Following a thematic review of the general insurance industry, the FCA found concerning practices within the motor insurance sector, predominantly surrounding pricing practices.
In light of its findings, the FCA published its consultation paper on General insurance pricing practices remedies (CP20/19), proposing a package of remedies to address the issues identified.
These remedies include a ban on differential pricing between new and existing customers, making it easier for customers to cancel auto-renewing policies, extending the product governance rules to existing products and restricting firms’ ability to use price optimisation techniques when setting prices.
As most regulated firms expect, the new rules also include additional reporting requirements, ranging from product-specific data reporting to annual attestation by senior managers on compliance with the new regime. To aid firms with implementing these reporting requirements, the FCA published Policy Statement (PS20/9) General Insurance value measures reporting and publication setting out requirements for firms to report and publish value measures data from July 2021.
In addition, firms should take into consideration value measures data in their product value reviews from January 2021.
So what does it mean to firms?
As noted above, the FCA places greater emphasis on firm’s Senior Managers to embed the principle of the new rules, and with the same brush, enable itself to hold SMFs to account under the SMCR regime (particularly thought the REP022 attestation).
As a result, firms will have to carefully review their products and sales process, ensuring not only that they comply with the new bans but also that they have an appropriate level of record-keeping in place to facilitate the new reporting requirements.
The new rules - at a glance
Ban on price walking
The FCA, in its thematic review, found that some brokers (and insurers) offer different prices to identical customers, representing identical risk. The FCA found that longer tenure (more loyal customers) ended up paying a higher price, compared to new business.
Under the new rules, firms must offer the same price for new business as for renewals (largely, where the risk is the same).
With the new rules, the FCA extends the remit of the product governance rules, so to include all General Insurance Products. The detailed rules can be found in the PROD section of the FCA handbook. In brief, the rules require firms to ensure:
The end price paid by the customer is of fair value (value assessment), including in the foreseeable future
Firms conduct at least annual product reviews
Typically, this should be a straightforward exercise within firms, however, those with an extensive distribution network may find the process slightly onerous. As such, firms should allow sufficient time and resources to comply with the requirements - potentially considering whether products can be grouped together.
The FCA now requires firms to make it equally easy for customers to opt-out of auto-renewal, as to buy the policy in question. In particular, consumers must be able to opt-out of auto-renewal using the same method as they purchased the product.
In addition, firms must ensure that the customer understands what auto-renewal means and whether it applies to the given policy.
As most firms will be aware, the FCA is undergoing a reform to become a data-driven regulator. As part of this transformation, the new rules now introduce additional reporting requirements, mostly so the FCA can supervise the effectiveness of the new rules. These requirements include reporting on price differentials for new and renewing customers. In the first year after the new rules come into force, firms are required to report pricing practices data in a single report covering the six months ended 30 June 2022.
As part of the new rules (and reporting requirements), a senior manager (approved under the SMCR regime), will need to attest that the firm’s pricing models comply with the pricing rules.
The additional attestation, by large, should be straightforward, however, we will provide further guidance on what these reporting obligations are and what firms should do with them. Particularly, we will be looking at:
REP021c - General Insurance Pricing Information - Core Product by Channel
REP021d - General Insurance Pricing Information - Close Books of Business
REP021e General Insurance PRicing Information - Premium Finance, Add-ons, Fees and Charges
REP022 General Insurance - Attestation
REP019 General Insurance - Value Measures Report
If you require assistance with insurance pricing regulation or any other compliance issue, don't hesitate to reach out to our compliance consultants.