It’s only natural to get exasperated when a new term comes to the market purporting to describe an activity that is common but has no previous label to describe it? “Price walking” is one such depiction.
Price walking was coined in the insurance world to portray the situation where policyholders are charged more at each annual renewal date even though the risk to the insurance company is the same. Consider a typical house insurance policy when the rebuilding costs and the contents’ cover remain unchanged; and yet the premium increases by 5%. Insurance companies typically offer increased overheads and general market claims as earnest excuses for the premium increases. But everybody else has their doubts.
The doubters include the UK Financial Regulator, which this month banned the practice of price walking. On first glance, this might appear a positive consumer move; but as with all regulatory interventions there are consequences – and some will negatively impact consumers, unintentionally it seems.
To understand the dynamics, we have to examine the motives of the business models of insurance companies. Bizarrely, in general, they do not reward customer loyalties. Policyholders who remain with the same insurers year after year have a habit of becoming lazy. This inertia is seized upon by unscrupulous computer algorithms resulting in a ratcheting up of costs for loyal customers.
But the wider business model also incorporates teaser pricing to attract new customers – offering substantially discounted rates for new business. This is a bone of contention for consumer groups, who point out that it discriminates against existing customers, who are not offered such discounts. Insurance companies have been slow to develop alternative business strategies in the past – but the change in UK regulation has now forced their hands.
With price walking banned, the companies will be unable to secure annual price increases from existing customers. This will curtail their offers of discounted pricing to new customers – resulting in a re-shaped business model. The new structure may settle down in time, but the trauma of regulatory intervention will have negative consequences upfront.
MMPI has long argued that concentrating on price alone is a poor means of judging value. Consumers who trawl online at renewal time desperately seeking the lowest price are misguided. Price is but one element in the equation, albeit we accept, an important one. But insurance is about much more than securing a policy document for the lowest price. Insurance comes into its own when we need to make a claim. The claim experience and the general level of service quality are further important elements to consider.
MMPI offers a far broader service capability on all of its insurance products. We can overcome price walking by constantly scouring the market for better value. We can recommend discounted pricing where we believe it offers longer-term worth. But above all else, we can educate everybody on the importance of a “good” insurance policy – one that meets our customers’ needs and one that provides significant cover at a reasonable cost.