Context
The FCA has released its Policy Statement and final rules on general insurance pricing practices. This follows on from its previously published papers in relation to pricing practices and value measures:
- MS18/1.3 – General insurance pricing practices market study – Final Report
- CP20/19 – General insurance pricing practices market study – Consultation on rule changes
- PS20/9 – General Insurance value measures reporting and publication – Policy Statement
The remedies implemented by the FCA aim to enhance competition and protect home and motor insurance customers from so-called ‘loyalty penalties’, with new rules so that renewal quotes for home and motor insurance consumers are not more expensive than they would be for new customers.
Key points to note
Pricing Remedy
- The FCA is attempting to ban what is known as ‘price-walking’ (charging renewing customers more than equivalent new business customers) as it estimates that, in 2018, 6 million motor and home policy holders would have saved £1.2 billion had they paid the average price for their actual risk.
- Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer. It is likely that firms will no longer offer unsustainably low-priced deals to some customers.
- Most motor and home insurance brokers will not be affected by the new pricing rules as they are bound by the price which is set by insurers. However, the FCA’s view is that discounts and incentives do form part of the ‘pricing’ and so are captured overall by the pricing remedy. This means that any discounts or incentives which are offered to new customers must also be available to existing customers. A broker charging the customer a fee does not form part of the price, but it should be noted that the FCA has said “in accordance with the anti-avoidance provisions they should not be charging higher fees to renewing customers”.
- Brokers who do arrange or offer incentives or discounts are very likely to be considered ‘price-setting intermediaries’; there are consequences involved in brokers being price-setting intermediaries, not least the requirement to complete more of the new reporting requirements.
- Add-ons sold alongside motor and home policies are also caught by the pricing remedy.
- Premium Finance is also included as one of the add-ons caught by the pricing remedy, with the APR charged being the determining factor (so a renewing customer cannot be charged a higher APR than an equivalent new business customer).
- These pricing rules come into force 1 January 2022.
Product Governance
- The FCA has used this as a platform to bolster its Product Governance requirements.
- The product governance requirements apply across the board, not just to motor and home insurance but also other personal lines products, protection products and commercial risks (except for large risks).
- Premium finance arrangements are also captured, meaning that virtually all insurance intermediaries are being brought into scope.
- There are requirements for firms to assess all general insurance and pure protection products at least every 12 months. The assessment should consider if products provide value for a “reasonably foreseeable period”.
- The new rules concentrate on whether products offer fair value to the customer and if firms are acting in their customer’s best interest.
- Most of the requirements fall on the product manufacturers so it is important to determine and agree who the manufacturer(s) is (are) for each product offering.
- The new product governance rules come into force 1 October 2021.
Cancelling Auto-Renewing Policies
- Firms must provide consumers with a range of easy and accessible methods for opting out of auto-renewal (private health, medical and pet insurance being the exceptions to this).
Reporting Requirements
- All firms operating in the motor and home insurance space are caught by the reporting requirements.
- There are greater reporting requirements for price setting intermediaries; including providing the FCA with an annual attestation signed off by an SMF holder that they have been compliant with the rules throughout the reporting period. Therefore, firms may wish to consider whether they want to be price setting intermediaries.
- For firms that are not price setting intermediaries they will be required to provide data on premium finance, charges and possibly add-ons split by tenure of customers by year ranging from new (T0) to T10+ years.
- The first report will be due in September 2022 for the period of the first half of 2022.
Next actions
We recommend you contact your Compliance Support provider for guidance on the implications of these rules – in the meantime, firms should assess their business models, identify where they may be deemed to be price setting intermediaries for motor and home insurance; and to give some consideration as to whether they have been (even unintentionally) price-walking customers. Where firms will need to complete information in the required reporting, they will need to start to collect the data from the beginning of next year.