Spotlight: Motor – The future of pricing

Motor insurers have had to adapt to changing consumer behaviour in the current economic climate. In addition, insurance firms will need to review their pricing practices as a result of the reforms set out in Financial Conduct Authority’s final policy statement for its general insurance pricing study. The introduction of new rules around pricing practices comes on the back of a pandemic that has already altered consumer behaviour, due to its economic impact and disruption of work routines.

Research, conducted by Post, suggests over the past 12 months consumers have become more price sensitive. When asked to score the most frequent behaviour currently seen from motor policyholders out of seven options including reducing their excess and paying upfront, respondents ranked cutting back on add-on covers the highest [graph one], second most frequent was consumers paying for cover on a monthly basis, while more interest in usage-based insurance options ranked third.

Additional services

In the past some brokers have relied on their ability to sell additional services to customers in order to make the profits they require. However, under the FCA rules it is going to be more difficult to do that unless they can demonstrate that the customer requires the product and that they get them with the fair value that is dictated.

Martyn Mathews, senior director personal lines at LexisNexis Risk Solutions, explains: “If customers are pulling back from this it puts further emphasis on insurers and brokers to make sure that they are using all the available data sources so they can write the business at the correct price, but also at a price that is fair to the customer. That has always been the challenge, but this will add a new dimension to that challenge because the ability to under-price a quote in return for selling these add-ons to make the policy work has gone now.

“People will want more products that reflect their personal circumstances at this time. That may mean fewer multi-car policies because some vehicles are off the roads during the lockdown period, mileage is another example.”

Price the main factor

Many customers already viewed price as the main factor in choosing their insurance. Paul Rountree, director of car trading at broker Brightside, says this behaviour has become more common alongside a culture of online shopping and a desire for speed of purchase.

“While the industry strives to make additional products clearer to customers, some will still look to save cost rather than consider what they would do in the event of incurring uninsured losses or a breakdown,” says Rountree.

“The advantage of talking to a broker is a two-way conversation where policy benefits and overall cost can be understood.

“Brokers and insurance providers are already talking to customers about additional products and services that we offer. Some customers will choose to ignore additional products or may already have the cover elsewhere, but we do see customers buying additional products when they are needed.”

The ranking of UBI third as a behaviour respondents are seeing reflects a significant increase in people willing to share data with insurers in return for a tangible benefit, says Mathews: “Consumer expectations have changed during Covid and consumers expect things to work as they need them to. It’s about consumer convenience and buying habits. The interest in UBI is based around how many miles you drive, but if you’re an insurer that presents a problem in how you validate that information.

“We are seeing a big rise in the number of connected vehicles on the road now and insurers will need to work out how they harness the data that comes out of the vehicle to make sure the customer receives that service and the policy that they expect.”

Fewer miles

It is also indicative of the needs of drivers who are accumulating fewer miles than ever before. This is a long-term decline that has been accelerated by the pandemic, according to Anthony Aronin, head of telematics insurance at More Than.

“Car usage is getting back to normal levels, which is likely to result in drivers seeing more value in add-ons, such as breakdown cover. However, while many people are going back to using their car as much as they were pre-pandemic, some might not,” says Aronin.

“With more flexible working arrangements and less commuting, it is likely some people will be driving less. Recognising this need, we want to ensure everyone has access to insurance that best suits their needs. We are, therefore, likely to see an increase in demand for UBI.”

Mathews says that UBI can sometimes mean a reduction in premium but it might also mean a product that provides a better service. It also reflects the desire of customers to be treated as individuals and know that sharing data can help them.

He adds: “By 2030 every vehicle that leaves the production line will have connectivity in some capacity. There will be no connectivity costs, just the cost of getting the data out of the car. What that ultimately means is it is cheaper to access the data so more insurers will do that. It will take telematics out to the mass market.”

Of those surveyed, most respondents believe using claims data as part of their data enrichment process is more important for existing customers at the point of renewal compared to new customers [graphs two and three]. For renewal customers claims data only ranked second, whereas it was top ranked for renewals.

Gary Thompson, underwriting and technical director at young driver insurer, Marmalade, says: “This may be because the data is pure at renewal, as it has occurred during the policy period. Although lots of validation is used at new business, it can still be subject to undetected misrepresentation.

“As well as using our telematics devices to monitor and score driving behaviour, we are also improving the way we use claims data through our telematics devices, in terms of notification and type of accident. UBI allows us to amend rating at various stages throughout the policy life including claims rating, as there are no renewal dates to our pay-as-you-go policies.”

Quote history ranked least important as part of the data enrichment process, with respondents ranking it last for both taking on new customers [graph two] and at both the point of renewal [graph three]. However, quote history can be valuable for an insurer in understanding the risk of an individual according to Mathews: “We have seen the value that can be derived from someone’s quote history. If you’re an insurer, understanding how someone has been quoting elsewhere during the 12-month period which you’ve been on risk with that customer can be a critical risk factor for you. It can really help you understand behaviourally what’s going to happen with that customer.

“There is a reasonably low market adoption of intelligence around the quotes, with the exception of those organisations that are looking to see whether there are discrepancies between what you declared at quotes and the reality, the number of the claims you have had.”

Quote history suggests more about the consumer’s buying habits rather than the risk itself, according to Aston Lark’s private client motor manager, Kris Lewis: “Other factors are more important to an underwriter as they tell a story of the driving history as well as risks that could have an impact on the ‘quotability’ of the client.

“However, more can be learned from quote history as it can provide a good insight into how we, as an industry, can reach more people and provide that all-important information consumers need to make good, informed decisions about their insurance.”

After reviewing the FCA’s final policy statement for its general insurance pricing study, survey respondents believe it will have a moderate impact on general insurance pricing practices.

Industry engagement

The survey suggests that the level of industry engagement with the FCA’s consultation was evenly divided with 50.7% of firms responding to the regulator.

In terms of impact 34.2% of survey respondents said the impact of the FCA’s consultation would be high on their business [graph four], and an additional 7.9% said it would be very high. Meanwhile 38.2% of those surveyed thought it would be neutral, with almost a fifth saying it would have low, or very low, impact.

On changes to their own pricing due to the FCA policy statement 48.6% believed their pricing would stay the same [graph five], yet 59.5% felt pricing across the market as a whole would rise, with only 29.7% believing it would stay the same and 10.8% thinking it might fall [graph six]. 

Mathews says: “The data will underpin the motor market’s response to the FCA’s pricing practices statement. It will play a critical part in the industry response.

“It is interesting how there is a divide in the responses. There’s no consensus on what would happen to pricing from a customer perspective. The industry seems to agree that the intent of the guidance is good, but that prices are going to rise for some people.

“The use of data in the renewal process, and past that, will grow because it is critical for insurers to be tailoring the risk appropriately for the individual at renewal. That’s not just about the price, although that is a large element of it, it is about making sure the customer has a product that is actually suitable for their needs at that point in time.”

Insurers must not assume that just because a customer has had a policy for several years that it is still the most appropriate policy for the consumer and represents fair value.

Jonathan Marsh, personal lines portfolio director for Aviva’s general insurance business, says: “We support the FCA review and its intent to bring greater consistency to general insurance pricing and we await publication of the final rules. Aviva has already taken action to tackle some of these issues through limiting price differences between new and renewing customers, and these changes will create further consistency in removing price differences.

“We are committed to working with the FCA on these new rules to ensure that these changes are fair to all customers, regardless of how they buy their insurance, and that these changes do not create unintended consequences for some groups of customers.”

Around 80% of respondents do not plan to change their motor insurance renewal engagement strategies as a result of the FCA study. Perhaps unsurprisingly, respondents anticipate a rise in the number of motor insurance customers using aggregators in the future [graph seven], with 55.4% expecting customers will make more use of them and 21.6% anticipating their usage will remain the same.

Key concerns

One of the key concerns highlighted in the survey was the timeframe for implementation. The new rules around pricing practices are set to take effect in June. The FCA proposes to give firms an implementation period of until the end of September 2021, for the systems and controls rules and product governance rules, and the end of 2021 for the pricing and auto-renewal remedies and the reporting requirements.

Neil Mercier, motor director at Axa Retail, says: “We are supportive of measures that will lead to greater clarity and fair value in the market for everyone. However, for the FCA measures to succeed, it is crucial that the industry has adequate time to implement these proposed changes.”

Others, however, remain confident that the insurance industry will adapt to whatever change is imposed upon it.

Mathews concludes: “Although the timeframe may seem aggressive in some ways this has been on the horizon for a long time and those organisations that have understood that are making rapid changes. They are already deploying changes to pricing strategies at new business and renewal and ensuring that their working with their customers to make sure they have the most appropriate products.”

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