The Financial Conduct Authority’s (FCA) Final Report on general insurance pricing practices concludes that retail home and motor insurance markets are not working well for all consumers and confirms proposals to prohibit “price walking”.

The deadline for responding to the Consultation Paper was 25 January 2021 and the FCA intends to publish a Policy Statement responding to the feedback received in Q2 2021. The new rules are planned to come into effect four months after the Policy Statement with both a review of the effects of the remedies, and a full post-implementation evaluation, following approximately one and two years respectively after implementation.

The FCA’s reforms include the following key changes:

  • Firms will be prohibited from imposing a “loyalty penalty” on customers at renewal of their policy.
  • This prohibition will extend to products sold alongside insurance cover.
  • Manufacturers and distributors will be required to consider whether their products represent “fair value” for customers.
  • Further measures will aim to stop practices that act as barriers to switching.
  • New regular reporting requirements will be introduced to help the FCA’s ongoing supervision of home and motor insurance markets.

The deadline for responding to FCA Consultation Paper (CP20/19), which sets out its detailed proposals, was 25 January 2021 and the FCA intends to publish its response in Q2 2021. New rules are planned to take effect four months later.

Background

On 22 September 2020, the FCA published the final findings of its general insurance pricing practices market study which sought to understand whether pricing practices in home and motor insurance support effective competition and lead to good consumer outcomes. The FCA’s Final Report (MS18/1.3) confirms many of the findings of its earlier Interim Report (MS18/1.2), which was published in October 2019.

In summary, the FCA’s conclusion that retail home and motor insurance markets are “not delivering good outcomes for all consumers” remains unchanged. The FCA proposes a package of remedies, which are set out in Consultation Paper (CP20/19), which was published alongside the Final Report.

The deadline for responding to the Consultation Paper was 25 January 2021 and the FCA intends to publish a Policy Statement responding to the feedback received in Q2 2021. The new rules are planned to come into effect four months after the Policy Statement with both a review of the effects of the remedies, and a full post-implementation evaluation, following approximately one and two years respectively after implementation.

Key findings

The Final Report concludes that general insurance markets are not working well and do not deliver good outcomes for all consumers.

  • In particular, the FCA found extensive evidence of “price walking”. This allows firms to offer policies at a discount to new policyholders but to recover any losses on renewal by increasing the price year on year.
  • Firms that practice price walking will make an assessment of how likely a customer is to switch supplier when setting the premium they propose to charge for renewal of the policy. This can lead to some loyal customers paying very high prices as compared to others who, for example, regularly switch insurer or negotiate the cost of their cover.
  • A motor insurance customer that has been with their provider for more than 5 years will expect to pay a premium that is on average 85 higher than a new business customer with the same risk. The equivalent increase for a combined buildings and contents insurance customer is 122.
  • Some firms also use practices that can discourage consumers from shopping around to find a better a deal with a new insurer. For example, firms may make it difficult policyholders to stop their policy from renewing automatically.
  • The FCA argues that these findings suggest that some consumers are not getting “fair value” for their general insurance products. It would not expect this to be the case if markets are working well for all customers, a key priority for the FCA.

Proposed package of remedies

The FCA has proposed a package of remedies intended to stop firms systematically increasing prices in home and motor insurance for loyal customers, as well as ensuring firms in the general insurance market focus on providing fair value to all their customers.

Pricing remedy

Scope: applies to firms, including intermediaries, that have a role setting any part of the premium or any other element of the final price paid by the consumer for home or motor insurance products or additional products sold alongside them including premium finance.

  • Firms will be required to offer renewal prices to consumers that are no higher than the equivalent new business prices offered by the firm. Where additional products are sold with the insurance, the price-walking prohibition applies to both.
  • An anti-avoidance provision will prevent firms “operating in a way which defeats the intended outcomes of the pricing remedy”. Firms will, however, be able to offer different prices to different customers when they are differentiated on other bases.
  • A Senior Manager will be required to confirm annually that the firm’s pricing practices comply with the pricing rules, starting with an attestation three months after the rules come into force.
  • The pricing remedy is intended to make the quotes a firm offers a customer when switching, a better indication of the price that that customer will pay in future years if they do not search or negotiate. This is intended to “intensify and improve the nature of competition”.

Enhanced product governance rules to help ensure that firms deliver fair value for all consumers

Scope: applies to firms manufacturing or distributing general insurance policies, additional products sold alongside them including premium finance, and all pure protection insurance (except reinsurance).

The FCA plans to enhance and expand the scope of its existing product governance rules including by:

  • Requiring manufacturers and distributors to consider whether their products represent “fair value” for customers through their product approval processes.
  • Extending the application of the rules on product oversight and governance (in the Product Intervention and Product Governance Sourcebook in the FCA handbook) including the new rules, to all general insurance and pure protection products, regardless of whether they are newly manufactured or have been significantly adapted.
  • Introducing a minimum requirement for manufacturers to review products at least every 12 months and complementary changes to the product governance rules for insurance distributors.
  • Implementing other changes including requirements in relation to the offering of premium finance.

Remedies to tackle practices that discourage switching

Scope: applies to all firms selling general insurance products.

For all types of general insurance, including home and motor insurance, the proposed rules would require firms to:

  • explain to customers whether their policy is set to renew automatically and what this means for them;
  • make it easier for consumers to decline auto-renewal of policies at the time of purchase and at renewal; and
  • communicate the options available to consumers to stop their contract from auto-renewing both at the point-of-sale and in good time before renewal.

Rules on the reporting and publication of value measures data and value measures product governance rules

Scope: applies to firms, including intermediaries, that have a role setting any part of the premium or any other element of the final price paid by the consumer for home or motor insurance products or additional products sold alongside them including premium finance. Some of the proposed requirements apply to intermediaries that do not have a price-setting role.

  • The FCA proposes to introduce a reporting requirement for firms to report data on retail home and motor insurance products and, where applicable, additional products sold alongside, including premium finance.
  • The data is to be collected for the purposes of monitoring compliance with the pricing remedy, identifying instances of consumer harm and monitoring the market more generally.
  • The FCA does not rule out publishing such data collected in the future, for example if it consider “there would be value in doing so, for example, to increase scrutiny of firms’ pricing practices”.
  • The data is proposed to be collected on an annual basis except for an initial 12-month interim period of quarterly reporting starting when the rules come into force.

Based on its modelling the FCA considers that the proposed remedies could deliver a total savings for consumers over 10 years of 4.2bn to 11.2bn depending on the intensity of competition between firms. However, the FCA expects intense competition for new customers to continue.

Practice points for firms

With the FCA’s remedies likely to come into effect in H2 2021 firms should begin to take action to align their practices with the proposed remedies and the FCA’s emerging expectations. This can include: Considering appropriate models and definitions of product

  • Considering appropriate models and definitions of product value to incorporate into product approvals processes and price frameworks. Within certain parameters, firms have flexibility on the approach and definitions to be adopted but “fair value” must involve a reasonable relationship between the overall cost to the end customer and the quality of the product/service and should be sufficiently long-term.
  • Conducting a review of factors used in pricing models to eliminate those associated with tenure, and ensuring sufficient operational and organisational infrastructure, as well as sufficient visibility over pricing practices and metrics, to implement the FCA’s proposed pricing and reporting remedies. Significantly however, firms will not be prevented from assessing, and determining prices in accordance with, the likelihood a consumer will switch brands, renew or negotiate at renewal, and other non-risk factors (excluding tenure).
  • Ensuring that responsibility for product governance and pricing and the role of attestation of compliance with the FCA’s pricing remedy are clearly delineated and attributed to the appropriate Senior Manager/(s) under the Senior Management and Certification regime.
  • Reviewing the channels and communications available to customers on renewal. Firms should ensure they have operational and organisational processes in place to allow customers to “easily and accessibly” cancel auto-renewal by each of phone, post and email or online. In line with the FCA’s wider commitment to fair treatment of all consumer groups, firms should bear in mind the needs of older and more vulnerable customers in considering the ease and accessibility of any communication channel.
  • Re-examining business models, distribution channels, marketing and pricing strategies in light of the pricing remedies particularly as the FCA acknowledges that their remedies are likely to cause some firms in the distribution chain (eg price comparison websites and brokers) to have less business as the level of switching falls.



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *