Posted: 1st November 2018

Background

On the 31st October, the FCA launched a market study into how general insurance (GI) firms charge their customers for home and motor insurance. Alongside this, they have also published a Discussion Paper on Fair Pricing in Financial Services Markets.

This market study fulfils part of the FCA’s 2018 / 2019 Business Plan and follows supervisory work on insurance pricing practices. The results from this work was also published on the 31st October, revealing that a number of actions are necessary to address issues within the market. Following review of the information collected, the FCA has set out to address firm conduct, undertake the market study discussed here and develop a wider discussion paper on the fairness of pricing structures in financial services.

UK insurers play an important part in the economy of the country, generating £78 billion in premiums and servicing 82% of UK adults with GI products. Home and motor insurance are the most commonly held products.

While the FCA is concerned that general insurance pricing practices have the potential to cause harm to consumers (through the excessive differences between premiums charged to new customers and those renewing, as one example) the regulator is also aware that members of the industry are making headway into addressing these concerns.

In May 2018, The Association of British Insurers (ABI) and British Insurance Brokers’ Association (BIBA) published Guiding Principles and Actions Points for General Insurance Pricing, a document that aimed to rein in some of the excessive premiums seen in the market.

Details of the market study

The market study will focus on a number of key issues identified by the regulator over their period of supervisory work. These include:

• The consumer outcomes from pricing practices
• The fairness of outcomes from pricing practices
• The impact of pricing practices on competition
• Remedies to address any harm that the FCA finds

Andrew Bailey, Chief Executive of the FCA, stated that:

“Our initial work has identified a number of areas of potential consumer harm. We want to make sure that general insurance markets deliver competitive and fair prices for all consumers. This market study will help us examine the outcomes from general insurance pricing practices and inform how, if necessary, we should intervene to improve the market.

“If change is needed to make the market work well for consumers, we will consider all possible remedies to achieve this.”

The regulator identified that some firms were failing to have “appropriate and clear pricing strategies, governance and control”. Also identified was the potential non-compliance of some firms with the rules on ‘transparency at renewal.’ The FCA expects all firms within this sector to pay greater heed to the interests of their customers and treat them more fairly. The regulator will certainly not restrain itself from using its full powers to make sure this change occurs.

Fair pricing in financial services

At the same times as it launched the market study into GI pricing, the FCA also published a ‘DP18 / 19: Fair Pricing in Financial Services’.

The paper makes the point that the judgement on the fairness of ‘price discrimination’ in financial services is not a straightforward one. Because of the amount of stakeholder views likely to emerge from action on fair pricing practices, the FCA has decided to launch a public debate on the topic of fairness. The purpose of the discussion will be to ensure that any action taken will be in the public’s best interest.

The discussion paper invites debate on the following pricing practices:

• Firms charging different prices to different consumers based solely on differences in consumers’ price sensitivity
• Firms charging existing customers higher prices than new customers

Next steps

The FCA is seeking input to the terms of reference and accompanying evidence for the GI study by the 3rd December 2018. The FCA aims to publish an interim report on the study in summer 2019, outlining preliminary conclusions and a discussion of potential remedies. The final report is set to be released by the end of 2019.

Input to the accompanying discussion paper on fair pricing is due by the 31st January 2019.

Considerations for firms

The FCA’s overarching strategic objective remains to ensure that the markets function well. Customers will always be a core part of this, so ensuring their protection, as well as the protection and integrity of UK markets.

Though the results of the market study are still a long way away yet, it will be important to begin reviewing your firm’s pricing structures now to ensure that they are clear and appropriate.

Firms should already be questioning how to define value. It’s certainly a subjective area which has divided firms we have worked with. Ultimately, whichever definition firms settle on, whether it is a qualitative, quantitative or a hybrid approach, this should be underpinned by a robust product governance framework and management information suite which takes results into account.

Firms should seek to ensure they create a robust product governance framework. These 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. Finally, and crucially, these metrics should be aggregated to form an objective view against tolerance.

In some scenarios, customers are paying more than others for the same service. Firms should consider whether the terms of this cross-subsidisation are fair on the customer groups paying more and whether customers in vulnerable circumstances could be disproportionately impacted by such pricing strategies.