Today's business and finance round up 1st June 2021
Today's issue - 🚗Why staying loyal to an insurer will soon cost less
1st June 2021
Good morning Hope you enjoyed the sun yesterday which was the hottest day of the year. New month, new forecasts from international economic organisation, the OECD. It's upgraded it's prediction of UK economic growth for 2021 from 5% to 7%. The UK's growth is set to be the fastest among the richest countries.
- Why staying loyal to an insurer will soon cost less
- Are British businesses being sold into the wrong hands
Friday's market moves
FTSE 100 0.0% 7,023
FTSE 250 +0.1% 22,684
Markets were flat on Friday in anticipation of President Biden’s first budget. He proposed a $6 trillion package intended to make the US more competitive by investing in infrastructure, education, healthcare and more, which would push government spending to its highest sustained levels since World War II.
Why staying loyal to an insurer will soon cost less
What’s going on
Loyalty is often seen as a worthy attribute but not when it comes to insurance, it's often very costly for consumers.
In a major overhaul, the financial services watchdog, the FCA, announced that insurers must stop charging existing customers more than new ones.
Why is this important
For years insurers have lured customers in with attractive prices in year one, before increasing them on renewal every year after, even when a customer’s risk has not changed. This practice, known as “price walking”, impacts millions of people in the UK who don’t shop around for insurance.
The FCA found that on average new customers paid £285 a year for car insurance, while customers who had been with their insurer for more than five years were charged £370.
In the home insurance market, new customers paid £165 a year for buildings and contents cover, while after five years, premiums had increased to £287.
The FCA estimate that by banning price walking in car and home insurance consumers will save £4.2 billion over the next 10 years.
About 10 million policies in the home and motor insurance market are held by people who have been with the same provider for five years or more, and many could see their premiums fall as a result of the ban, which comes into effect in January.
Price walking is not unique to insurance, it happens in energy, broadband and mortgages. It’s estimated that staying loyal to these sorts of providers costs the average consumer £900 a year. Even with the ban on price walking in insurance consumers are not necessarily better off staying with their existing insurer.
The message to consumers is clear - shop around for the best deals when your contracts come up for renewal, for example by haggling with your current provider or using a price comparison site.
Are British businesses being sold into the wrong hands
While many activities have been shut down for the past year or so, the buying and selling of companies has very much been open for business.
123 UK companies, including Asda and the AA, worth £36bn have been bought by private equity (PE) firms since the start of the pandemic. PE firms are spending at the fastest rate since before the 2008 financial crash.
But there is growing concern in some parts of the media and government that PE controls too many British businesses.
Refresher - what is PE?
PE firms are owned by a limited group of private investors (i.e. not publicly traded on the stock market).
Their business model uses a method called leveraged buyout where they buy companies using debt, and lots of it. Under new ownership the PE firm tries to accelerate the growth of the business by improving their operations.
PE usually owns the business for 3-5 years before either selling it on the stock market or selling to another PE or company.
Globally, PE owns businesses worth over $4 trillion.
The private equity industry has been under scrutiny for many years. Criticism comes when a business is saddled with so much debt that they cannot make their repayments, they then don’t have the cash to invest for the longer term meaning jobs can then be at risk.
One recent example is Debenhams. After over 200 years of trading the high street retailer closed its final stores last month. Its ownership under PE firms from 2003 to 2006 is often cited as the reason for its demise.
Debenhams owed about £100 million when it was taken private. But by the time it returned to the stock market in 2006, that debt had ballooned to more than £1 billion. In its weakened state Debenhams was unable to generate enough revenue to invest in the chain.
Supporters of PE say that it gives companies access to funds that they otherwise would not have had to grow. Private equity isn’t always bad but when it fails, it can fail big.
Stat of the day
A household with Amazon Prime membership spends twice as much ($3,000) per year on Amazon as a non-Prime household does
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