Thought leadership article: Dual-fuel tarrif
Why dual pricing ban will drive insurance to a better future
So, the FCA’s ruling on dual pricing is now live. This is where insurance providers artificially lower their acquisition pricing to win new business then ramp up the prices at renewal time in order to try to recoup their acquisition losses and move to profit. Clearly, it’s not hard to see why the regulatory commission – and indeed consumers reading this story – were so quick to put an end to this practice.
Short-changed by insurance
For too long, consumers have felt short-changed by insurance companies. In most instances, they have been paying for little in return, particularly with necessary policies like home or motor (which are the focus of this ruling), which have felt like an additional tax, rather than a value-add service. No surprise then that consumers want more. The CII’s latest Public Trust Index found that consumers wanted to see a discount for staying with the same company at renewal. The research found that avoiding dual pricing is important for policyholders to feel that their loyalty is being acknowledged.
Indeed, the FCA believes the new rules will save consumers £4.2 billion over 10 years. In its interim report, published in October, the regulator found that if those customers paying high premiums paid the average premium for their risk, they could save about £1.2bn a year in total. When inflation and the cost of living are increasing at such a rapid rate, this is news to be celebrated. But, while on the face of it, this all looks to be about insurance pricing, it is actually far more than that.
Fit for purpose finance
This regulation is going to lead to some short-term volatility but will settle down as the industry establishes a status quo fit for an era where the financial ecosystem has been disrupted by consumerisation. Namely, the use of technology in an everyday, consumer-oriented context that is inextricably connected to our personal lives. It is something the financial sector has been quick to adopt with the notable exception of insurance. The pandemic, too, has been another scenario where insurance has failed to shine with brands criticised for poor messaging, poor service, poor policies that didn’t adapt to major socio-cultural changes.
This is particularly the case in vehicle insurance where brands have the opportunity to become truly customer-focused with telematics allowing risk – and therefore price – to be more individually aligned as opposed to being based on generic mass data. Collecting customer data and tailoring policies accordingly will bring many other benefits. For example, in an era of pervasive massaging around sustainability, driver data can be used in everything from encouraging users to drive less, or at different times of the day. Like it or not, this is a ‘welcome to the 21st Century’ for insurers that have been resistant to change.
Ease-of-doing-business becomes increasingly important
Aside from providing insurers with a clearer, more flexible understanding of risk, insurers will move away from a purely cost-saving model as ease-of-doing-business becomes increasingly important. As a result, brands will find themselves competing on things like value, trust, and understanding. Ultimately customers can then be rewarded through tailored pricing, incentives, and other value-add services like apps, rewards, personalised usage data, and more, which will increase retention.
This is where technology has a role to play – particularly automation which the insurance industry is beginning to adapt, though at a speed that is slower than required. At the very least, this can automate essential but low-value-adding tasks, enabling the human workers to focus on customer experience to drive the business forward. Indeed, by automating what happens behind the scenes in a smart, data-centric way, insurers can create a frictionless experience for the customer across different services and claims, one that is more finely tuned to their needs and specific to their usage. This is especially powerful when combined with another trend drivers are calling for – usage-based insurance (UBI).
Insurance is being forced to clean up its act
UBI provides transparency in pricing to customers which increases the feeling of ‘value’. It means customers are only being charged for what they use and, in a new world of insurance, it represents a logical step for some insurers to take. The advent of UBI is an ideal solution for this scenario, especially for large companies which traditionally lack the agility to respond swiftly according to unpredictable market trends. It’s an offering insurers can make without having to overhaul legacy technology at all. In fact, UBI is a plug-and-play system and works by adding tools to an existing tech stack. It can also be fully operational in weeks so, for insurers playing catch-up to this regulation, it’s a no-brainer.
Insurance is being forced to clean up its act in no uncertain terms. A customer-centric and technology-driven approach will go a long way in improving the ease of doing business in this highly complex industry. And that will ultimately lead to more brand trust and an enhanced industry reputation in 2022 and beyond.