Thursday 3 June 2021

Markets without consumers

Last week the FCA confirmed that it will ban the so-called 'loyalty penalty', where existing customers end up paying more than new ones, in relation to house and motor insurance. This feels like quite a significant intervention to me.

It's interesting to note the type of consumers getting fleeced under the existing regime. Broadly elderly and low income are less likely to switch, and therefore more likely to fall victim to 'price walking'. So the policy is essentially favouring these types of consumers over frequent switchers who have benefited from the lower premiums charged to new customers. (This is one reason why I think ESG folks ought to be more interested in competition policy and market regulation.) 

Even on its own terms this type of intervention throws up some interesting questions. It takes some responsibility off the customer for having to shop around, and it means that they don't get financially punished for their inertia. I imagine this is what a lot of insurance customers want, since they don't enjoy having to go through the annual renewal hassle and the product is not one they would choose to buy unless necessary.

But essentially this does mean that we're moving to a market - in the financial services sector - where the benefits of shopping around can be trumped by other considerations. That's OK with me but it's going to trouble others.

On this point I came across this piece from a couple of years back by the always interesting free-market policy wonk Sam Bowman expressing concern about the reduction in incentives to switch provider that result from charge caps and similar interventions. This bit sticks out: 

[C]ustomer switching is good for efficiency overall. Customer switching forces companies to compete with each other and try to find ways of doing business more cheaply. Diminishing the rewards for switching means that fewer people will be willing to shop around, which weakens the incentive these companies have to improve.

This is a pretty standard defence of the merits of competitive markets. It could also be framed as an argument that we want customers to do some work to help providers get better. Do your bit to improve the car insurance market, lazy switchers!

This in turn reminded me of this section on the energy market in this fascinating report on the loyalty penalty commissioned by the CMA.  

Energy is essentially a homogenous good, so it is easy for regulators to determine the optimal offer in the marketplace for a given consumer. Whenever this is the case, however, one may argue that there is little economic purpose to consumer choice. If Ofgem can determine the optimal choice for each customer, why have customers go through this apparently difficult or annoying procedure themselves? Ofgem in a different market design could buy energy from the cheapest supplier and simply pass it on at average cost to customers, thereby keeping competition among energy suppliers alive while circumventing the retail market.

To be honest I find 'shopping' for insurance "annoying", if not particularly difficult, and my experience of numerous insurance 'products' that I've never needed to claim again is that they are "homogenous" too. In practice, I assume like most people, I stick my car details into a price comparison website, play around the filters marginally and then scientifically pick the 2nd or 3rd cheapest because I'm a bit wary of the offer from the firm I've never heard of. 

I'm not dealing directly with any of the insurers and I'm not checking any of the prices. Essentially a privately owned algorithm is doing that for me and somewhere in the system I'm paying for that service. The relationship between the platform and the insurers is already far more important than my individual decision to switch. (In fact, like with Hargreaves Lansdowne and Woodford, I wonder how much the platforms shape customer choice as much as facilitate it.) 

In the big data era it strikes me as extremely unlikely that an ordinary punter, no matter how well informed, is ever going to be evenly matched against companies that have always amassed and crunched data for a living and now have much enhanced computing power to do it. Essentially price comparison sites are our hired guns, battling it out on our behalf because we basically can't do it ourselves. I'm not sure how much individual consumers matter anymore - in terms of their impact on providers - in markets like insurance or energy in this scenario. Their interests are represented by algorithmic proxies. (As an aside, in some free market wonkery consumers seem to be somewhat analogous to the working class for the Left. If only they would realise their true interests they would create real change, but instead they're a constant disappointment despite repeated attempts to organise/activate them.)  

In the medium term, it's possible that scrapping the loyalty penalty is the thin end of the wedge. There is an expectation that premiums will rise for new business to offset the 'cost' of not price walking existing customers. If it looks like some insurers are using this as an opportunity to take a bit extra could we see price caps like those in the energy markets?

Longer term I do wonder if we might head in the direction suggested by the CMA paper. I've already outsourced the job of checking prices to my algorithmic proxy, why do I need to be involved in the process at all? If someone else can do a better job of assessing my needs why bother sustaining the myth of active consumers? In fact, why not, like the CMA paper suggests, make the state our proxy in the energy market? And why not insurance, and what else...? In terms of energy, we could imagine something like the rail reforms recently announced. We might have a Great British Energy as a national buyer that negotiates with the providers on our behalf and in turn we pay bills to GBE every year. (My personal preference would be to take the whole thing back into public ownership but hey).

The insurance market is obviously more complicated, but I do wonder with motor insurance if someone couldn't come up with a way of syncing road tax with basic mandatory coverage. Maybe the 'market' then shifts to extras like replacement car etc. Brings a whole new meaning to National Insurance...

I think there's a lot here.

PS. I think there is an interesting potential coalition in big P politics. I strongly doubt the mix of consumers who are more likely to get fleeced is unique to insurance. Therefore there seem to be some real shared interests between retiree and low income consumers. It's notable that the Daily Mail was very vocal in opposition to the loyalty penalty. That ought to prick up the ears of people with an interest in further reform.