With the decorations back away in the loft, the sweet tin looking decidedly empty and the chimes of Big Ben not even an echo in the recent past, we now look to 2020 and what this might hold for the insurance sector.
First thing on the horizon is the release of the final report by the FCA into general insurance pricing practices is scheduled for Q1 of 2020. The interim report (issued in October 2019) raised serious concerns around premium pricing practices, including:
- pricing inception or renewal premiums on the basis of customer type, rather than cost - resulting in disproportionately higher premiums being charged to customers who renew every year (price walking), and vulnerable customers; and
- the imposition of barriers to make switching insurance providers more difficult.
We therefore predict that the final report will recommend the introduction of legislation and/or some type of code of conduct which imposes:
- price restrictions on premiums charged to certain customer types – e.g. customers currently subject to price walking, or customers with a household income below the national average;
- restrictions on automatic renewals – similar to the inertia selling provisions in the Distance Selling Regulations/Consumer Contracts Regulations; and
- the requirement to improve customer care e.g. the requirement to provide clearer information, to facilitate rather than obstruct switching by customers to alternative providers, and to provide greater transparency around pricing structures.
We further predict that the effects of the introduction of this legislation/code of conduct will be seen towards the end of 2020/beginning of 2021 and will include:
- a decrease in renewal premium income but an increase in inception premium income - as a result of brokers ceasing the practice of charging heavily discounted, zero or negative commissions at the policy inception stage;
- lower customer turnover as a result of the significantly smaller difference between inception and renewal premiums; and
- a significant increase in the already fierce, competition for new business, in turn, resulting in the search for more innovative marketing methods and greater marketing costs –which may well result in larger providers looking to bring their marketing function in-house.
Towards the end of 2020 and into 2021, we believe that the increased cost base – from increased marketing costs and more extensive regulatory requirements, coupled with the decrease in renewal premiums will result in:
- a further increase in M&A activity –as a consequence of the inability of smaller providers to compete in this environment;
- smaller providers restructuring their business – for example:
- by focussing on less competitive niche areas where due to the customer base, there is likely to be less restriction on the premiums charged e.g. vintage car insurance or temporary insurance; and
- by restructuring their business –e.g. changing from a brokerage to an MGA, to reduce distribution and arrangement costs.
- providers looking to increase revenue from add-on products, while navigating the regulatory issues which are increasingly associated with this area. We do not expect to see an increase in administration, cancellation and similar fees due to the increasing regulatory scrutiny of such fees; and
- many players are likely to be affected by the marked hardening in premium rates that is currently being observed: this is likely to work to the advantage of brokers and insurers but to the disadvantage of some MGAs.
Finally, we would expect the changes to result in a sharp increase in claims for compensation by customers (probably led by no win-no fee claims companies) – for example, on the basis of the Unfair Contract Terms Regulations/Consumer Rights Act, or on the basis that they were misled when they entered into the insurance policy.
In short, we believe that 2020 will see providers not only having to contend with any Brexit fallout, and the threat of claims for compensation, but also having to revisit their marketing strategies to ensure that any decrease in renewal premium income is countered by an increase in the volume of inception premiums. In addition, as they constitute a significant proportion of the cost base of these businesses, efficient VAT and IPT management will take on an even greater urgency.
Let’s see how 2020 plays out and in the meantime if you would like to talk about any of the thoughts above, or find out more on about how we are working with and supporting insurance firms then please contact Justine McInnes or Peter Allen.