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General Insurance: Pricing Practices Market Study

  • United Kingdom
  • Financial services disputes and investigations
  • Insurance and reinsurance
  • Litigation and dispute management
  • Financial services

13-07-2021

The FCA published feedback to its Consultation Paper in relation to general insurance pricing practices (CP20/19) and its final rules on 28 May 2021 in a Policy Statement (PS21/5), (see our earlier briefing summarising the FCA’s activity in respect of value leading up to this point).

The new pricing and reporting requirements apply to consumer motor, home and additional products sold alongside. However, the product governance and auto renewal provisions apply across all retail general insurance, and the product governance provisions also apply to commercial insurance products. For product governance, insurers will, therefore, need to extend the scope of their product reviews beyond those products manufactured (or significantly altered) after 1 October 2018 (which is what is currently required following the implementation of the Insurance Distribution Directive) and review all affected products.

The new requirements have left some doubt as to when an additional product is sold “alongside” home or motor insurance are caught by the pricing rules. Although the term “alongside” is already used in the Handbook, it is not defined and the FCA have not sought to define it. This could leave insurers at risk of failing to comply in limiting the price of an additional product where it is not clear that they should have done.

1. Timetable

Firms have until:

  • 1 October 2021 to implement any rules relating to SYSC, product governance, premium finance provisions; and
  • 1 January 2022 to implement new pricing and auto-renewal remedies as well as reporting requirements.

There is a short transitional period to 17 January 2022 to enable full compliance with all rules, but if firms take advantage of this, they must backdate benefits to customers to 1 January 2022.

2. Pricing Remedy

The new pricing remedy can be summarised as follows:

Applies to Consumer: (i) Motor Insurance (ii) Home Insurance and (iii) Additional products sold alongside, including premium finance.

There is a ban on price walking, meaning renewal prices for existing customers must be no greater than the equivalent new business price which would be offered to a new customer and the price calculated as if the customer was a new customer. It also applies to multi-product pricing i.e. the combined renewal price must be no higher than the equivalent combined new customer price.

It does not mean that there can be no changes in price over time. In the same way Firms calculate prices for new customers, renewal quotes may differ year to year due to factors such as changes in the customer’s risk, the Firm’s margin for all customers and the Firm’s pricing model (although this must not routinely lead to higher prices for renewal customers).

For closed books, Firms need to ensure that renewal prices do not systematically discriminate against customers based on tenure and a Firm must be able to assure itself of value relative to similar products available to new customers in the market.

A Senior Manager will be required to attest that their Firm’s pricing models comply with the pricing remedy. The first attestation is required within three months of the rules coming into effect and is then to be provided annually.

3. Product Governance

Applies to: (i) All Retail General Insurance (ii) All Commercial General Insurance (iii) Pure Protection Insurance and (iv) Premium finance sold alongside

The current product governance rules require Firms to have appropriate processes in place when manufacturing, distributing and managing products and apply to products manufactured on or after 1 October 2018 (or to significant adaptations to existing products made on or after 1 October 2018).

The FCA has enhanced these rules with a provision that requires Firms to ensure that their products offer fair value to customers for a reasonably foreseeable period.

The existing and new rules will apply to all general insurance and pure protection products regardless of when they were manufactured, as well as additional products and premium finance. A product approval process will therefore need to be applied to existing products which do not currently fall within the scope of the rules and existing product approvals will need to be updated to take into account the new requirement on fair value. The FCA has allowed a period of 12 months within which Firms must do this.

The FCA have also introduced a minimum requirement for Firms to review products at least every 12 months.

In addition to the changes to the rules for product manufacturers, the FCA has made changes to the product governance rules for insurance distributors. These complement the changes to the requirements for product manufacturers.

4. Auto Renewal

Applies to: All Retail Insurance

Firms are required to offer a range of easy, accessible and straightforward options for consumers to cancel the auto-renewal of their policy using at least the same methods they allow consumers to purchase a new policy. The process should be straightforward and no unnecessary barriers should be placed on the consumer.

Firms are expected to explain to consumers whether their policies are set to auto-renew and what this means for them. Consumers should also be informed of the options available to them at the outset and consumers should be able to cancel the auto-renewal of their policy at any time during the term of their contract.

5. Reporting Requirements

Applies to Consumer: (i) Motor (ii) Home and (iii) Additional products sold alongside, including premium finance.

Firms will be required to submit pricing reports on an annual basis to assist the FCA with supervision. Reports will need to cover a range of metrics and include data such as average premium prices, net and gross prices, number of policies sold/renewed and expected claims costs/ratios. These reports are intended to be a snapshot of pricing practices and used for monitoring requirements, although the FCA has not ruled out publishing data if there would be value in doing so, for example to increase scrutiny of Firms’ pricing practices.

Comment

Whilst intervention has been anticipated, the published final rules will clearly impact long-standing business models. Given the implication that Firms have not been getting it right to date, many will be rightly concerned about whether the FCA will be seeking to look further into historical practices or expecting firms to do so.

The FCA’s refusal to provide further clarity around fair value and how it should be assessed may make it difficult for Firms to be confident that their products will provide fair value for a reasonably foreseeable period and that their distribution channels will not affect this.

Similarly, the lack of clarity as to when additional products will fall within the scope of the pricing rules, will mean Firms may need to adopt a cautious approach. They may, therefore, choose to treat sales of products sold to the same customer at the same time, whether or not during the same “journey” or relating to the same risk, as having been sold “alongside” and rely on their ability to change their pricing models over time in order to mitigate the financial impact.

Useful links

Statement: The implementation period for any rules arising from CP20/19

CP20/19: General insurance pricing practices market study – Consultation on Handbook changes

MS18/1: General insurance pricing practices market study

PS21/5: General insurance pricing practices market study

 

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