On 25th January, the FCA published its first general insurance values scorecard – the first set of data in its general insurance value measures pilot. The data relates to 38 insurers who voluntarily provided claims information for the year ending 31st August 2016 for the products selected for the pilot.
The pilot is designed to test insurance and add-on products to determine their suitability – i.e. whether they offer value based on assessing metrics such as claims ratios, acceptance rates and average pay-outs.
The initiative arises from the General Insurance Add-ons Market Study, which identified persistent poor value in some add-on products sold by firms.
To address these concerns, in DP15 / 4: Developing General Insurance Add-ons Market Study, the FCA set out options for publishing value measures in the general insurance sector. In the subsequent feedback statement (FS16 / 1), the FCA announced it would pilot the publication of value measures data. The FCA believes publishing the data above will reap the following benefits:
- Consumer groups and market commentators will have commonly available indicators of value for insurers by which to help assess products
- Firms can use to data to compare with peers
- Improved transparency will influence both consumer and firm behaviour by incentivising firms to improve the value their products offer to consumers
Key points from the pilot
Our observations from the data as published by the regulator:
- The participating insurers have provided claims frequency, claims acceptance rates and average claims pay-outs for home (buildings and contents), home emergency, personal accident and key cover policies
- In home insurance (combined buildings and contents), claims frequencies peaked at 12.4%, but claims frequency for most firms commonly fell between 5 and 7.4%. All of the products in this group were stand-alone, and the consistency of the data indicates customers’ good awareness of their policies and how to claim against them across the board
- The average claims frequency for standalone Home emergency products is between 34-40%, compared to an average claims frequency of 4-6% for home emergency add-ons. This suggests some customers are not claiming either because they are unaware they have purchased an add-on, or they don’t understand what they’re covered for or how to claim against the policy
- Both the claims frequencies and claims pay-outs for key cover are very low across the sample, indicating this could be a low-value product (claims frequency no higher than 5% and average claims pay-outs up to £399)
- Personal accident add-ons (only when sold as an add-on) – claims frequency is typically low for some insurers in this area (between 1 and 25,000 to 1 in 100,000), however some firms experienced claims rates of up to 1 in 100 policies. For insurers with higher frequency claims, the average claim pay-outs are lower (for example, between £500-£999). This reflects the diversity of business models in this area
Regulatory next steps
The FCA will continue with the initiative by publishing further data for the year ending 31st August 2017, following which they will consider the value of the data to the market before deciding whether to continue the initiative into 2018.
The data suggests there is work for firms to do in ensuring customers are clear they have bought a policy, what they are covered for and how to claim. Consumer groups and market commentators are likely to lobby for improvements to the information provided to the customer so they are in a more informed position.
Considerations for firms
The emergence of the pilot is in keeping with the FCA’s desire to protect customers from taking on poor value or unsuitable products. With this in mind, many of the considerations for firms in this space are cultural and based on a firm’s appetite to act in the best interests of its customers. The various distribution models in this market also present some cultural challenges, especially around ongoing monitoring of products sold by intermediaries (for which principal firms and their third parties are responsible from a customer outcomes point of view).
Therefore, principal firms should consider:
- Whether they have a robust internal monitoring approach which looks at the value and suitability of insurance product add-ons
- If intermediaries distribute their products, how easy it is for them to oversee those intermediaries’ performance, especially when it comes to the internal culture elements such as sales incentives and appetite for risk. Are firms in the supply chain aligned in their approaches?
- Whether the appetite exists to continually assess the value products are providing (this is driven by top-level decision makers)
And intermediaries should consider:
- That they are responsible for the standard of customer outcomes the products they sell provide, regardless of the product designer
- How sales incentives are driving behaviours – for example, whether incentives are too focused on commercial goals and do not take into account the suitability of the product for the customer to whom it is sold
Firms in the market – whether involved in the pilot or not – should compare their own data against that of their peers to assess their market position. If the pilot delivers the intended benefits, the FCA may require all firms to publish data for the products in question, or conduct pilots on a wider range of products.