By Ben Johnson, Managing Director of the Insurance Practice, Sheffield Haworth
Interest in the FCA’s insurance pricing remedies is intensifying. Following two webinars in March hosted by Consumer Intelligence, April saw Insurance Times host another.
So far, industry insiders are engaging with the remedies and keen to find out what others think. Yet few are willing to go on record to talk about the practical measures they are taking in response. This is understandable, but also frustrating for readers seeking insight into how insurers are looking to evolve from pricing to Fair Value.
As a result, I spoke to three experts to get their views: Suneeta Padda, founding director of Padda Consulting; Colin Robertson, a former UK personal lines director at RSA, who previously worked at More Than, Direct Line, and Tesco Bank, and is now a consultant; and a senior product manager at a major UK insurer with a long career in insurance underwriting who preferred not to be named.
I hope you find this helpful as you plan your own evolution to providing Fair Value.
What do you think the FCA hopes to achieve with its pricing proposals (beyond ending price walking at renewal) and why?
Suneeta: “I think the FCA are looking for firms to engage proactively with customers to help them switch to better deals. If you look at all the work the FCA have done and continue to do on pricing, coupled with the FCA’s Call for input on Open Finance, where we (as consumers) can consent to a third party to have access to our financial data/information who in turn would seek out the best deals, that would make it easier for the customer to switch to a product that is suited to their needs and priced competitively.”
“The FCA is trying to generate greater transparency and trust between the customer and the insurer.”
Colin: “The FCA have stated their goal is to rebuild consumer trust in the industry. Their direction of travel has been consistent for a few years now. However, the super complaint made by Citizens Advice to the CMA (Competition and Markets Authority) about loyalty pricing in 2018 has turbocharged their approach.”
Senior Product Manager: “The way I personally consider the pricing practices regulation is that it is the FCA trying to generate greater transparency and trust between the customer and the insurer. I feel that the pricing measures themselves are a tool rather than the ultimate aim.”
Given that the FCA has said it wants firms to offer “Fair Value” to consumers, what does the term Fair Value mean to you?
Suneeta: “I think the concept of fair value and price walking is not exclusive to insurance. This is a broader issue where customers are penalised for their loyalty across numerous sectors.
“Fair value to me would mean that I am given the option to pay the same price or less at renewal as a new customer. I’m not sure the insurance industry considers fair value for loyal customers. One could argue that pricing is competitive for new customers but that is just to lure them in!”
“At an industry level there isn’t currently a consistent view of what Fair Value is, with different insurers at different stages in their thinking.”
Colin: “I think you could replace fair value with value for money. A further consideration is that this should apply to all customers irrespective of how long they been with their insurer.
“For many customers, being with their insurer a long time raises expectations their loyalty should be rewarded. At an industry level there isn’t currently a consistent view of what fair value is, with different insurers at different stages in their thinking.”
Senior Product Manager: “Customers currently buy their insurance based on price – often only price – which means they are not considering the product quality or service that an insurer offers them.
“Customers could be forgiven for thinking that products are homogeneous, with the exception of add ons, but the reality is far from true. This is a particular risk on price comparison websites where space for product information is limited and quotes stacked in order of price.
“The pricing remedies are combined with other changes to the display of premium finance and auto-renewal, alongside a slight change in the requirement placed on insurers to assess the value of their products.
“This demonstrates to me one of the actual aims of the regulation, which is ensuring value is shared along the value chain, where each link has to earn their share of the value.”
What do you see as the biggest potential compliance challenges or opportunities for the industry due to what the FCA is proposing?
Suneeta: “The biggest challenges for compliance will be largely around embedding all the requirements set out by the regulators, ranging from pricing strategies to determining customer impact assessments for the different segments.
“This is an opportunity for insurers to put customers at the heart of their business and create a commercial model that delivers competitive advantage, as well as meet the regulations.”
“The pricing piece is just one piece of the jigsaw. Firms will need to look at all the other papers and requirements linked to pricing. These include aspects such as smarter communications, product governance (especially for new versus renewal), and insurance distribution. On distribution for example, does the end customer end up paying more because there is a longer, more complex distribution chain?”
Colin: “The biggest compliance challenge is not to approach this purely as a compliance challenge. Rather this is an opportunity for insurers to put customers at the heart of their business and create a commercial model that delivers competitive advantage, as well as meet the regulations. Those who embrace this the best wholistically will be the winners when the dust settles.”
What do you see as the biggest potential business challenges or opportunities for the industry as a result of what the FCA is proposing?
Suneeta: “The biggest challenge with the new and forthcoming regulatory requirements will be what each firm determines to be ‘fair value’. How a firm defines fair value will be fundamental to how a product is priced.
“How a firm defines Fair value will be fundamental to how a product is priced.”
“How will they regularly review this against changing strategies and business environments? How will firms determine the fair value and pricing for new customers versus long standing or vulnerable customers? That will be the biggest challenge!”
Colin: “In the short term, for many figuring out how to develop their pricing models to cope with the new regulations is a great intellectual challenge.
“The opportunity lies in the possibility of creating a customer centric commercial model that delivers competitive advantage against your rivals. That will require the best brains to think about all aspects of the regulations, apply a customer and a commercial lens to create the desired outcomes.”
Senior Product Manager: “Insurers have to consider the immediate commercial realities of the pricing remedies and to ensure that their pricing models reflect the new rules. This is not a task that can be underestimated in its size and scope.”
“I am hopeful that the regulation will lead to greater competition on product quality and service and finally lead to some of the innovations see in the banking sector.”
“However, over time I am hopeful that the regulation will lead to greater competition on product quality and service and finally lead to some of the innovations seen in the banking sector – long discussed in the insurance industry but seldom delivered in reality.
“What do customers actually want and need and how is their insurance going to demonstrate that they will be there in that customer’s hour of need?”
From you experience, what practical measures can the industry take to move from a ‘pricing-based’ business model to a ‘value-based’ business model?
Suneeta: “To be honest, the insurance industry should already be looking at fair value as part of their product approval processes which should focus on what is right for the customer. That said, the challenges will be around enhancing and governing such processes.
“Whilst firms do well in implementing new regulatory requirements, most struggle with maintaining the initial standards that have been set.”
“The industry should already be looking at Fair Value as part of their product approval processes which should focus on what is right for the customer.”
Colin: “The industry needs to be able to intimately understand what they need to deliver for customers in order to create a value as opposed to pricing-based model. This means focusing on areas customers value beyond just a great price, such as offering the right cover levels, ease of doing business and a great claims experience.
“In addition, the technology out there, combined with consumers’ more widespread adoption of digitisation due to Covid, means the ability to create a better customer experience at a lower cost is a greater opportunity than ever before.”
“Overall I think this is a challenging but hugely exiting moment for the industry. It’s time to innovate and genuinely focus on customers’ needs.”
Senior Product Manager: “I do care very much about how insurers treat this regulation. It is about putting the customer and their needs and expectations at the forefront of what we do.
“Matching a renewal price to new business price does flip the industry on its head and will be complicated to implement in the timeframes but I believe it will lead to better outcomes for all parties in the longer term.
“Overall, I think this is a challenging but hugely exiting moment for the industry. It’s time to innovate and genuinely focus on customers’ needs.”