Regulatory update: MS18/1.3 - The FCA’s General Insurance Pricing Practices Final Report

BACKGROUND

Insurers play an important role in the UK economy, generating £78 billion in premiums and providing 82% of UK adults with general insurance (GI) products. However, the Financial Conduct Authority (FCA) is concerned that existing GI pricing practices have the potential to cause harm to consumers.

In October 2018, the FCA published a discussion paper on Fair Pricing in Financial Services and launched a market study into how insurers charge their customers for home and motor insurance, the most commonly held products. Following this, the FCA published an interim report in October 2019, focusing on how firms set their profit margins. Overall, the FCA found that pricing techniques in these markets are complex and opaque, with loyal customers often paying far more for the same risk than newer customers. It was estimated that six million customers were paying prices higher than they should, with a potential saving of £1.2bn if they paid average premiums instead.

The long-awaited final report from the market study was published on 22^nd September 2020, alongside a consultation paper outlining supporting recommendations (CP20/19).

MARKET STUDY OUTCOMES

Within the final report, the FCA articulates several high-level outcomes for the GI market:

• Long term fair value - firms compete in effective and innovative ways, to provide long term fair value (reflecting both price and quality), for all consumers throughout the duration of their relationship with the firm. This is ingrained in their culture and underpinned by strong governance. All consumers continue to receive fair value over the long term as technological developments advance.
• Transparency - firms do not engage in practices that limit customers’ ability to make informed choices. They are transparent with consumers about the overall cost and quality of products from the start and they do not impose barriers to consumers switching to better deals. This helps consumers make more informed choices about which GI products meet their needs.
• An end to price walking - consumers can trust that firms are offering long term fair value. Consumers who remain with their insurance provider can be sure, that they will not end up paying high prices, simply because they have not switched provider. Consumers no longer need to search, switch or negotiate at every renewal to avoid price walking.
• Fair competition - the incentive for consumers to search and switch in the market is maintained by differences in firms’ products (including the type of service and quality they offer), in the evaluation of insurance risks, and in pricing structures. This drives competition and helps to ensure that all consumers receive fair value. Over the longer term, new technology helps to make it easier and quicker for consumers to search and switch to better deals.

CONSULTATION ON HANDBOOK CHANGES

The final market study was published alongside a consultation (CP20/19) on new measures to further boost competition and deliver fair value to all insurance customers including:

• A pricing remedy to ensure that when a customer renews their home or motor insurance policy, they pay no more than if they were a new customer through the same sales channel.
• Product governance rules requiring firms to consider how they offer fair value to all insurance customers over the longer term.
• Requirements on firms to report certain data sets to the FCA so that it can check the rules are being followed.
• Measures making it simpler to stop automatic renewal across all GI products.

In the long-term, the proposed remedies are designed to improve competition, resulting in lower costs for supplying insurance, and, on average, reducing the prices paid by consumers. The FCA estimates that its proposals will save consumers £3.7 billion over 10 years.

POLICY STATEMENT ON VALUE MEASURES DATA

Following a two-year pilot, the FCA has also published requirements for insurers to publish value measures data for GI products. The key performance indicators being monitored are: claims frequencies and acceptance rates; average claims pay-outs; and claims complaints across all GI products. By making this information available to firms, as well as the media and consumer groups, the regulator hopes it will deliver better outcomes in the market. You can read our blog on how insurers can demonstrate value through this data here.

NEXT STEPS

The FCA is seeking views on its proposals by 25^th January 2021. It will consider the feedback and intends to publish a policy statement and new rules next year, alongside its response to the consultation feedback.

CONSIDERATIONS FOR FIRMS

Looking forward, it is important that firms evaluate their pricing and distribution strategies in advance of the regulatory changes. The focus should be on the key areas raised in the FCA’s consultation: ensuring value in product governance frameworks, reviewing existing products in line with the new requirements and improved performance relating to the ongoing publication of value measures data. To achieve this, insurers can review the following:

• Product value – the definition of value within insurance products is a subjective area, which has divided firms we have worked with. Ultimately, whichever definition a firm settles on – whether it is a qualitative, quantitative or hybrid approach – this will need to be underpinned by a robust product governance framework and a management information suite, that takes results into account. A balanced focus across both firm conduct and customer outcomes is key.
• Customer outcomes - to ensure an alignment with the regulator’s broader expectations for consumer protection, firms would be advised to take into account the customer harm and outcomes articulated within the report and review their own articulation of risks and customer outcomes against them.
• Product governance - creating a robust product governance framework is vital for firms. This framework could be based on financial or customer-based benchmarks. For example, the claims frequency ratio against policy volumes, the percentage of notified claims that are accepted, and the average sum paid out. It is important that these metrics are aggregated to form an objective view against tolerance. Any changes need to reconcile with the broader value measure data collected and published by the FCA.
• SMCR - the definition of product value, setting of pricing strategy and running of a robust product governance approach requires clear accountabilities and responsibilities, aligned to the FCA’s Senior Managers & Certification Regime.
• Fairness and vulnerability - in some scenarios, the FCA’s market study identified that customers are paying more than others for the same service. It is crucial that firms consider whether the terms of this cross-subsidisation is fair on the customer groups that are paying more, and whether customers in vulnerable circumstances could be disproportionately impacted by such pricing strategies. The identification and classification of vulnerability needs to be a priority in evidencing fair outcomes.

If your firm is looking for support or guidance on the FCA’s expectations regarding the final report, please don’t hesitate to contact the Huntswood team.