An important development has occurred in the insurance sector which could have a major impact on the sector in the medium term.

Aviva (AV.) has announced that it will launch a new subscription-based insurance product called AvivaPlus with several novel features.

First the customer will be able to choose the level of cover and add or remove features during the policy life with no administration fees. They can also pay in monthly instalments without having to pay interest.

Most significant is the guarantee that when it comes to renewing a policy existing customers will get the same or an even better price than new customers.

One of the most common gripes among insurance customers is that loyalty isn’t rewarded with renewal quotes routinely priced above the existing quote despite the cover being identical.

This issue prompted the Financial Conduct Authority (FCA), a regulator, to launch a study of the general insurance market in October looking at how firms charge their customers and the ‘fairness’ of pricing.

General insurance plays a key part in the UK economy generating close to £80bn in premium revenues each year. The FCA wants to make sure that insurers are providing competitive and fair prices to their customers.

It is particularly keen to look at renewal practices as it says it has identified ’potential non-compliance’ by some firms when it comes to the transparency of renewal quotes.

The CEOs of the general insurers have been asked to submit their views to the FCA by the end of January and it will then publish a preliminary report next summer.

Aviva’s move to guarantee prices is surprising given that UK general insurance isn’t its core business. In the six months to the end of June UK car and home products generated just 20% of profit with life insurance generating almost all the rest.

By being the first to act it obviously hopes to gain an advantage over its smaller rivals. Also by moving ahead of the regulator it is able to pitch it as a response to customer demand.

The smaller UK general insurers like Admiral (ADM), Direct Line (DLG), Esure (ESUR) and Hastings (HSTG) will have to respond in kind as they are almost entirely dependent on car and house insurance and they can’t afford to lose customers.

However the issue for the smaller firms is that some of them already lose money on selling home insurance and they don’t have the resources that Aviva has to absorb lower fees and premium income if they want to match its offer.

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