The regulator published the interim report of its market study into the pricing of home and motor insurance and said competition in the insurance market was “not working well” for consumers as they tended to pay more when they failed to switch or negotiate.
Other potential measures set out by the regulator included requiring firms to automatically move consumers to cheaper or equivalent deals, a halt on practices that discourage switching and requiring firms to publish information about price differentials between customers.
It also said it would consider making firms be clear and transparent in their dealings with consumers – including improvements to the way they communicate with customers and to embrace the benefits of long-term innovation such as technological developments including Open Finance.
Overpaying on policies
The FCA estimated that around six million policyholders paid high prices and were not getting a good deal on their insurance.
It said if those customers paying high premiums paid the average premium for their risk, they could save around £1.2bn a year.
The FCA said this included one in three people who were potentially vulnerable.
Mortgage brokers and lenders have a larger share of the home insurance market than insurers, with ‘other intermediaries’ making up 34 per cent compared to the 27 per cent of policies distributed directly through insurance firms.
Banks and building societies make up 24 per cent.
When it comes to motor insurance, consumers tend to go direct to the insurer with 60 per cent of policies being distributed through this channel.
Banks and building societies hold three per cent of the market while other intermediaries make up 31 per cent.
Loyal consumers pay more
The FCA’s report found insurers often sold discounted policies to new customers while increasing premiums when customers renewed, targeting increases at those less likely to switch.
It also found longstanding customers were likely to pay more on average although sometimes, people who switched paid higher prices.
From the FCA’s consumer research, one in three consumers who paid high premiums showed at least one characteristic of vulnerability, such as having lower financial capability.
For consumers who bought combined contents and building insurance, lower income consumers – below £30,000 – paid higher margins than those with higher incomes.
The regulator also found that people who paid high premiums were less likely to understand insurance or the impact renewing had.
Most firms did not make it clear that when setting a price, the expectations of whether a customer will switch or pay more was considered.
The FCA’s research discovered that consumers who switched or negotiated could get a better deal, but firms often engaged in practices to discourage switching.
Market ‘not working well’
Christopher Woolard, executive director of strategy and competition at the FCA, said: “This market is not working well for all consumers. While a large number of people shop around, many loyal customers are not getting a good deal.
“We have set out a package of potential remedies to ensure these markets are truly competitive and address the problems we have uncovered. We expect the industry to work with us as we do so.”
The FCA intends to publish a final report and consultation on remedies in the first quarter of 2020.