Mixing With Loyalty

    Price Walking, also known as the loyalty penalty or dual pricing, refers to when new insurance customers receive more competitive and cheaper premiums compared to long-standing customers renewing their cover.

    As of September 2020, the Financial Conduct Authority (FCA) described the practice as a “systematic scam” and announced a regulation that would forever change the way insurers provide products and services. In the past, insurers were able to adjust their pricing to be the most competitive in a bid to drive new business sales. Resulting in the cost of renewals and reward schemes being incredibly unbalanced when it came to the pricing of loyal customers.

    This has driven a culture among insurers to chase the aggregator sites, driving consumers to a different insurer every year, with over half of motor policies now being sold through comparison sites. Customers can access one website that offer comparable products from multiple providers, enabling them to compare policies to get the best deal. This change in customer behaviour has skewed insurers to value expensive to acquire, shorter term new customers more highly than retaining existing policy holders in a long term relationship over several years. If it sounds like the opposite of everything they taught you at business school, then you’d be right!

    The FCA found that:

    • On average, new customers pay £285 for motor insurance, while customers who have been with their provider for more than five years pay £370.
    • 10 million policies across home and motor insurance are held by people who have been with their provider for five years or more.

    What happens to the loyal customer?

    It’s been estimated that insurers spend £2bn per year attracting new customers. Over £0.1 billion of that is spent on comparison websites with consumers ultimately bearing this cost by paying higher premiums.

    Many customers are unlikely to switch because they:

    • Don’t know their renewal price isn’t competitive and typically price walk every year.
    • View price increases due to industry-wide cost increases and so underestimate the benefit of switching providers.

    What happens to the 'New' customer?

    • Over time, some of these consumers are charged prices that are substantially greater than those available if they were to switch.
    • Many consumers who frequently switch providers or negotiate their premium can get lower prices.
    • Shopping around and switching to avoid price walking takes time and effort and can impose unnecessary costs on consumers and firms.
    • People who pay high premiums are less likely to understand insurance products or the impact that renewing with their existing provider has on their premium.

    Customers no longer need fear unfair hidden insurance costs

    The FCA intervention means companies will have to align new business and renewal prices ending the ‘loyalty penalty” causing many effects in the insurance industry.

    To address this new regulation, UK insurers need to implement fundamental changes to their business model, using pricing algorithms and adapting to real-time changes in the market.

    The only way to stay ahead of the game is to truly understand market dynamics.

    Thankfully, lessons have been learned and organisations are demonstrating and delivering better overall value to consumers. Many companies are already using our unique whole market data to increase business whilst managing risk with laser-sharp accuracy.

    Using emerging technologies with AI and machine learning is undoubtedly the answer. Easy and immediate access to vital information will ensure a competitive status. This is where data and their valuable insights carry tremendous weight. The ability to see how a vehicle will be valued at any date in time is as important as its current market value.

    Cazoo Data Services helps vehicle insurance organisations see the full picture.

    Our award winning products are designed for the automotive industry. We offer whole market data with an unbiased data driven view allowing insurance companies full visibility of the entire market, enabling competitive offers.
    Cazoo Data Services brings innovative AI and data science-driven modelling to an outdated sector that relied heavily on manual editorial processes and opinion to establish current and future vehicle values. Our insurance products offer clear data and actionable insights that insurers love.

    To learn more about how we can support your car insurance business contact the team today.

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