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Customer loyalty gets its reward from the FCA

With so-called “price walking” now banned, insurers can no longer penalise loyal customers with higher annual rates, but what does it mean for companies who rely on consumers switching their deals?
Customer loyalty gets its reward from the FCA
  • Lack of price walking creates a problem for Moneysupemarket
  • Diversification key to its future success

The practice of charging steadily higher rates for customers who stick with the same insurer has caused controversy for years, not least because it seems to make little sense to penalise loyalty.

However, too often in the personal insurance industry, the writing of new business – and the top line revenue boost it generates – has taken precedence over the interests of existing customers.

After a long and wide-ranging consultation, the The Financial Conduct Authority (FCA) has now banned “price walking” and existing customers should now, in theory, be charged the same rates as those who join on new contracts. New rules also eliminate the longstanding paradox that new business could only be written at cheaper teaser rates because some customers, particularly the vulnerable and less tech-savvy elderly, were happy to keep paying higher premiums out of a sense of confusion over the terms offered, or a simple lack of practical internet knowledge.

While insurers all face higher reorganisation costs and tweaks to their business models, what is not clear is whether price comparison websites have now lost the major point of their existence. For companies such as Moneysupermarket (MONY) the FCA’s move presents management with an uncomfortable quandary; with less incentive to switch, how will the company generate the same fees from its lucrative insurance business? The company’s own annual report highlights the core of the problem – that “…the proposed ban on price walking may remove introductory insurance discounts and increase prices for regular switchers".

"This will in turn reduce one of the triggers for switching and the use of price comparison sites, although many other triggers, such as a car purchase, accident or penalty, will remain,” it said.

This suggests that management understands that the price switching phenomenon is as much the result of the insurance industry’s pricing foibles as a trend for tech-savvy consumers to take a strictly transactional view of the relationship with their financial service providers. But it has been notably tight-lipped about how it will adapt to life without the lucrative commissions that insurers paid it for teaser deals. That reticence is understandable. Insurance accounts for around 50 per cent of the company’s annual revenue and the same proportion of its profits.

Therefore, diversification seems to be the only way to go and it is notable that the company seems to be following a strategy of muscling in on other commission-based sources of income. In October, Moneysupermarket bought Quidco for a total of £101m, £87m upfront in cash and £14m deferred. The deal brought in 4,000 outlets that offer cashback services if consumers shop with certain outlets and brands. Another alternative doing the rounds is that the site should become more of an educational one-stop shop where consumers can inform themselves before making decisions on switching, with the resulting data potentially generating a handy income stream for the company.

Making a sound investment decision on Moneysupermarket is not straightforward as the company has also been trying to recover from the devastating effects of the pandemic on its travel insurance business. Although up slightly so far this year, the shares have been on a volatile ride and currently trade at a forward price/earnings ratio of 16, similar to levels last seen in 2015.

The business remains very capital-light, with a lowly-geared balance sheet and overall cash flow is forecast to recover by the end of next year. But the impression remains that a maturing market for price comparison has already plucked all the low hanging fruit, leaving Moneysupermarket with a long, hard slog ahead to regain its poise.