First published by the ABI on 5th December 2017
The general concept of value for money (VFM) in everyday life is relatively easily understood. When aligning this concept to financial services and the products and services different organisations offer, it can become troublesome and time consuming to design and implement effective value for money assessments because of the number of features, characteristics and dependencies inherent within product design.
What is the regulatory direction of travel?
The regulator has been proactively assessing the extent to which businesses offer a ‘fair deal’ to consumers across the financial services sector.
Within the insurance market, we have seen a particular focus of activity from the regulator in relation to general insurance value measures work, released in January 2017. Here, the FCA created several measures to help identify ‘value’ in relation to add-on and stand-alone insurance products. The scorecards covered four products: home insurance, home emergency, personal accident and key cover, for both stand-alone and add-on products. The FCA acknowledges that the measures are not intended to provide a perfect representation of value although, they can be used as indicators.
At this stage, the regulator has said that it does not propose to introduce mandatory point of sale disclosure of value measure data to customers, but it may reconsider this at a future date. The FCA’s present intention is to use the findings from the pilot exercise to further refine its value measures, obtain further evidence and to feed into potential future consultations.
The regulator has also increasingly focussed on ‘fees and charges’. The FCA have taken a particular interest in early exit charges for pensions and has also recently suggested that some of the governance reforms under consideration for asset managers, such as the strengthened duty to act in the best interests of investors, could also apply to insurance companies that sell investment products to retail investors.
Where have firms fallen short?
The definition of value:
As a firm, how do you define value?
It’s certainly a subjective area which has divided firms we have worked with across both life and general insurance.
Ultimately, whichever definition firms settle on, whether it is a qualitative, quantitative or a hybrid approach, this should be underpinned by a robust product governance framework and management information suite.
Creating a robust product governance framework
Some practical considerations for your review framework:
- Do you have a methodology that uses a combination of different benchmarks to demonstrate how a product is performing? These could be financial or customer-based benchmarks, for example, within the life and pension’s space, performance against relevant indices and benchmarks, customer outcomes results, persistency and complaint volumes and within the general insurance market, the claims frequency ratio against policy volumes, the percentage of notified claims that are accepted, and the average sum paid out. Finally and crucially, do you reconcile all of these metrics to form an objective view?
- In some scenarios, customers are paying more than others for the same service. Are the terms of this cross-subsidisation fair on the customer groups paying more? How does it impact on value for money and the final return on investment, and are customers who are investing in the same product experiencing different results?
- How do you examine whether the information needs of customers are being fulfilled? Customers should not only be engaged at the outset, but on a regular basis and at key trigger points during the life of the product. Do you conduct outcome tests on the back of such interactions?
Practical steps forward
Whilst there is no single solution to providing a transparent measure or benchmark of value, it is worth considering the end state that the regulator and indeed consumers wish to achieve. This is so that products and services perform as expected and are priced in a fair and transparent manner.
Measuring value and having management information that is robust, is one key step to allowing management to access accurate, up-to-date and clear metrics which will ultimately allow for the identification of products that could be providing poor value for money.