This paper presents the results of field trials testing the potential for improved renewal notices to encourage consumers to switch or negotiate their home or motor insurance policy at renewal.
We have published this Occasional Paper alongside CP15/41: Increasing transparency and engagement at renewal in general insurance markets[2].
Summary
The majority of British home and motor insurance policies automatically renew annually, at a price chosen by the provider, unless consumers actively switch or negotiate. Auto-renewal can be beneficial to consumers for example by ensuring continuity of cover. However, the media, consumer groups and politicians have expressed concern that some consumers, often the elderly or vulnerable, pay high prices as a result of automatic renewal.
In collaboration with one home insurer and two motor insurers, we conducted field trials to test the potential for improved renewal notices to encourage consumers to switch or negotiate their policy at renewal. We also use bespoke survey data linked to administrative data from a home and motor insurance provider, as well as aggregated data on price levels from several other insurance providers.
Aggregated data from three home insurance providers suggests that average premiums increase in the first five years until they plateau. Our survey evidence for a home insurer suggests that customers underestimate the benefits of shopping around and overestimate the amount of time it takes. Our evidence for the motor insurance providers varies by insurer, with consumers showing fewer signs of inertia and some firms showing little evidence of price increases at renewal.
We find that putting last year’s premium on renewal notices causes between 11% and 18% more consumers to switch or negotiate their home insurance policy. The effect is larger for consumers offered higher price increases at renewal. We find little evidence of price increases at renewal for customers at the two motor insurers, and including last year’s premium has no effect. Other changes to renewal notices, including simplifying renewal notices, sending information leaflets, and sending reminders have little or no impact on consumer behaviour.
Authors
Paul Adams, Robert Baker, Stefan Hunt, Darragh Kelly and Alessandro Nava
Paul Adams, Stefan Hunt and Darragh Kelly work in the Behavioural Economics and Data Science Unit of the Financial Conduct Authority. Robert Baker and Alessandro Nava work in the Chief Economist's Department of the Financial Conduct Authority.