We all know that some regulatory publications can be pretty impenetrable, but that’s certainly not the case for the interim report of the general insurance pricing practices market study, published today by the FCA.
Through work conducted as part of this extensive market study, the regulator has concluded that the motor and home insurance markets are simply not working well for consumers. The FCA clearly states its readiness to intervene with a wide range of remedies now on the table.
This interim report highlights that competition within the general insurance market is not at the level it needs to be. More critically, however, is the fact that evidence of unfair pricing practices within the industry is rising to the surface.
The possibility, floated by the regulator, of an outright ban of specific pricing practices should be a loud wake-up call for the market. It requires firms to take immediate action, with such measures having the potential to shake specific business models to their core. In fact, the very financial soundness of some specific firms could be threatened. The fact that the share prices of the major UK insurers were hammered a couple of hours after the announcement reveals that analysts are already anticipating the impact of changes to come.
These conclusions come 18 months after the industry has defined its own guiding principles on pricing, published by BIBA / ABI. It also follows a previous FCA ‘call to action’ following the thematic review on pricing practices in the home insurance sector. It is fair to say that the FCA considers that these various actions did not go far enough and have not yet produced visible improvements at scale.
Their plan in this area is to ensure that the existing regulatory requirements and expectations are fully embedded into firms and go on to produce their full, expected results (for example, those required by accountability rules, Insurance Distribution Directive [IDD] obligations, renewals rules, ‘Dear CEO’ letter conclusions and so on).
The interim report reinforces the importance of identifying and treating vulnerable customers with respect and appropriate levels of care. The findings in this area complement and expand on the proposed guidance published by the FCA earlier this year.
Most of the firms in this space will have already kick-started programmes to address fairness in pricing, having originally been put to task by previous papers. There is an opportunity now to review such initiatives in the light of the regulator’s interim conclusions. Firms will surely want to ensure their programme of change is heading in the right direction and set to deliver the outcomes expected by the FCA.
We propose that, if firms are looking to take another look at their programmes or even begin whole new ones, they take an action plan that follows the key themes of the report.
1. First thing first – respond to the interim report
The immediate focus for any insurer or intermediary should be getting themselves into a position to be able to respond to the consultation on these interim findings within the next six weeks. This answer can be either made directly or through a trade body such as the ABI or BIBA.
From all of our experience in this space we have definitely learned that, if the industry wants to make its voice heard and have the opportunity to influence the final proposed remedies, this consultation requires robust answers backed-up by data and analysis. Firms should also resist the urge to reject some or all of the measures, considering the customer harm that the FCA is seeking to address. They should, instead, propose potential alternative solutions.
This work will also help firms to work out the potential impacts and priorities for their business. Responding to the report according to the sensitivity of your business model to the remedies suggested is a very easy way to identify where your business would be hit hardest if the proposed rules are implemented.
2. Robust embedding of IDD, renewals rules and CEO letters expectations
In addition to the market-level interventions considered, the regulator concludes the interim report saying that their various existing requirements and expectations are not being embedded fully and widely enough to mitigate the customer harm uncovered.
This is set to be the “immediate term” focus of the FCA.
Huntswood has assisted numerous clients in embedding policies, procedures and people into firms to meet regulatory requirements. We are very well-placed to bring the various specific requirements into a cohesive programme of work that will improve customer outcomes and ensure the sustainability of your business model.
We believe that the cornerstone of such a programme will be effective product governance and oversight – in order to maintain and monitor the improvements likely to be required.
3. Preparing for the market-wide suggested remedies
The range of remedies that the FCA is considering is broad and far-reaching, and very few options have been discarded since the beginning of the market study. The interim report makes the point very clear that the FCA is looking to implement some fairly drastic, customer-centric changes to rules, including:
Restrictions on pricing practices
This is, by far, the most impactful proposal, and a new territory for the FCA entirely.
The regulator has, on multiple occasions before, said its hesitation to intervene on price directly, but announced today that they may on “pricing models”, opening a ‘Pandora’s box’ of “pricing model regulation” that we have not seen in practice in the UK for a substantial period of time.
We recommend firms perform stress tests and scenario analysis in order to measure the impact of such measures. There is no doubt that the firms’ responses to FCA rules will attract the attention of the Prudential Regulatory Authority. The PRA will require a robust response from firms on the potential impact these new rules will have on their financial soundness and business model sustainability.
Auto-switching of customers to better deals
In terms of fairness, one can argue that this comes as part of the existing expectation around treating customers fairly.
Without waiting for the final conclusion of the market study, we would suggest that firms look into performing a review of legacy books and seek operational support in managing the workload of such activities.
Your business will have to be ready to make contact with, inform and perform switches for potentially thousands of customers – hardly a simple task.
Auto-renewals and transparency
The FCA will review and propose some amendments to its auto-renewals rules, following the lead of the Competition and Markets Authority. The CMA published advice almost a year ago now as a response to a super-complaint made by Citizens Advice on behalf of customers losing out as a result of the “loyalty penalty”.
This is an action that could have a great impact on consumer behaviours and put stress on business models that rely on customer ‘stickiness’.
One of the options proposed is to require additional communication with customers at the point of renewal. This would, of course, create potential resourcing and capabilities gaps to appear in firms’ operating models. Businesses will have to start looking, now, for ways to bridge these gaps when the time comes.
The additional proposed measures around transparency will also, potentially, create a market performance ‘league table’, an item that will surely be appearing on Board agendas very soon.
Proactive firms will thrive
Businesses that make a point of being proactive in their response to the interim report, making changes to operating and pricing models ahead of time, will surely place themselves as the customer-centric, trustworthy businesses that the FCA wants to see in the market.
As we head into a period of increased regulatory scrutiny and decreasing customer loyalty, now is the time to ensure your business is built for success and providing the best possible service, at the best possible price, to your customers.
Michael Sicsic, the former Head of General Insurance Supervision at the FCA, has recently joined Huntswood's Advisory Panel. We thank him for his unique insight into this sector and for his contribution to this article. You can read more about his background on our Advisory Panel page.