By Ben Johnson, Managing Director of the Insurance practice, Sheffield Haworth
The FCA’s current pricing remedies are about much more than just pricing. The regulator has made it clear that insurers must become more customer-centric across all parts of their business and all parts of the distribution chain. Here’s what insurers need to know now so they can prepare.
All the signs point to the FCA’s current push on pricing remedies being the start of a long, evolutionary wave of regulation to nudge the insurance industry towards becoming more consumer centric and value focused.
The recent history of similar regulation in banking suggests what the roadmap may look like. Insurers will have to review not just pricing, but also their products, their use of consumer data, how they communicate to consumers, their claims service, and even their business models.
For this article, I spoke to several key insurance insiders off-the-record to gauge the industry’s response. I also got contributions from James Yerkess from Hal Consulting and Ian Hughes from Consumer Intelligence. Yerkess has done a lot of work on value and pricing regulation within the banking sector. Hughes has carried out decades of research into consumers’ attitudes to insurance.
Here’s what they all have to say about what the FCA wants to achieve. As well as what forward-thinking insurers can do now to get ahead of the regulatory curve.
Insurance pricing and the FCA: when are the rules changing?
In September 2020, the Financial Conduct Authority published its General Insurance Pricing Practices Study and then began an open consultation with the industry, inviting companies to submit feedback.
The FCA’s Pricing Practices Study proposed a package of measures to “improve competition and ensure firms offer fair value products in the future”. These measures include:
- An end to price walking and other common auto-renewal practices.
- Better product governance.
- Reporting requirements for insurance businesses to submit statistics annually for retail home and motor insurance.
The FCA closed this consultation on 25th January 2021 and plans to publish its policy statement at the end of May 2021.
Firms will then have four months to implement any proposed systems and controls (SYSC) rules and product governance rules published in the policy statement. After that, they will have until the end of the year to implement whatever pricing and auto-renewal remedies and reporting requirements are in the policy statement.
The FCA’s pricing intervention: “a business model shift that’s likely to challenge a lot of insurers”
One well-known insurtech thought leader I spoke to welcomes the intervention. “This is seen as the nuclear option, the regulator getting involved,” he says. “But that’s because there are serious questions for the industry about how we’ve been missing loyalty when dealing with customers.”
“There are serious questions for the industry about how we’ve been missing loyalty when dealing with customers.”
The essential challenge for motor and home insurers is to move away from competing purely on price when acquiring customers and then punishing loyalty by raising premiums at renewal.
“As an industry, we have spent far more time and energy attracting customers than we have retaining customers,” he adds. “The question is how we move away from that – as well as how we communicate and the narrative around this. That’s a business model shift that’s likely to challenge a lot of insurers.”
How are insurers responding so far?
In a recent poll for Consumer Intelligence, 84% of firms said they were responding to the FCA proposals – mostly with changes to their underwriting, compliance, and product lines.
Yet, according to several industry observers, many insurers are missing something crucial about the recent FCA proposals – the Fair Value element.
What the FCA really wants to achieve: it’s about more than just pricing
According to Ian Hughes, CEO of Consumer Intelligence, the phrase “Fair Value” is the key to understanding what the FCA wants to achieve. The FCA’s paper explains that the regulator’s pricing intervention is, among other goals, intended to “provide long term fair value (reflecting both price and quality) for all customers throughout the duration of their relationship with the firm.”
As Ian says: “When the FCA first published a document about pricing and auto-renewals four or five years ago, that document didn’t have a single mention of the term ‘Fair Value’. But in the September paper they mention it 102 times.”
“When it comes to Fair Value, I’m not sure insurers have clocked that at all.”
He worries that insurers are in danger of missing this point, adding: “When it comes to Fair Value, I’m not sure insurers have clocked that at all.”
James Yerkess agrees: “I think many insurers don’t yet fully grasp why the FCA was asking for certain metrics in its pricing study in September,” he says.
“If the FCA only cared about pricing, it wouldn’t ask for these metrics. But if you think of them as being used by the regulator to track and promote deeper aspects of Fair Value over the longer term, then they start to make more sense.”
How do we know the FCA wants Fair Value? Because it says so…
In March, Consumer Intelligence hosted a webinar with Kate Collyer, Chief Economist of the FCA, to emphasise what Fair Value means for the insurance industry.
On the webinar, Collyer defined Fair Value as “the overall benefit I as a consumer get relative to the total cost.”
“Fair Value should be central to a firm’s culture and purpose.”
“At all times, consumers must have confidence that they’ll get Fair Value,” she said, adding that, “Fair Value should be central to a firm’s culture and purpose” and that, “consumers don’t feel they are getting Fair Value.”
We’ve been here before: lessons from 9 years of banking regulation
Yerkess says this all sounds very familiar: “This is exactly how value and pricing banking regulation started. The regulator began by looking at pricing and that evolved into looking at Fair Value.”
He cites the example of the Retail Distribution Review in 2012, which sought to achieve transparency around the costs and fees associated with financial advice. It was followed by the Markets in Financial Instruments Directive in 2017 and the Payment Services Directive in 2018.
These rule changes increased competition across the sector and led to the rise of new market entrants. The same pattern is likely to be replicated across insurance, James believes.
“This is really about customer-centricity.”
The language around transparency and providing value to customers the FCA used to introduce these regulations is almost exactly the same as that being used now for insurance. As Collyer said on the March Consumer Intelligence webinar:
“We’ll be looking for a demonstrated commitment to Fair Value by firms evolving to simpler and more transparent pricing models, and for firms to look at governance regularly and holistically.”
“The regulator wants to use these proposals to create a value ecosystem in insurance as it has in banking, and it’s using price to start the ball rolling,” Yerkess says.
“This is really about customer-centricity,” he adds. “The regulator has even quantified this value ecosystem with a number – that the proposed pricing remedies represent a value transfer back to consumers worth between £3bn and £11bn over the next 10 years. That means they’re taking it very seriously.”
Insurers will have to change, just as the banks did
Responding to my question about the potential risks to insurers who aren’t able to change fast enough, Yerkess says: “The regulator will move them faster. This is not a possibility, it’s a reality. We saw that happen in banking and that’s what will happen here.”
“Not doing anything in the banking sector resulted in worse financial implications for some banks because they got fined.”
We should be in no doubt that the FCA intends to be as strict with insurers as it was with banks, Yerkess says, adding: “Not doing anything in the banking sector resulted in worse financial implications for some banks because they got fined – or had to implement costly remediation exercises.”
Collyer’s comments on the March webinar supports this view. “We’ll be monitoring closely to see how firms adapt their models,” she said, later adding: “The reported data will mean we can work out what’s going on – and take follow-up action with the appropriate firms.”
For Yerkess, the FCA’s reporting requirements are the key.
“The first round of data collection will be the beginning of this journey towards Fair Value,” he says. “The FCA will get a landscape of what is out there across the insurance sector. Then, as they did in banking, they’ll start looking at value and pricing quartile management – ranking the performance of insurance companies comparative to each other.”
This represents a possible threat for those within insurance organisations who will be responsible for signing off the pricing remedies and submitting data to the FCA.
“You’re signing for your organisation to say you’re providing Fair Value – but at the moment you’re potentially signing blind in terms of how you compare with the rest of the industry,” he says.
“If in the first submission of the reporting metrics you rank in the bottom or lower quartiles then it is highly likely the regulator will end up paying you a visit. They will ask you to evidence your process for Fair Value assessment and governance. So how confident are you really that you’re providing Fair Value and do you have the evidence to support your decisions?”
In summary, the FCA’s pricing remedies are designed to promote Fair Value across the insurance industry. From the recent history of banking regulation, it seems clear that this is just the start of a series of interventions that are likely to go across the industry over the next few years. The FCA has hinted strongly that this the case. The next question is how the industry should respond, which I’ll cover in part two of this article.
Read part two: “How the insurance industry should respond to the FCA’s pricing proposals”
Make your voice heard – take our FCA Pricing Remedies survey:
I’m keen to get your views. How closely are you following the FCA’s proposals? How are they likely to impact your business?
I’ve put together a brief survey to take the market’s temperature on this. To see what you and other leading lights in the industry are thinking.
Take part, and you’ll get priority access to our report on the results as soon as it’s ready.
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About the contributors
James Yerkess, Founder & MD at HAL Consulting
With a career spanning executive leadership roles across financial services, global retailers and start-up banks, James Yerkess is the Founder of HAL Consulting. HAL joins highly experienced value and pricing experts with exclusive benchmarking data to deliver long term sustainable growth across global locations.
Ian Hughes, CEO, Consumer Intelligence
Ian Hughes is CEO of Consumer Intelligence, helping companies to better understand their customers through market and consumer benchmarking. A Fellow of the Institute of Direct Marketing and an I Love Claims Member, Ian is also a graduate of Harvard Business School and a regular contributor to the Post and Insurance Times.