On the 4th October the FCA published its interim market study on General Insurance Pricing Practices. This report follows on from a number of FCA publications in 2019 highlighting significant and systemic conduct risk exposures within the GI sector.
The FCA’s Dear CEO letter published in April referenced “significant potential for harm and poor outcomes for customers arising from the product development and distribution approaches in some sectors of the GI market” which is echoed in the Pricing Market Study “Overall, our analysis raises significant concerns that these markets could work better and are not delivering good outcomes for all consumers.”
The FCA has indicated that they are ready to take action to address the findings in the study, but firms should also consider the wider implications this may have across the GI sector. As referenced in a previous blog by Baringa, and evidenced by the findings in the Market Study, General Insurance is top of the priority list for the FCA as we approach 2020.
In the Market Study the FCA found that the home and motor insurance markets are not operating effectively for all consumers:
- Potential for £1.2bn of overcharging in the GI market affecting up to 6 million policy holders;
- Consumer research indicated that up to 30% of customers paying high prices could be classed as vulnerable;
- Lower income consumers are potentially penalised for buying dual buildings & contents cover over higher income generating consumers;
- People who pay high premiums are less likely to understand insurance or the impact that renewing has on their premium; and,
- Firms engage in a range of practices that could make it more difficult for consumers to make informed decisions and could raise barriers to switching.
The FCA has set out remedies that are under consideration, potentially resulting in wholesale reform across the market to address the scale and severity of the perceived problem in GI.
- Pricing practice restriction;
- Helping consumers find and switch to better deals;
- Strengthening product governance rules;
- Increasing transparency between firms and customers; and,
- Monitoring firm actions in relation to pricing practices.
The FCA has stated, among other remedies, that it is considering:
- Restrictions on price increases to renewing customers. For example, allowing firms to set discounts for new customers but not permit any future increases in margins beyond the first year if these customers renew. This would remove firms’ ability to step prices up over time until consumers are paying prices far above costs. They could also ban price walking as a strategy for general insurance.
- A ban or restriction on the use of auto-renewal of insurance policies, including where there has been a change in the price.
- Another option they are considering is to require firms to migrate consumers to cheaper products offering equivalent cover. Periodic automatic switching could help prevent long-term price walking. This remedy could be restricted to consumers who have renewed multiple times or who are paying high or very high prices.
- Expanding Senior Management Function holder responsibility for the value of products to the target market.
- They will also look at whether firms should be required to publish information about their pricing practices or differences in prices between customers of equivalent risk. Publishing such information could lead to public scrutiny and pressure on firms, prompting them to lower prices. It may also prompt consumers to consider the prices they are charged, how these prices may have changed over time and whether they should switch.
In the event that any, let alone all, of the above remedies are implemented by the FCA this will likely result in an industry wide change for firms, requiring drastic changes in pricing strategies as well as product governance and oversight.
There are naturally comparisons being drawn between the FCA’s proposed pricing intervention into GI to that in Consumer Credit. The FCA is ever more focused on pricing regulation in markets where consumer confidence is low, where previously firms had been left to govern their own practices in line with the wider conduct of business requirements.
Next Steps for Firms
Firms may wish to respond to the FCA directly or through an industry body. Firms will need to consider the findings of the Market Study in the context of their own practices and pay due regard to the proposed remedial actions outlined by the FCA. Whilst it is not guaranteed that all of the remedial actions will be adopted, the FCA do not make considerations for intervention without proper deliberation. We have seen in other industries how they have taken what is considered hard action where they believe it to be necessary, knowing that there may be far reaching consequences.
Firms should aim to be proactive before the final report is published. The intentions of the FCA are clear, and there is a period of increased regulatory scrutiny beginning with low consumer confidence. Firms may wish to review the appropriateness of recent changes made in their business as a response to other regulatory publications, the product governance aspects of IDD as well as renewal transparency rules would be particularly relevant in the context of the study findings. They may also want to proactively make changes to their pricing strategies and governance frameworks to evidence that customer centricity is at the heart of their business.