Home Business The FCA Isn't Going To Save People Money On Insurance

The FCA Isn’t Going To Save People Money On Insurance

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The Financial Conduct Authority has a bad case of the screaming abdabs here. They’re insisting that there should be no introductory offers on insurance contracts.

That’s not quite how they’re putting it of course, instead they seem to think that it’s naughty that new customers pay a lower price than those who simply roll over their contract with the one insurer over the years. Their claim is that this will save people lots on their insurance. Of course, it’ll make no difference in aggregate at all. It’s just change the mix of marketing costs.

Anyone renewing their home or motor insurance should pay no more than they would as a new customer, under a proposed shake-up of the sector.

The Financial Conduct Authority (FCA) said the “radical” reforms would save consumers £3.7bn over 10 years.

If adopted, the plans would see customers, old and new, buying on the same channel getting the same price.

The cost of supplying insurance to that entire customer base is the cost of supplying insurance to that entire customer base. No one is alleging that insurers are making excess profits at any point in the chain. Indeed, many insurers make a loss on their underwriting and make up the difference on their investment pile – the float – to reach those normal returns upon capital.

Insisting that prices are equalised across the customer base doesn’t change all of that. So, it’ll not change the aggregate cost of insurance either.

The other way to look at this is that this is a marketing expense. All those insurers are in competition with each other. There are varied ways of getting people to buy from you. Stick the company name on football shirts and no necks will advertise for you on their replicas. Pay a fee to a comparison engine. Promise a commission to that tedious twat at the golf club. Offering a reduced price for the first purchase is just another one of these marketing expenses. Ban this one and that competition will mean spending upon the others rise.

Because that’s how competitive markets work. Indeed, we can measure how competitive the insurance market is by looking at the difference in premiums demanded from a new as opposed to an old customer. The bigger that difference the greater the scramble for that as yet uninsured punter.

We can even apply this new model more generally. Peeps shouldn’t pay more for their second purchase than their first? So that’s a ban on 50% off a new brand of coffee pod, isn’t it? And there does come a point – one we’re past now – when we tell these people to bugger off, doesn’t there?

There aren’t even going to be any savings, the costs are just going to be redistributed.

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3 COMMENTS

  1. The important factor here would be how big the difference has to be to make people feel it’s worthwhile to switch.

    I do remember when my dear father died. The family said I could use the house, so I rang up Suncorp or whoever they were to switch the house insurance to my name. The phone began to say, ‘Your call is important to us etc.’ I’d had more than enough by then so I rang up the RACQ and actually contacted a human being. She agreed to switch the insurance to the RACQ. It’s still with them.

  2. The assumption that all these twits make is that all these dictates will transfer wealth from the shareholders to the customers rather than adjust the distribution of profit sources by customer type (in this case by eliminating the discount offered to new customers).
    However an insurance company that fails because it is unprofitable is significantly worse than a chocolate teapot and shareholders will not stump up for yet another “Rights Issue” after they have bailed it out too many times, so the idea that “we must always confiscate shareholders’ profits because any profit is an excess profit” is a route to disaster since bureaucrats *never* envisage the next unexpected event. For instance, yesterday Beazley announced a $170m, net of reinsurance, *increase* in the cost of its Covid-19 claims for event cancellation costs due to the re-tightening of Covid-19 restrictions although the FCA didn’t envisage *any* cost of Covid-19 for months after it started

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