California auto insurers overcharged $5.5bn during pandemic
The pandemic’s impact on driving is well known: with working from home broadly implemented and all non-essential stores closed, people had fewer reasons to travel by car.
A noticeable consequence of this has been the proliferation of pay-per-mile insurance providers, which allow customers to save money by only paying for the exact distances traveled. It would seem apparent, therefore, that less frequent car travel would result in fewer claims and therefore cheaper policy rates.
However, focusing on the Californian market, the Consumer Watchdog found that auto insurers did not reduce costs despite an 11.8% reduction in company loss ratios. As such, drivers have actually been overcharged a total of $5.5bn.
Insurance payouts withheld
By California law, insurance companies must calculate their return on net worth by premiums and investment income. In this instance, the final figure was twice the annual maximum allowed.
Insurance Commissioner Ricardo Lara has apparently been aware of this situation since April 2020 and issued bulletins for consumer refunds accordingly. Insurers were granted the ability to calculate themselves how much they should return, yet the top 15 companies (representing 70% of the US market) have only returned $1.9bn (34.5%) of total owed.
Although the report stated that data of any 2021 overcharges is not currently available, the pandemic’s pronounced effect on traffic for the early part of the year suggests the $5.5bn total could grow significantly.
Post-COVID: Evening out the score
Carmen Balber, Executive Director of Consumer Watchdog, tacitly condemned insurers for obstinately holding on to money that is not rightfully theirs.
"Asking insurers to calculate their own refunds hasn't resulted in consumers getting what they're owed. Insurance companies are hanging on to billions of drivers' dollars that should be helping Californians get back on their feet as we emerge from the pandemic,” she said.
The strain on insurers and reinsurers during the pandemic has been palpable; the inclination for insurers to retain funds to weather the storm is understandable, but from a customer relationship perspective unacceptable.
Insurance companies are required to justify their rates as a legal measure against price gouging. However, from a purely empathetic perspective, companies must realise that their customers are also struggling and need support from their policy providers now more than ever.
"Many Californians are struggling to pay their bills in the aftermath of the shutdown. Insurance companies cannot be allowed to keep billions in illegal overcharges," concluded Balber
Lloyds Bank fined by FCA for misleading insurance customers
In many ways a continuation of the Financial Conduct Authority’s (FCA) quest to eliminate ‘price walking’ from insurance, Lloyds Banking Group has been heavily penalised for seemingly misinforming their customers.
Specifically, nine million home insurance policyholders were contacted and encouraged to renew for the chance of getting ‘competitive prices’. Furthermore, approximately 500,000 customers were promised ‘loyalty discounts’. According to the FCA, both claims were unfounded and false.
The £90mn fine leveled at Lloyds is the largest since Standard Chartered Bank was ordered to pay £102mn in 2019 for breaching money laundering regulations.
It remains purely speculative about how volitional this error in communication was. Nevertheless Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, stated the institution would not tolerate any situation with the capacity to harm customers.
“Firms must ensure their communications with customers are clear, fair and not misleading. [Lloyds] failed to ensure that this was the case.”
The bank had largely started to remove phrases like ‘competitive prices’ from its official communications since 2009. However, the FCA found that renewal forms still included such wordings as late as 2017.
Since the renewal prices offered were likely to be higher than those offered to new customers, or even if the policyholder switched provider, Lloyds was in fact deceiving the recipients of these communications.
Battling against insurance price walking
According to reports, 87% of customers offered the aforementioned ‘deals’ renewed. Although the FCA will not be ordering Lloyds to reimburse them, the bank itself has paid out £13.6mn to 350,000 customers by way of compensation.
“We’re sorry that we got this wrong. We’ve written and made payment to those customers affected by the discount issue and they don’t need to take any further action,” said a spokesperson from Lloyds.
“We thank the FCA for bringing this matter to our attention and since then we’ve made significant improvements to our processes and how we communicate with customers.”
As the battle to end insurance price walking continues, companies must be careful to establish a new relationship with their customers.
With instances like California auto insurers overcharging $5.5bn during the pandemic still fresh, the public’s perception of the traditional industry could quickly sour and contribute towards its decline in favour of digital-first competitors.
To recover, incumbent insurers will need to price their policies more fairly, make cover management easier, incorporate tech-based solutions where appropriate, and consider customer loyalty as a prize and not a right