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GIPP and Insurance: How the industry is adapting

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When the General Insurance Pricing Practices (GIPP) rules came into place in January 2022, the industry braced for a turbulent few months. GIPP came into effect shortly after Covid-19 restrictions ended and just before inflation skyrocketed. It wasn't great timing.

But now that we've had a bit of time for things to settle down, what actually happened when GIPP came into place? What does it mean for the future of insurers, their consumers, and Price Comparison Websites (PCWs)? That's what I'll be exploring in this article.

GIPP was put into practice after the Financial Conduct Authority (FCA) conducted a market study on insurance policy pricing. The regulator concluded that insurers were unfairly raising prices at renewal and using discounts to attract new customers.

GIPP rules ensure renewal customers don't pay more than new customers, assuming they have the same level of risk. So if customer A has the same risk profile as customer B, they should pay the same premiums. That should be the case even if customer A has been with the insurer for 5 years and customer B has just signed up.

The FCA argued that while new business prices would increase, renewal price increases would drop significantly, meaning an overall net benefit for the customer.

There are 2 main reasons that the FCA introduced GIPP:

1. It eliminates the 'loyalty levy'

Prior to GIPP, customers would often get charged the so-called 'loyalty levy', paying more at each renewal and therefore paying a higher premium for no extra value. They were being penalised for remaining a loyal customer. While some people were used to shopping around for deals at renewal, many vulnerable and less tech-savvy customers weren't able to.

Of course, the new rules don't mean that customers' premiums will never rise. Premiums can still be increased based on an increase in risk, but this increase has to be evidence-based. Insurers can no longer price walk customers' premiums without a good reason.

The FCA argues that price walking distorts competition and increases cost for both customers and firms, leading to higher overall prices for consumers. This means there isn't fair value for general insurance products.

2. It protects vulnerable customers

The FCA defines a vulnerable customer as "someone who, due to their personal circumstances, is especially susceptible to harm - particularly when a firm is not acting with an appropriate level of care."

A 2022 survey estimates that 47% of UK adults show one or more characteristics of vulnerability. How does GIPP help vulnerable customers?

Vulnerable customers are less likely to use PCWs and shop around each year for the best deal on their insurance. They may not be tech-savvy enough to know how to switch policies and do research online, or they may not know about PCWs. As a result, they may miss out on new business deals and pay more every year at renewal.

With GIPP, this no longer happens. Vulnerable customers who have auto-renewal on their policy aren't penalised for being loyal, or subject to price walking.

Like most regulations, there are pros and cons to GIPP. On the one hand, it benefits those who don't shop around at renewal dates. On the other hand, overall premiums have increased for customers across the board.

Here are some pros and cons of GIPP, from a consumer perspective:

Pros: Better pricing, transparency and more flexibility

Fairer pricing: By eliminating the loyalty penality, customers aren't worse off financially just because they didn't look for a new deal. This is particularly important for vulnerable customers who might be less likely to renew and who are often victims of price walking.

Transparency on how premiums are calculated: Consumers now have a clearer understanding of how their premiums are calculated, with less discrepancy between the pricing for new and existing customers. More transparency means more trust in insurers and a higher perceived value of insurance.

More competition, meaning more flexible products: The changes sparked by GIPP mean that insurers can no longer rely on new business discounts to acquire customers and are focused instead on retention. This change of focus opens an opportunity for challenger insurance providers to enter the market and acquire new customers. These insurtech companies are often more customer-centric and more flexible, which allows customers to choose a more flexible product if they wish.

Cons: Fewer deals and increased premiums

Customers may overpay their policy: The lack of new business discounts means there's less of an incentive for consumers to shop around at renewal. However, this usually still means they're overpaying for their policy.

Increased premiums: Immediately after the launch of GIPP, there was a spike in prices across motor and home insurance. This was because insurers were bringing new business quotes at the same level as renewal quotes. Now, in mid 2023, prices have found a new, higher, normal. Motor insurance prices are 40% higher, and by December 2023 home insurance prices could be 30% higher compared to 2022.

January 2022 coincided with a time when inflation was on the rise and prices were going up. A combination of GIPP and claims inflation has translated into insurance costs increasing across the board for both new and existing customers.

Regular customers of a PCW like Confused.com are used to comparing their policies each year and making the most of new deals. If insurers no longer offer exclusive discounts for new business, the savvy consumer could end up paying more.

Keep in mind that this is happening amid high inflation and where car parts and labour cost more. So a customer looking to find a new deal in 2023 might be shocked at their insurance premium. This increased price is partly due to inflation and partly due to the lack of new customer deals caused by GIPP.

When GIPP came into place, insurers had to adapt their pricing strategy immediately. We saw a sharp rise in January 2022: 84% of car insurance and 90% of home insurance brands raised their prices. However, this calmed down a bit almost immediately. By February of the same year, 33% of motor brands and 43% of home brands had dropped their prices.

Now, as the market continues to course-correct - and with new customer deals becoming a thing of the past - how can insurers entice new business?

There are a few things that insurers are doing to adapt to GIPP:

Using more sophisticated risk assessments to get a better understanding of their customer

Since insurers can't depend on new business discounts to attract new customers anymore, they're placing greater emphasis on retaining their existing customer base. When they do acquire a new customer, they're taking more substantial precautions to ensure a suitable fit, thereby increasing the likelihood of a longer-lasting relationship.

Larger insurers are investing more in big data and machine learning to measure risk more effectively and get a better understanding of their customer. Another way to assess risk is to ask more detailed questions when a customer signs up.

Let's say that you're a home insurer considering covering a property in a high-risk flood area. You might ask if the homeowner has installed flood prevention strategies such as flood gates or replacing air bricks. This makes the risk profile more accurate, and also might offer the customer a more affordable premium.

Offering budget-friendly insurance products

In response to the new pricing rules, insurers are increasingly developing budget-friendly insurance products such as an 'Essentials' package or offering pay-per-mile or telematics insurance. They can be more attractive to consumers, especially those trying to cut costs in the midst of inflation.

It can also be a way to start fresh. GIPP only asks that new and renewal customers in the same risk categories pay the same premiums. However, new challenger insurance companies don't have historical data to establish their 'normal' price. This opens the door for new insurance products to undercut the competition.

Educating customers to increase retention

I think it's fair to say that the cost of living crisis has made the average Brit far more financially savvy. As a result, people are questioning the value of the services they use. Is insurance really worth the money?

That's where insurers need to better educate customers on the value of their policy. That means using less jargon, explaining in advance how the quote and claim process work. This can be done using a diagram to explain a question (for example, asking which lock the homeowner has with lock illustrations).

As a PCW, we rely on customers shopping around and buying new policies, so there was a worry that we might see a drop in engagement. And when GIPP first hit, this was true - people were shopping around less.

However, this has now readjusted, and our overall engagement is back to pre-GIPP levels. This is likely due to customers looking for ways to reduce bills and shop around for better deals.

Here's how we're adapting to GIPP and what we're doing to help customers during the cost of living crisis:

Negotiating discounts with insurers so customers can still get deals

While new customer offers are rare, we actively invest our money into our relationships with insurers to negotiate discounts for new business and renewal customers. By doing so, we can help offset the increased cost of insurance for our customers in a time of financial instability.

Adding new, customer-centric and affordable brands

There are constantly new, more customer-centric challenger insurance companies entering the market. At Confused.com, we're continuously updating our platform to include these new players. By ensuring that customers have access to the broadest possible range of quotes, we can make it easier for them to find a policy that suits their needs at the best price.

Asking customers more questions so insurers get a more accurate risk profile

As the first touchpoint for a customer, we want to give as much detail to our insurance partners as possible. We ask customers for more details to provide as much detail on risk as possible.

For example, our comprehensive quote process for homeowners means we're still able to offer prices even though the property has a history of being affected by natural disasters. Last year, we had 15,000 quotes where the customer had had flooding in their property. We were still able to provide 16 different prices from separate providers due to our comprehensive questions.

The introduction of GIPP has transformed the insurance sector. By banning price walking, it helps to protect vulnerable customers by promoting fairness through transparent pricing. However, customers accustomed to yearly new customer offers may see their premiums rise.

Our industry can help make this a smooth transition by finding new ways to measure risk and promote engagement with our customers.

To stay in the loop about how the industry is adapting, learn more about what we do at Confused.com.

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