The regulator’s insurance pricing rules are coming into force. Simoney Kyriakou asks: what does this mean for brokers and insurers?
The UK Financial Conduct Authority’s (FCA) final rules for insurance pricing practices come into force this year.
The aim, according to the City watchdog, is to “improve charges and transparency for all consumers”.
The rules mean consumers renewing home and motor insurance will not be quoted more than a new customer would; it will become easier for customers to stop automatic renewals if they want to; there will be new product governance rules; and there will also be a focus on ‘fair value’ across all insurance products.
Insurers and aggregators must implement the systems and controls, product governance, premium finance provisions and related glossary changes by 1 October.
Firms have until 1 January 2022 for the pricing and auto-renewal remedies, reporting requirements and related glossary and administrative changes.
The 2020 consultation on the rules garnered 101 responses. Initially, the FCA wanted to end auto-renewal on all products to combat ‘price walking’ – the practice of automatically renewing policies and increasing the price each year.
This caused concern, as without auto-renewal, thousands of people could be left without vital cover should the worst happen while they were getting a new contract.
The FCA listened and is allowing greater flexibility on the methods firms offer consumers to cancel auto‑renewal and how consumers can take out a new policy.
The FCA is also excluding private health, medical and pet insurance, where customers could lose cover for pre‑existing conditions or acquired benefits if they unintentionally don’t renew.
However, the practice of price walking, or – as Graeme Trudgill, executive director of the British Insurance Brokers Association calls it – the “loyalty penalty” will end.
Mr Trudgill comments: “Customers who remain with their insurance provider for many years should benefit, as the review ends the so-called ‘loyalty penalty’, where customers are charged more for renewing their existing policy than if they came as a new customer.”
Canny policyholders who like to shop around each year might find it harder to get a great deal, but commentators feel this won’t be too problematic.
This requires deep, cultural change from insurers to prove they are offering fair value to consumers. Insurers must show they have fair value governance in place to make this work and show the FCA how they have evolved to deliver fair value
However, when it comes to the insurance profession, Ian Hughes, CEO of Consumer Intelligence, says the impact will be “seismic”.
He explains: “The fault line causing the earthquake is the introduction of ‘fair value’. This requires deep, cultural change from insurers to prove they are offering fair value to consumers. Insurers must show they have fair value governance in place to make this work and show the FCA how they have evolved to deliver fair value.”
While most of the onus will be on general insurance (GI) providers reviewing car and house insurance products, Phil Jeynes, corporate strategy director at Reassured, believes the rules “could be expanded to include other products if there is a risk the FCA feels needs monitoring”.
Indeed, as Rob Evans, CEO of Paymentshield says, the review draws pure protection within its purview: “This is much broader than just price walking. The focus is also on fair value and data collection on pricing; and includes anti-avoidance and transparency over charges.”
There have also been some questions raised about whether the regulator might use the data collected to check on discrimination against consumers.
Alan Lakey, founder of CI Expert and adviser at Highclere Financial Services, thinks this is “extremely likely”, although he believes the FCA’s history of data usage is “dubious at best”.
Mr Jeynes says firms should expect to be monitored. “The FCA would not impose the requirements if it were not going to use the data to monitor firms, so those with unusually high numbers of customers paying above the going rate for policies should expect to have a few questions asked.”
Charlotte Clark, director of regulation at the Association of British Insurers, agrees that data will be used to
She explains: “FCA supervision, through data and ongoing engagement with firms, is essential across the entire distribution chain – including insurers, brokers and price comparison sites – to ensure compliance.”
However, Mr Evans thinks there is more to ensuring compliance than just data collection. He says: “Reporting and data input is part of the regulation, both on price walking and on fair value. So, the regulator could look at this to see where people might be out of kilter with the market, but this will be hard.
“So, the regulator could look at this to see where people might be out of kilter with the market, but this will be hard.
“This is where the Senior Managers Certification Regime comes into play – managers will have a personal responsibility to attest that their pricing models comply,” explains Mr Evans.
Mr Trudgill says brokers should ensure they are “in a position to advise customers whether to switch insurers, or the reasons why staying with their existing insurer would be in their best interests”.
Also, as Ms Clark says: “It will be important for advisers to manage customers’ expectations through
Mr Hughes believes the introduction of fair value could open the door to new players: “Providers offering new types of insurance and insurtechs can build fair value products from the ground up, quickly, without the hindrance of legacy systems.
“This is why incumbents must take fair value seriously to ensure their survival,” he adds.
Additionally, the value-measures data rules, on which the FCA is consulting, will show who is truly offering fair value.
While policies are unlikely to change drastically as a result of the review, Mr Lakey warns: “The additional work insurers must do is likely to create additional costs, which will eat into profits and will be reflected in product prices.”
So, it will pay to understand the new rules, as these could be a stepping-stone to broader regulation in the future.
Simoney Kyriakou is senior editor of FTAdviser