Encouraging Consumers to Act at Renewal Evidence from Field Trials in the Home and Motor Insurance Markets

43 Pages Posted: 9 Mar 2017 Last revised: 5 Apr 2017

See all articles by Paul Adams

Paul Adams

Financial Conduct Authority

Robert Baker

Financial Conduct Authority

Stefan Hunt

Financial Conduct Authority

Darragh Kelly

Financial Conduct Authority

Alessandro Nava

Financial Conduct Authority

Date Written: December 24, 2015

Abstract

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 conduct 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. The evidence is compatible with Gabaix and Laibson’s (2006) ‘shrouded equilibrium’ model, where consumers do not anticipate that they will purchase additional products at high prices when they are purchasing the original product (although we do not have evidence that firms are making overall excess profits). 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.

Keywords: Home Motor Insurance, Inertia Beavioual Economics, Matched Survey RCT

JEL Classification: C93, D03, D04, D14, D18, D83, G18, C21, C20, C54, C83

Suggested Citation

Adams, Paul and Baker, Robert and Hunt, Stefan and Kelly, Darragh and Nava, Alessandro, Encouraging Consumers to Act at Renewal Evidence from Field Trials in the Home and Motor Insurance Markets (December 24, 2015). FCA Occasional Paper No. 12. Available at SSRN: https://ssrn.com/abstract=2858148

Paul Adams (Contact Author)

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Robert Baker

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Stefan Hunt

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Darragh Kelly

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Alessandro Nava

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

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