New FCA rules on fair value came into effect in October, but were firms ready? Simoney Kyriakou investigate
The insurance profession has been scrambling to meet the UK Financial Conduct Authority’s (FCA) enhanced product governance rules.
While the rules on pricing, auto-renewal and reporting will come into effect on 1 January 2022, the FCA expected all firms to have complied with the so-called ‘fair value’ rules that came into effect on 1 October.
But in August, the FCA warned that insurance firms may not be ready.
Its claims were backed up by pre-emptive enforcement action as the City watchdog identified areas during its supervisory work where companies were found to be selling poor-value products.
The FCA said: “In some cases we have intervened to ensure firms take action to amend products and improve the value they deliver to customers, including through reductions in remuneration and the provision of additional cover or benefits.
“This can involve requiring firms to withdraw products from sale while these amendments are made, or to pay refunds or redress, where we see harm arising.
“We will consider all appropriate regulatory action where firms fail to meet their regulatory obligations, both for their historic product governance arrangements or under the new requirements from 1 October 2021.”
Ian Hughes, CEO of Consumer Intelligence, believes many insurers have mistaken the regulation changes to General Insurance Pricing Practices as being only about the equalisation of new business and renewal premiums, rather than understanding fair value.
He adds: “The fact the FCA believed many firms would not meet the deadline should have sent a shockwave through the industry. Whether insurer, bank, investment managers, or other providers to the insurance market, fair value is the regulatory future.”
As reported previously in The Journal, the changes will ensure firms have processes in place to deliver products that offer fair value and prevent practices such as ‘price walking’.
These provisions apply to all non‑investment insurance contracts, including all types of general insurance and pure protection insurance.
So, while the FCA investigates the laggards, what do these strong words and actions mean for the profession?
David Sparkes, head of compliance and training at the British Insurance Brokers’ Association, says there must be a better “two-way exchange” of information between insurers and distributors when deciding that the product offers fair value.
Insurers already have data such as customer research, claims information, complaints as a percentage of claims and any additional costs to the customer, including distributor remuneration.
“This same information could be shared with distributors as part of meeting the requirements in this area,”
Mr Sparkes says, while “insurers will have to ask any and all distributors in a chain to share information on fees they charge as part of arranging cover for clients”.
But therein lies the rub. He adds: “Once insurers have this information, they will be required to undertake the near-impossible. How can they judge whether a fee represents value for the service delivered by a distributor? Do they know each distributor’s operating costs? Can they judge the quality of any advice given during a sale where a fee is charged?”
For a firm to truly understand whether it is delivering long-term fair value, it needs to first understand what fair value means to its customer base
Before communication, however, comes understanding the client. Mr Hughes comments: “For a firm to truly understand whether it is delivering long-term fair value, it needs to first understand what fair value means to its customer base.
“This understanding will be pivotal in the success of any innovation or improvement to product governance, and will help companies to ensure compliance and translate it into a sustainable and profitable customer relationship.”
Despite the stentorian tones of the regulator’s August missive, many firms were ready.
Mr Sparkes says: “It is worth remembering the FCA said its ‘findings show some firms had made good progress in meeting the FCA’s existing rules and guidance on product governance and value’.”
A spokesperson for Aviva says: “We are supportive of the positive changes for customers. Aviva has robust product governance processes in place already and had plans in place to meet the revised rules ahead of the deadline.”
Others, such as Peter Goodman, CEO of insurance platform Aventus, see this as a great opportunity for improving the profession, given the roles technology, data and digital underwriting will play in meeting the FCA’s principles.
He says: “The rules are an opportunity, not a challenge. The FCA’s principles are centred around providing fair value to the customer, which fundamentally has to be right.
“Modern no/low-code technologies create the flexibility to deploy and change products in weeks, underpinned by a modern, open API architecture, which enables businesses to gather another level of insight to price business intelligently, to another level of sophistication, around each customer.”
As technology can support the practical implementation of the FCA principles, insurers, brokers and all those affected by the new regulations should be “encouraged”, he says, by the ability to price risk now at a more individual and granular level.
It seems that better communication, knowing your client and investing in technology means the transition to fair value need not be the mountain-climb some insurers seem to have made it out to be.
Simoney Kyriakou is senior editor of FTAdviser