Price walking happens when an insurer continues to increase prices at renewal for loyal customers without a change in the customer’s risk profile.
Price walking isn’t a renewal increase due to a customer making a claim or a change in circumstances. It happens when the insurer increases prices for customers to maintain their margins.
The Financial Conduct Authority (FCA) investigated price walking by conducting a study of the UK market in 2018. Fast forward to January 2022, and they introduced the General Insurance Pricing Practices (GIPP) to combat systemic price increases for loyal customers.
Why do insurers engage in price walking?
To reduce their risk profile across all customers
The main reason insurers price walk – according to them – is to reduce risk.
Every year, insurers adjust the risk profile of a customer based on their circumstances. This could be because the customer has made a claim or they’ve changed their job situation. If, for example, a natural disaster such as flooding occurs in your area, then your home may be deemed high risk and your premiums may increase.
Insurers might increase prices at renewal to protect against this type of risk.
To manage high acquisition costs
Despite all the reasons insurers gave for price walking, the results of the FCA in-depth study were undeniable: 6 million policyholders were paying over 50% more than those with a similar risk profile.
Based on the study, the FCA found that the main reason insurers price walk is to maintain their margins. As insurance products become increasingly commoditized, insurers’ main pricing strategy is to price policies at a lower rate than their competitors when attracting new customers.
Insurers know that a certain portion of their insurance customers don’t shop around at renewal. Research conducted for Mintel’s Price Comparison Sites in Financial Services – UK, 2021 shows that 44% of adults used a price comparison site to research car insurance and 30% researched home insurance. A potential 56% of adults not shopping around for their car insurance is a huge number.
Why is price walking a problem?
As a customer, you’re paying more for no additional value and are being penalized for being a loyal customer. If you’re tech-savvy, then you know how to change car or home insurance and take advantage of new business discounts. But for those customers who don’t take the time to shop around, they end up paying more every year and suffer a loyalty penalty.
In other industries, loyalty is usually rewarded. But as a customer who has to pay more every year without a valid reason, there’s no incentive to remain loyal to the brand.
How GIPP has impacted the insurance industry as a whole
In January of 2022, the FCA launched GIPP, making price walking in general insurance illegal. Part of the new rules is a ‘pricing remedy’, which asks insurance companies to offer consumers a price that’s no higher than the equivalent new business price (ENBP).
The result is that firms can’t increase prices for renewal customers without also increasing the prices they offer new customers.
To ensure compliance, insurers need to submit an annual report where a company leader must state that they’re adhering to these new rules.
How has this impacted consumers and the insurance industry? In 3 key ways:
1. Overall prices are higher
Immediately after the launch of GIPP, there was a spike in prices across motor and home insurance. Insurers were bringing new business quotes to 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.
We’re now in a situation where customers feel that nothing has really changed despite the introduction of the GIPP rules which should have positively impacted their spending.
2. Price doesn’t play as big a role in customer acquisition
According to research from Globaldata, we’re already seeing the diminishing importance of price in the insurance markets. The difference between the largest and smallest average quote for a car insurance policy dropped from 37.7% in 2021, to 11.4% in 2023.
Since insurers can no longer issue large new business discounts to attract customers, they need to find new ways to differentiate. Some examples of putting this into practice is by offering more flexible insurance products or servicing a specific segment of the market.
I believe we’re going to see insurers shift away from acquiring new customers, and more firms focusing on retaining existing customers to avoid reacquisition costs.
3. There are savings, but margins are lower
The FCA says that consumers will save £4 billion in the next 10 years thanks to GIPP. But those savings will be from not paying more at renewal rather than switching providers. Those savings may also turn out to be vastly lower if prices continue to rise at the rate they have in the last 12 months.
Pre-GIPP, consumers saved most of their money by switching insurers – but this is no longer the case. Customers can still save money by switching now, but they might not save as much.
It still might be worth it for some customers, but for others it means they’re more likely to remain loyal to their insurer. Instead of switching, they might try to negotiate on pricing, removing price comparison websites (PCWs) completely from the equation.
By closing the gap between existing customers and new business, PCWs might not have as big a role in the customer's buyer journey.
So what is the role of PCWs in a post-GIPP world?
The role of PCWs and Confused.com in a post-GIPP world
Communicate the impact of regulation and protect customers
GIPP was supposed to make insurance pricing more customer-centric. But with claims inflation combined with the cost of living crisis, it’s likely most customers haven’t noticed a difference. In fact, with claims inflation, it’s possible that most customers feel that insurers are serving them worse than before.
As a PCW, we can play the role of educating customers on how GIPP has impacted their policies. We can also explain why a ban on price walking benefits them in the long run, and what they can do to save money moving forward.
At Confused.com, we can and will still prioritize playing our role as consumer champion. That means protecting customers from overpaying and making sure insurers justify the value of what they’re charging.
Encourage new, more customer-centric, insurance companies
When a new insurance company enters the market it can take years to acquire a consistent number of customers. By working with a PCW, new entrants can start acquiring customers instantly.
As a PCW, we can increase competition in the market by adding new, more customer-centric brands to our panel. This ultimately benefits the customer, who can then access more customer-centric policies and holds incumbent insurers accountable to stay relevant and innovative.
With insurers focusing less on acquisition and more on protecting their back book, there’s a chance for new entrants that are more customer-centric to enter the market.
Add value in other ways than price
If the savings to be made when switching insurance are no longer there, then what’s the role of a PCW?
This is where PCWs need to look for ways to add value that isn’t just focused on price. As a platform with many third-party integrations and a huge amount of data and insights, there are many ways we can improve customer experience.
Some examples of ways that we’re doing that at Confused.com is:
- If someone has already completed a quote with us for car insurance, we help them get a home insurance quote and pre-fill most of their information
- For those who have our app, we remind them when to file for their MOT or renew their policies
- We educate and inform customers on new regulations, or how to combat current events like the cost of living crisis
As a PCW, we still play an important role as the consumer champion. When insurers engage in unfair pricing practices, we advocate on behalf of the customer and ensure fair business practices.
Engaging in price walking proved to be detrimental to insurance customers, particularly the vulnerable and elderly. With GIPP, customers can rest assured they’re not being penalized for being loyal. As a result:
- Overall prices for policyholders are higher
- Price is less of a differentiator
- Customers no longer make large savings when changing insurance
I don’t believe, however, that PCWs are less relevant. Now, more than ever, our role is to educate and protect customers, encourage newer entrants and find other ways to add value to our relationship with customers.
If you want to learn more about Confused.com and our history as a consumer champion, read about our journey.