explanation. What’s good for the goose…

So three cheers and a feather in the cap for the regulator?

It should be. But there is just a teensy problem. These are insurers we’re talking about. If they are deprived revenue from price walking, they will inevitably look at ways to claw it back, just as they do from you if you have to claim on your policy.

One way of doing that is if they simply hike prices across the board. The FCA fully expects this to happen. It still estimates a net saving for consumers, but one totalling £3.7bn over ten years rather than the £12bn you would expect by multiplying up the £1.2bn a year the victims of price walking are currently thought to be overpaying.

The FCA’s move still counts as a win, and a big one if you’re in favour of fairness. The loyalty penalty imposed by insurers is an important part of the poverty premium identified by organisations like the Equality Trust.

But that £3.7bn of estimated savings across the market comes with a caveat: it holds good only if there is “no change in the intensity of competition”.

Can we rely on that? Not necessarily.

There are a bewildering array of insurance brands, selling their products through multiple channels (direct to consumer, through brokers, through price comparison sites, over the phone, over the internet etc).

To judge from their advertising, they compete aggressively for new business. But because companies typically sell through multiple brands – Direct Line also owns Churchill and Darwin for example – the actual number of underwriters is a lot smaller.

It’s the underwriters who are responsible for setting prices.

Shares in general insurers slipped in response to the news on a day when the FTSE 100 was modestly ahead. That’s a good sign for the FCA. It tells you investors are concerned that their returns will be impacted in favour of the consumer.

But by how much remains to be seen.

The FCA is proposing a radical change to the insurance market. For it to prove successful, it will need to keep a very close eye on how it develops and be willing to intervene again based on how insurers respond.

These, remember, are the people who came up with price walking in the first place. Trusting them to play fair is like trusting a striker who takes a dive in front of the goal to tell the referee, no you absolutely shouldn’t award a penalty.