General insurance, pricing, and ever-increasing scrutiny

Posted: 23rd May 2019

If the regulator’s spotlight is aimed in any particular direction at the moment, it is in the direction of General Insurance firms.

An increasing level of FCA and Financial Ombudsman Service focus has seen pricing practices and affordability assessment heavily scrutinised of late. Not only that, media attention has brought several issues within the sector to public attention.

Scrutiny can, and should, lead to massive positive gains, for both firm and customer. It will be up to the firms to take on board suggestions, criticisms and complaints and use them to affect the change that is required.

The regulator’s work

In April, the FCA published a ‘Dear CEO’ letter to heads of UK GI firms informing them of the release of Thematic Review 19 / 2: General insurance distribution chain. The regulator certainly pulled no punches in this report or in the related letter and press release, outright “warning” GI firms about “manufacturing, sales and distribution approaches that can lead to customers purchasing inappropriate products, paying excessive prices or receiving poor service.”

The thematic review identified a significant potential for customer harm in the product development and distribution approaches in some sectors of the GI market. The FCA is concerned that customers could be being sold products that aren’t appropriate for them. It was suggested, as well, that they could be paying increased prices simply because of the design of – and lack of oversight over – the distribution chain that delivers the product or service to them.

The FCA has also found that the levels of remuneration paid to stakeholders within the insurance distribution chain – who may not be providing concrete benefits to end customers – have meant that the firms have been encouraged to either bump up prices or sell products that don’t cover the basic needs of those that need them most.

It is clear that the FCA is somewhat disappointed that the new rules introduced as part of 2018’s Insurance Distribution Directive (IDD) – including obligations for firms in every part of the GI distribution chain to act “honestly, fairly and in accordance with the best interests of their customers” – have not shifted the issue as far as possible. It is hoped, however, that the thematic review will spark the action needed, and that the widening of scope of the Senior Managers and Certification Regime (SM&CR) will encourage more customer-centric business models, strategies and governance within GI firms.

The thematic review report sets out the FCA’s clear expectations for firms. For example, product manufacturers should reconsider the value provided of their product for the end user, as well as the oversight of distribution arrangements. Distributors themselves should take a look at the impact of the distribution processes on the value that customers receive from products. These processes should not be remunerated in a way that presents a conflict of interest between profit and customer outcome.

Off the back of this work, the regulator is proposing non-Handbook guidance, which are currently being consulted on. These include:

• All GI firms must act fairly, honestly and professionally in accordance with the best interests of customers.
• All GI firms should consider the value customers ultimately receive from their products and services.
• All GI firms should maintain appropriate systems and controls over the remuneration they receive.
• All GI manufacturers should have sufficient knowledge of the roles and remuneration of all entities in the distribution chains they use to be able to assess the impact they have on the value customers receive.
• All GI firms must maintain appropriate systems and controls (including the production and use of appropriate management information) over their GI products and services. This includes when delegating authority to another business.
• All GI distributors should consider the impact of their distribution strategy (including the distribution method and the level of remuneration they receive) on the overall value of the product for their customers.

Where to from here?

GI firms should begin performing something of a “gap analysis” to uncover where there are shortcomings in their own governance and operational structures that could lead them to fail to meet the FCA’s rising expectations. This won’t be easy, of course, but the directness of the messaging from the regulator should leave no questions as to what needs to be addressed.

It’s worth noting, perhaps, that the very beginnings of the PPI issue we have all been exposed to over the past decade were found in similar issues – firms pushing inappropriate or unsuitable products to generate revenue. If firms wish to avoid another large-scale remediation project, they need to ensure that they are only offering products that deliver proven benefit to customers depending on their individual needs. A small drop in profit now could save millions in reparations in a worst-case future scenario.

In general, firms need to become more focused on customer outcomes. Developing a ‘customer-centric’ culture, in which the end customer is seen as something of an extra Board member, will be crucial to delivering the good outcomes called for as part of the work. Manufacturers that let their distributors have complete control over the ‘product sale’ element of the chain should also seek to rein in their influence over prices if they find there is a negative impact on customers.

In fact, it’s safe to say that every part within the distribution chain will need to thoroughly assess how appropriate their delegation of responsibility is, and whether or not they have appropriate oversight and adequate controls over the end product in place. Firms should be performing regular due diligence checks on any partners of delegated parties within the chain and collecting appropriate volumes of management information from all parts of it. Ultimately, firms need to develop a conduct culture within their ranks.

For businesses that fail to meet expected standards as set out in the IDD and SM&CR, reputational damage and financial repercussions become real possibilities. Needless to say, this can have long-term consequences, far beyond the ‘bottom-line’.

The red flags of poor value

With an emphasis on beneficial outcomes for customers, firms that consider themselves to be ‘fair’ will be those routinely evaluating their pricing strategy and using this review as an opportunity to identify any ‘red flags’. Some of the common ‘red flags’ that could suggest that unfair pricing practices may be taking place across the insurance distribution chain include:

• Low claims frequencies
• Low claim acceptance
• High commission levels
• Excessive profitability of a product
• Overly restrictive terms, exit fees and barriers
• Over-emphasis on ‘peace of mind’
• High fees and charges
• High pricing complaint volumes

If any of these red flags have been identified in your firm, it is likely you will have to take a long and honest look at your pricing strategies and the methods you use to communicate with customers – both new and continuing.

Poor pricing practices can have huge consequences for businesses and their customers. For firms working within the insurance industry, it simply makes good business sense to protect consumers – especially in an increasingly crowded marketplace. Heightened regulatory scrutiny has put even more pressure on businesses to get it right, with the FCA in particular introducing various guidelines and processes that will ensure insurers put customers’ interests first, else face heavy penalties.

All this means that businesses must have a proper understanding of what fair means to them and their customers – something that is likely to vary from firm to firm, depending on the quality of its product or service.

Building the concept of 'fair' into pricing and distribution strategies will, therefore, be critical and this is something that firms should be addressing at regular points throughout the year. As part of this, it’s also critical that they consider the impact on vulnerable customers, as they are likely to be those hit hardest by any changes.