Context
When the FCA launched its market study, it was concerned that premium finance did not offer fair value to customers and that competition may not be functioning effectively. In this update paper, the FCA summarises and explains its initial findings. Alongside this interim report, the FCA has published three papers and a technical annex which provide details of the initial findings (‘The UK Market for Premium Finance’, ‘How and why Consumers Use Premium Finance’, ‘Profitability of Premium Finance’ and ‘Premium Finance Market Study Technical Annex’).
Key points to note and next actions
The FCA specifically looked at the effect of the GIPP remedies on:
- tenure-based price walking (where firms raise prices for renewing consumers each year);
- prices;
- product quality; and
- switching costs.
Overall, the FCA has found that:
- its reforms were effective in reducing price-walking practices;
- prices for existing customers remained stable in home and rose only slightly in motor, despite high inflation in recent years; and
- prices for new customers have increased in both markets to reflect risk more appropriately.
In relation to home insurance, the FCA:
- expected the price gap between existing and new customers to reduce;
- found this gap has almost halved (£95.38 to £49.17) and average prices remained stable for existing customers; and
- no statistically significant evidence of a causal link between our rules and price changes in the home sector.
In relation to motor insurance the FCA:
- expected insurers to charge new customers more than existing customers as they are, on average, associated with higher risk levels;
- found, after its reforms were put into place, the price for new customers rose by £111.14 in absolute terms, but the price for existing customers increased by only £22.71, despite significant inflationary pressures on motor insurance prices; and
- found statistically significant evidence of £1.6bn of consumer savings over a 10-year horizon as a result of the GIPP reforms in the motor market.
The FCA welcomes views on this Evaluation Paper, and any comments should be sent to evaluationpapers@fca.org.uk.