Why the FCA fair price ruling will drive product innovation and benefit consumers

The FCA consultation on fairness in pricing is closed. The industry now knows when they must have new controls, systems, and rules in place by September, and be ready to go live with new price and auto-renewal processes at the end of the year. 

So, insurers are now firmly on course to ensure pricing for new and existing customers must be the same, ending a pricing partition that has persisted for years.

Obviously, this shakes up the stakes for differentiation as well as how an insurer maintains and, ideally, maximises profitability. The latter can come from their continuing investment in digital processes to streamline operations and costs, while improving their understanding of customer needs through smarter data analytics.

Yet, the challenges created by the FCA ruling should lead many general insurers to accelerate how they innovate with new products and services that offer greater value to all their customers, and be more modern, attractive brands.

An example of this can be seen in how the Vitality brand is spreading its wings from life and health insurance into an area of general insurance where the customer commonly drives most aggressively for the lowest priced policy possible, namely car insurance.

So what, you might say? What is striking here is that Vitality’s motor insurance policy will be based around nudge theory and telematics, and not price. They describe it as their unique Shared-Value Insurance Model.  They offer a similar product already in the South African market through their parent company, Discovery, where smart technology is used to promote improved policyholders’ behaviour with a series of app-based rewards. For example, South African policyholders who drive well get monthly, even weekly, rewards like cashback on fuel or discounts on taking their car to the garage.

Since these are strong, not merely token rewards (20 percent off getting your car serviced is not to be sneezed at) they are not dissimilar to exclusive new customer low price offers that have helped insurers to secure new business before the FCA ruling. This has the dual benefit in achieving that Holy Grail by enabling an insurer to engage with their customer positively on a regular basis. Unlike other motor telematic insurance products, the “black box” in the car is not being used to “judge and punish” but to reward good driving behaviours. In fact, for underwriters, this makes for ideal policyholders, good rather than poor drivers, with reduced potential claims risks.

Vitality, and its insurance carrier partner Covéa, seem to be turning motor insurance on its head and providing a model for all general insurance that is better aligned to the post-fair price world that will dawn this year.

There are challenges, of course. In the 2020 Censuswide research into UK customer attitudes to insurers, customers were asked about their expectations on how insurers might use smart devices to monitor their behaviour, property, and possessions. While almost half (49 percent) said they would want access to them, most (81 percent) expect a lower premium as a result.

So, will the rewards model be attractive enough?

Vitality clearly sees a great opportunity, with proven success in the South African market in their back pocket, and their existing UK life customers to cross-sell to. The proof will be in how much business they scoop up this year. However this plays out, it will be an important test case for the industry as a whole.