Posted: 18th September 2020
Over the last four years, the Financial Conduct Authority’s (FCA) General Insurance value measures pilot has provided insurers an opportunity to benchmark products against the market, to head off regulatory scrutiny and to outpace the competition.
The latest data set is focused on insurance ‘add-ons’, or in other words, the additional cover or policies that can be purchased or are provided to customers alongside a primary cover The data reveals that less than 20% of the total value of claims firms receive for personal accident and key cover add-ons is paid out. By comparison, firms pay out in claims over 30% of premium income for home emergency cover and over 50% for buildings and contents home insurance. Whilst these lines of cover have a significantly different claims profile, the comparison brings into question the fundamental value of these products for customers. This discrepancy has been called out by the FCA, with the regulator promising to follow up with individual firms that seem out of step with the market.
The regulator’s primary concern, made clear in the 2019 Dear CEO letter, is that poor value in general insurance products results in potential customer harm. This includes customers purchasing products that are not appropriate for them, as would appear to be the case in this instance. The FCA attributed the possible causes of such harm to ‘failures in product design, weak oversight of the distribution chain, poorly designed distribution strategies and conflicts of interest caused by firms’ remuneration structures’. All firms were urged to pay more attention to customer outcomes, which means doubling down efforts on product governance to ensure continuous improvement.
Demonstrating the value of personal accident and key cover ‘add-ons’ is clearly a challenge across the sector, so what steps can firms take to improve customer outcomes? For those who want to address the imbalance, this presents a competitive opportunity to the buck the trend.
Taking the value measures data as a starting point, learning from the design of the more effective home emergency add-ons could be instructive. Firms falling behind their peers might also evaluate the difference between their products or distribution strategies and those offered by their competitors.
It is apparent though, that the whole industry would benefit from a better understanding of the needs and crucially, behaviours of customers in these product areas. Since every insurer serves a different customer base, there is no one-size fits all solution to this. Is the lack of claims due to duplicate cover, a lack of awareness around the cover, or customer apathy around claiming for small amounts? Proprietary data showing trends for successful claims and customer behaviours is an obvious source of insight, as well as market research.
Once a greater understanding of customer necessity has been achieved, the FCA’s product governance requirements in October 2019 provides clear guidance on regulatory expectation and product design. The key to satisfying these requirements is a methodology for establishing, monitoring and responding to customer outcomes across all product lines. To demonstrate commitment to improving customer outcomes over time, firms will need to review these measures throughout the customer lifecycle.
Based on the publications to date, we anticipate the pilot of the values data measures will become a more permanent feature of the regulatory toolkit and be extended to other sectors, products and services, allied to the FCA’s commitment to increasing transparency.
Beginning to address these considerations now will prepare firms for a broader root and branch review of what product value is ahead of the FCA’s full guidance in a policy statement published later this year. It will also offer more time to plan for additional resource and advisory support in anticipation of the final market study report into the pricing of home and motor insurance, expected in October. Those who embrace this opportunity will be able to demonstrate clear improvements in performance to both the regulator and customers alike.
Paul Dyer is Head of Regulation and Assurance at Huntswood. If you would like to speak to the team about how Huntswood can support your business, please get in touch.