The FCA recently published the Interim Report of its General Insurance Pricing Market Study. The report sets out the FCA’s findings on the pricing of motor and home insurance, and outlines a package of hard hitting remedies the FCA is considering; these will have important implications for all non-life insurers and insurance brokers.

In summary, the package of remedies being considered reflects the trends we have observed in the FCA’s approach; greater price intervention coupled with an increasingly proactive use of the accountability provisions within the Senior Managers Regime. The package has the potential to change fundamentally the nature of general insurance pricing and its competitive dynamics. Firms will need to carefully consider how best to engage with the developing debate and prepare for forthcoming changes to the FCA’s rulebook.

Specifically, the FCA is considering:

• Banning or restricting firms’ ability to raise prices for consumers who continue to renew with the same insurance provider, in effect outlawing or restricting differential pricing. One such proposal the FCA is considering is to allow firms to set discounts for new customers but not permit any future increases in margins beyond the first year if these customers renew.
• Restrictions on the use of particular factors in setting prices and determining margins, for example the consumers’ likelihood of switching or negotiating a better deal.
• Restrictions on the price firms can charge for renewals relative to a benchmark, such as the price they charge to new consumers.
• Requiring firms to move consumers automatically onto cheaper equivalent deals. The FCA says that “this remedy could be restricted to consumers who have renewed multiple times or who are paying high or very high prices”.
• Introducing a direct responsibility under the Senior Managers Regime for a senior manager to take responsibility for the value of products.
• A ban or restriction on the use of auto-renewal of insurance policies, or making auto-renewal opt in only.
• Improving the transparency and disclosure around insurance pricing, including considering whether firms should publish information about the price differentials between their customers.

The FCA will be accepting responses to its Interim Report until 15th November 2019. It will publish its Final Report, alongside a Consultation Paper with its finalised set of proposed remedies, in Q1 2020.

In our view, pending publication of the FCA’s final report and consultation, firms now need to:

• Take stock of their current pricing policy and methodology, and consider how any potential ban or restrictions on pricing will affect their business model;
• Look to improve pricing governance and undertake a risk assessment of their suite of products and whether they are likely to deliver good customer outcomes, especially for those consumers deemed vulnerable;
• Consider proactively reviewing their back-book to assess the potential for poor customer outcomes and address the prices for those customers paying higher margins;
• Look to enhance their transparency and disclosure about pricing.

The FCA’s findings

The FCA’s interim review is primarily concerned with the fairness of price discrimination in the general insurance market, specifically the practice of ‘price walking’. ‘Price walking’ is where consumers who continue to renew their insurance policies with their existing insurance provider pay rising premiums each year they continue to renew, meaning they pay ever higher prices and become steadily more profitable than newer customers.

The FCA found that around 6 million UK consumers pay “unnecessarily high prices” for their insurance, and that if they paid the average premium for their risk they could collectively save around £1.2bn.

All types of consumers are affected by this issue. Importantly, however, FCA found that one in three of those paying these higher prices showed signs of vulnerability.

While the FCA found that those consumers who do switch or negotiate on their premium can get a good deal, it is also concerned that firms are using “complex and opaque pricing techniques to identify consumers who are more likely to renew and they can earn higher margins from” and that these consumers with lower price sensitivity are then given higher renewal quotes.

Implication for firms

The FCA’s proposed changes to GI pricing are strategic in nature and likely to have wide-ranging consequences for firms. The approach being adopted may well be extended to other sectors over time.

Central to the remedies the FCA is considering is some form of price regulation; namely a ban or restriction on firms’ ability to use ‘price walking’. It is likely that this would require many firms (both brokers and insurers) to fundamentally rewrite their pricing strategies and would have a significant effect on some business models.

In our experience, many firms are reliant upon their current pricing models to give them a competitive edge in attracting new customers. Consequently any price regulation is also likely to have a significant impact on the competitive dynamics of the market and may lead to a general flattening of prices across the front and back-book. The FCA will be considering how different potential remedies might affect the inherent trade-off between supporting competition for new customers versus protecting renewing customers from higher prices and how to best balance these competing considerations.

If the FCA implements these suggested remedies, those firms that compete primarily on price will need to rethink how they will win in their chosen markets. Insurers and brokers that rely on ‘price walking’ and add-ons sales to sustain profitability will have to find other ways to win that aren’t focused on price, for instance re-thinking product design. We have already started to see movement in the market in this area from start-ups and established players. Alternatively, those businesses that still intend to win on price will have to do so in a way that demonstrates that the customer is at the heart of their pricing strategy. This could require a re-think of the insurer’s operating model, including the use of technology to optimise the customer experience. Importantly, firms will need to look at their upstream and downstream distribution partners to assess whether the FCA’s remedies affect their partners’ business models.

More immediately, the FCA has expressed the view that firms’ governance, controls and oversight of their pricing practices require “significant improvement”. Firms should have regard to the expectations that the FCA set out in its Dear CEO letter of October 2018.  In particular, they will need good quality MI to assure themselves, and the FCA, that they review their pricing practices to ensure that poor customer outcomes, particularly for vulnerable customers, can easily be identified, actioned and addressed in a timely manner. Firms will further need to be confident that often complex pricing algorithms are not producing outcomes the regulator could deem to be inappropriate.

Of particular importance are the FCA’s proposals to give a senior manager responsibility for the value of the products sold to the firm’s target market. Whilst the FCA does not elaborate further on what this responsibility may entail, firms may want to look to the asset management sector – where the FCA has introduced a requirement for a senior manager to sign off on fund value for money assessments - as an illustration of the FCA’s practical approach. In particular, insurers may want to understand how asset managers evaluate the overall value of their funds, given that the FCA states that “value is driven not only by price but also by the quality of the product”. Firms will also want to put in place strong governance around pricing to ensure that senior managers and board members can satisfy themselves and demonstrate that the FCA’s expectations are being met.

Firms should also consider proactively reviewing their back-books to assess the potential for harm to customers from their current pricing strategies. Where consumers are found to be paying large price differentials compared to typical customers, firms should look to migrate them to cheaper comparable policies. Customer communications should also be reviewed and firms should consider enhancing their levels of pricing disclosure.

The wider regulatory message

It is clear that a key theme coming out of the FCA’s review is the fairness of firms’ pricing and the value for money they provide to consumers. We have previously blogged on the FCA’s Feedback Statement on Fair Pricing and firms should consider reviewing the FCA’s approach and its ‘6 question framework’. Firms will need to be able to explain how and why their services deliver value, while continuing to compete effectively in the market and deliver sufficient returns to all their stakeholders, including employees, shareholders and wider society.

Finally, firms should also take this opportunity to consider where UK conduct regulation is now heading and the implications for their strategy. The FCA’s General Insurance Pricing Review is a single piece of work, focusing on motor and home insurance, which forms part of a broader regulatory agenda, incorporating the FCA’s growing focus on ensuring good customer outcomes and value for money and willingness to use direct price intervention and the Senior Managers Regime proactively to these ends. While the reforms in this review are limited to the GI market, the FCA will also be looking at pricing practices across other markets, with a particular focus on those which are detrimental to longstanding and/or vulnerable customers. Action is likely to follow. Firms beyond the GI sector will consequently want to review their pricing and wider business model strategies to ensure they take account of these regulatory trends and so avoid being caught unaware by future market studies and reviews.

Cindy Chan - Partner, Risk Advisory

Cindy Chan has over 20 years of financial services consulting and audit experience. She has extensive experience in supporting firms in regulatory risk assurance reviews and conduct risk projects including complaints handling, product development and governance, sales and suitability assurance, as well as Section 166 Skilled Person reviews and enforcement cases.

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Andrew Bulley - Partner, Centre for Regulatory Strategy

Andrew Bulley joined Deloitte in October 2016 from the Bank of England, where he was, most recently, the Director of Life Insurance Supervision. Between 2014 and 2016 he was a UK voting member of the Board of Supervisors of the European Insurance and Occupational Pensions Authority (“EIOPA”). In a career with the Bank of England and Financial Services Authority stretching over 27 years, Andrew has held senior roles in the supervision of life and general insurers, the London wholesale insurance underwriting and broking markets, retail and investment banks, asset managers, and IFAs.

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Adam  Knight, Partner, Audit and Assurance

Adam is a partner in our Audit and Assurance team in London. He specialises in auditing insurance brokers and MGAs and has a significant amount of experience in the market. Adam leads our Insurance Regulation and Strategy Team and provides an extensive range of regulatory support to the global insurance market (including life and general insurers and insurance intermediaries) and to regulators across the Globe.

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John  Raven - Director, Financial Advisory

John Raven is a Director in the Economic Consulting group of Deloitte in London, focusing on the Financial Services Industry. He has some 20 years’ experience advising clients on the application of economic analysis to address regulation, competition and strategic matters. He has worked with banks, insurers, asset managers, fintechs, regulators and governments, applying a toolkit of competition economics, behavioural economics and finance to produce innovative solutions. John has advised clients on nearly all of the FCA and CMA market studies in the financial services sector in recent years.

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John  Lonen - Associate Director, Risk Advisory

John Lonen is a Director in Deloitte’s Financial Services Risk Advisory Practice. He has over 15 years of financial services experience in the UK (including within industry) and a very strong understanding and experience of the identification and management of conduct risk in Insurance, Wealth and Banking sectors. His experience ranges from managing skilled person reviews, support with the design and implementation of conduct risk frameworks and reporting through to helping firms with regulatory change projects.

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Felix Bungay, Senior Manager, Centre for Regulatory Strategy

Felix is a Senior Manager within the EMEA Centre for Regulatory Strategy, where he focuses on conduct regulation across a range of financial services sectors. Prior to joining Deloitte, Felix worked at the FCA where he helped produce a wide range of the organisation's House and Sector Views, including those on Retail Banking and Lending, Retail Investments and Wholesale Capital Markets.

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Orla Hurst - Senior Manager, Centre for Regulatory Strategy

Orla is a Senior Manager in Deloitte’s Centre for Regulatory Strategy where she focuses on Conduct Regulation. She has extensive experience of working with financial services firms to help them understand the strategic and operational implications of changes to conduct regulation. She joined Deloitte in June 2017.

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