Market update: the end of the “dual pricing” model

A market graph showing growth

In recent months, you may have read about the Financial Conduct Authority’s (FCA) decision to end the “dual pricing” model in the insurance industry.

As you may know, this is when a company saves its cheapest deals for new customers, before switching them to a more expensive one after this initial period. Thankfully, in May the FCA announced that they would be banning this model as of January 2022.

Now that the time has finally arrived, many are interested to see what the results of this decision will be for both consumers and the industry at large.

Critics have long argued that the dual pricing model penalises loyalty

For many years, dual pricing or “price walking” has been a controversial practice in the insurance industry. Critics have long argued that this pricing structure unnecessarily penalises loyal customers.

The regulator argued that because of this practice, customers are forced to switch providers to avoid higher premiums. They were quoted in the Insurance Times as saying that the dual pricing system “distorts the way the market works for everyone”.

“Many firms offer below-cost prices to attract new customers. They also use sophisticated processes to target the best deals at customers who they think will not switch in the future and will therefore pay more” the FCA further explained.

According to figures published by the BBC, the regulator estimates that this move will save customers an estimated £4.2 billion over 10 years.

Many insurers are concerned about the impact this will have on their profits

The Chartered Insurance Institute (CII) has supported the move by the FCA, being quoted by Insurance Business UK as stating that their “Public Trust Index has long emphasised consumer sentiments around price”.

“Despite the work the market has undertaken to improve this situation, it is nevertheless welcome that the regulator has stepped in with a plan to end this practice once and for all,” they went on to say.

However, despite this blessing, many insurers are concerned about the impact this could have on their profitability. With many having to make large payouts in recent months due to the pandemic, it’s easy to see why they might be worried about these restrictions.

The move may contribute to the “hardening” of the insurance market

If the ban causes a fall in profits, one likely result is that it will contribute to the hardening of the market that we discussed in a previous article. This would mean insurers would be likely to raise their premiums and restrict the cover that their policies provide.

This means that not only could your insurance be more expensive, but it could be harder for you to make a claim when you need to.

If this proves to be the case, it could highlight the importance of working with a broker when seeking protection.

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