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UK auto and home insurance reorganization guarantees £ four billion financial savings – Monetary Instances

The UK personal insurance market is set to experience major upheaval next month as a major overhaul of pricing rules will turn a sector with millions of customers on its head.

A new regime introduced by the Financial Conduct Authority will eradicate a practice known as price walking, where insurers benefit from attracting new customers with low prices and increasing renewal premiums.

Instead, the providers must offer an existing policyholder the same price for the renewal that they would have received as a new customer. The regulator estimates this will save customers £ 4 billion over a decade.

The changes affect the two core areas of general insurance: Motor, which, according to industry data, has 27 million policies across the UK, and Residential, which has 18 million.

"This is a huge moment," said Matthew Upton, director of policy at Citizens Advice, who triggered the changes three years ago with a formal complaint. It highlighted that people in five markets, including insurance and broadband, were paying nearly £ 900 each in “fidelity fines”.

Upton said the existing "tease-and-squeeze" model – where insurers offered low prices to new customers and then increased premiums over time – contributed to a "breach of trust" between consumers and the industry.

Mark Christer of the consulting firm Capco said the new rules were "the biggest price change that has ever occurred in the UK private insurance market".

Analysts said it would be difficult to predict the lasting impact of the changes on the market, despite assuming new customers will have to pay higher premiums as insurers try to offset the impact on future earnings. The impact could be mitigated if some companies use it as an opportunity to gain market share.

"There will be a period of volatility in pricing as insurers figure out how to determine the new market price," said Paul De’Ath, head of market intelligence at consultancy Oxbow Partners.

The effect is likely to be most dramatic in household insurance, as the price difference between new and new customers was higher than in the highly competitive motor insurance market.

But a big leap in premiums for new home insurance customers is unlikely in the long run, said De’Ath, since it would “compete away from those (companies) with more efficient business models”.

Some analysts expect price volatility in home and motor insurance to calm down by the second quarter, while others believe it could last longer.

James Dalton, director of general insurance for the Association of British Insurers, said the "one time" challenge facing companies is that they must all "do the same thing at the same time."

Bar chart of annual insurance costs for typical risk, £ shows long-term UK customers have historically been disadvantaged

Jason Windsor, Aviva’s chief financial officer, told the Financial Times that he anticipated a “bumpy” first quarter for these general insurance segments. Like executives at rival insurers, he predicted that factors other than price, particularly customer service, would become more important.

The changes have created further uncertainty in a sector still grappling with the effects of coronavirus restrictions. The good news for customers is that the pandemic has pushed insurance costs down. Auto insurance has been at its cheapest for six years after insurers cut premiums to reflect the lockdown-related drop in claims.

However, insurance broker Willis Towers Watson has warned that a mix of new rules and supply chain problems in areas like auto repair has made the pricing outlook "extremely uncertain".

Earlier this month, the ABI warned policyholders that their renewal premiums could still go up despite the changes. Pricing is based on a variety of factors, including complaints made during the period, changes in your individual risk profile, and repair costs, the ABI said. They advised anyone who renewed to look around.

The new rules also make it easier for customers to cancel the automatic renewal of their policies. But the ABI said before opting out, customers should "think about any factors that could contribute to your forgetting (renewing)," such as:

The new rules are expected to have a dramatic impact on home insurance, where the price gap between new and new customers is particularly large © Jeff J Mitchell / Getty Images

Not everyone welcomes the new rules. James Daley, executive director of the consumer group Fairer Finance, said those who have benefited from the shopping will "experience a nasty shock" from the expected price hike. "It is a cumbersome intervention that was not justified by the magnitude of the drawbacks in the market," he added.

The FCA acknowledged that younger customers, who insurers typically consider riskier, could be more affected by price increases if they intervene.

For those who have pushed for reform, the priority will be making sure insurance companies implement the changes. Citizens Advice's Upton said it was "putting a lot of pressure on the FCA to make sure companies are complying".

As part of the change, the regulator has required insurers to provide more data so they can monitor compliance. The FCA said it will "closely monitor" insurers' response and hold them accountable to ensure a fairer market. "Companies can still offer their customers cheaper and better deals, but people don't have to switch just to avoid bad business," it says.

Without the impulse of a loyalty penalty, analysts will closely monitor consumer reactions. Regulatory modeling suggests that the switch will decline. That would take a blow to one of the main sources of business for price comparison websites. But some precautionary measures that the impact on online intermediaries – used by the majority of insurance customers – would take time to unfold.

De’Ath said he believes that customers who shop all the time will be most “aware” of changes and will step up their efforts, knowing that a good deal may be harder to find.

"There could be some reduction in switching over time," he added. "But that will be more of a slow burn over several years than any big bang."

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