Seismic change in 2022
The big challenge facing personal lines insurance providers is positioning themselves for success in a changing environment a year into the implementation of the Financial Conduct Authority’s (FCA) dual pricing rules.
Over the past 15 years, price comparison websites (PCWs) have come to play a hugely important role in distributing car and home insurance products throughout the UK. In this environment, insurers and brokers needed to focus on offering competitive pricing, and to do this they had to significantly discount their quotes for new business, thus encouraging significant customer switching. As PCWs grew, switching levels in the UK expanded considerably when compared with the pre-PCW era, an expansion which also surpassed that of other countries.
The FCA’s general insurance pricing practice implementation since January of 2022 has now removed the ability of providers to price-discriminate based on tenure of the customer.
While the first year of implementation has been choppy for other reasons — namely claims inflation, supply chain issues, Covid-19 recovery and CLA impact — it is already clear that the industry is heading into an environment where customer switching is lower, thereby reducing the addressable “flow” for providers to grow their businesses. Our expectation is that all else being equal, switching rates could decline substantially over the next three years and move closer towards international benchmarks.
The year ahead
We do not expect PCWs to be laissez-faire about these changes — there is likely to be significant change to their strategies within this new switching environment, as well as a reaction to the greater participation from Amazon which has entered the space as recently as October 2022. There is a range of different outcomes to the distribution environment possible here, from changes to pricing levels, different pricing structures altogether and evolution of co-funding constructs, to consolidation in the PCW sector itself.
Providers facing this changing distribution environment will need to carefully read the tea leaves to understand both the winning attributes and the pitfalls to avoid in the context of their own starting points. This may very well require a white-sheet-of-paper approach to rethinking routes to market for players, much like Direct Line did in the 1990s.
The regulator’s consumer duty implications will also be continually scrutinised and implemented, potentially changing the economics of businesses across risk and non-risk income lines.
Furthermore, we expect that some providers will struggle to win in this environment and that 2023 will accelerate consolidation in the sector amongst brokers and insurers in favour of scale and tech-enabled platforms. For well-funded participants, this is also an opportunity to consider inorganic growth.
How we are helping clients
Dealing with change is an important part of our work as strategy consultants. Our ongoing work in the sector enables us to understand the range of new normal possibilities in this environment, supported by analytical rigour, understanding of consumer behaviour and deep research into competitor strategies. Our insights have empowered our clients to understand what it takes to succeed.
We have also been involved with shaping the M&A strategies that have emerged as our more forward-looking clients consider the opportunities to improve scale in their respective value chain positions.
Why L.E.K.?
We have been advisors to the insurance sector for over two decades — giving us a clear view of the industry’s growth and the changing strategies required to win.
Our work for investors and shareholders, both in the UK and further afield, brings further insight as well as a rare breadth of experience and perspective to our work.
And finally, our ability to fuse experienced strategic expertise with an analytical, data-led approach tailored to our clients’ circumstances gives them the edge they need to thrive in challenging markets.
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