It is not surprising that car insurance has been prominently in the sights of UK regulators. The UK market is the third largest in Europe – behind France and Germany – with €20bn ($21.4bn) of the €100bn ($107bn) gross written on premiums in Europe in 2021. Perhaps more importantly, it’s a compulsory purchase if you drive a car. And at the last count there were some 31 million registered drivers in the UK.
Regulators have for some time been taking action to ensure consumers get a good deal. Way back in 2014, the Competition and Markets Authority (CMA) published a series of measures it said would “increase competition in the car insurance market and reduce the cost of premiums for drivers”.
These included a ban on agreements between price comparison sites and insurers that stopped insurance firms making policies available more cheaply on other websites, and recommending the Financial Conduct Authority (FCA) looked at the quality of information about products sold as add-ons.
Seven years later, in 2021, the FCA introduced measures to prevent price walking — the name given to the process by which insurance companies increase the price of car and home insurance premiums for existing customer, allowing them to offer cheaper deals to entice new customers, essentially a tax on loyalty. The FCA estimated these measures would save £4.2bn ($5bn) over 10 years and make the market work better.
But only last year, the FCA felt the need to warn car insurers not to offer prices under fair market value when settling claims. It wrote to companies telling them to handle claims promptly and fairly, and to consider the cost of inflation when settling. This ties in with the work the regulator is doing to enforce the new Consumer Duty, which requires firms to deliver “good outcomes” for customers.
But despite the regulator’s efforts, nine years on from the CMA investigation and after multiple interventions, research by price comparison outfit Confused.com reveals that car insurance premiums have risen 19% — the biggest annual rise in six years. UK motorists now pay an average £629 ($754) a year to insure their cars.
So, how effective have the efforts of regulators been at delivering a better deal? The FCA issued a statement at the end of last year headlined “New year delivers fairer home and motor insurance renewals”, with Sheldon Mills, the regulator’s executive director, consumers and competition, saying: “Our interventions will make the insurance market fairer and make it work better. Insurers can no longer penalize consumers who stay with them. You can still shop around and negotiate a better deal, but you won’t have to switch just to avoid being charged a loyalty premium.”
“Insurers can no longer penalize consumers who stay with them. You can still shop around and negotiate a better deal, but you won’t have to switch just to avoid being charged a loyalty premium.”
Sheldon Mills, executive director, FCA
The regulator also says it has secured redress for consumers in a small number of cases where companies had accidentally price discriminated against loyal customers, and has published research showing not only that long-standing customers were still being discriminated against, but that poor recordkeeping meant many insurance companies could not prove they were not price discriminating between new and existing customers.
Smaller firms, in particular, “had few or no records to show how they had complied with our pricing rules” and “in most cases no evidence or records were provided to substantiate how these firms had satisfied themselves that they were and are complying with our pricing rules”. Larger firms “were generally able to show that they had taken appropriate actions to comply” but “not all the information that was reported to the person responsible for the attestation was made available to us”. The research also highlighted the fact that many firms had not appointed enough staff at a senior enough level to judge properly whether the business was complying with requirements.
All of this could be put down to teething troubles for a new regime. But seasoned observers question whether the focus is right. “Insurers should be looking more at controlling claims costs and ensuring people don’t get away with it,” says Branko Bjelobaba, a general insurance specialist and former vice-president of the Chartered Insurance Institute. “What insurers spend on claims we, the insurance buying public, have to pay for in our premiums.”
In 2020, the last year for which complete records are available, motor insurance companies paid out a total of £13.5bn ($16bn) in claims. And you don’t have to go far to find evidence of repair shops quoting for parts replacements when a repair would be cheaper.
Costs for insurers are rising and the difficulties companies face were underlined when Direct Line, the second biggest player in the UK market behind Admiral Group, announced it was scrapping its dividend payment because of the rising cost of claims. Margins are thin to non-existent, with S&P Global quoting sources who expected the industry combined ratio to be “significantly above 100% for 2022 and 2023”. That means insurers paying more in claims than they receive in premiums.
Car insurers, in particular, face unlimited risks, as Chris Wheal, former editor of Insurance Times, explains. “If a driver falls asleep at the wheel, leaves the road and ends up on a train track, causing a train crash, the costs will run into billions. That all comes on a £450 ($539) insurance policy,” he says. The combination of huge risk, claim inflation and a decreasing ability to use price increases as a defense means that insurers are deciding “it’s not worth it”.
Encouraging consumers to shop around is only effective if there are alternatives to shop around for. But current market conditions mean choice is, if anything, being reduced.
In Wheal’s view, “the regulator’s focus is to make insurance cheaper, but it might be better if they made it simpler”. It’s very hard, he says, for the average person to know if they are properly insured. He gives an example of a physiotherapist who also provides training. If they have an accident on the way to provide training rather than physiotherapy, they are not covered unless they have specified ‘trainer’ as a second occupation on their policy.
“The regulator’s focus is to make insurance cheaper, but it might be better if they made it simpler.”
Chris wheal, former editor, Insurance Times
Wheal is pessimistic about the market, saying: “Insurance is a broken model. Demutualization has done a lot of damage. And regulation doesn’t allow for the law of adverse consequences.”
To illustrate the point he says: “The FCA brought in the Insurance Conduct of Business Source Book requiring tough standards on those who recommend financial products and lower, more relaxed rules for those not giving advice. Now most firms that call themselves ‘brokers’ have withdrawn from giving advice at all, to make complying with regulation much cheaper. They sell unadvised. It is entirely down to the buyer to decide if the cover is appropriate and the price fair.
“Where does a consumer get advice on whether they have the right cover for their vehicle? I’ll tell you – from the police officer who fines them and gives them six points for driving uninsured.”
But regulators need to make what exists work as well as possible. For all the understandably high-profile action around car insurance, it’s far from clear that regulatory intervention as it’s currently being deployed will, or even can, achieve real benefits for consumers.
