The general insurance markets for household and motor insurance aren’t working well for consumers, with many loyal customers not receiving good value.
In May 2021, the Financial Conduct Authority (FCA) published their feedback and final rules (PS21/5) to their General Insurance Pricing Practices Market Study Consultation Paper (CP20/19) they conducted in 2020.
The FCA has identified that six million policy holders paid high prices in 2018, missing out on £1.2bn in savings had they paid the average price for their risk.
Their policy statement (PS21/5) contains the final rules and timeframes for implementation to ensure the relevant markets function well; there’s effective competition in the markets through the prevention of ‘price walking’; and consumers are protected from paying high prices over long periods.
Pricing remedy
Renewal prices offered to consumers must be no greater than the equivalent new business price (ENBP) offered to new customers. Furthermore, a firm’s senior management must attest that the firm complies with and meets the requirements of the pricing remedy.
In calculating the ENBP, firms must consider:
- The timing of the of the pricing assessment
- Payment methods and distribution channels
- Discounts and incentives
- Renewal transparency
- Parties to a transaction
- Premium financing.
Product governance
Product manufacturers and distributors should consider whether products offer fair value to consumers. Firms aren’t expected to carry out a fair value assessment each time they make an individual contract level change, However, significant adaptation of the product may require reapproval under the FCA’s PROD 4.2.
Since January 2021 these product governance requirements build on the existing requirements, i.e. products subject to the general insurance value measure rules are providing fair value. In addition, value measures should be considered by firms when assessing the fair value of products.
Existing PROD rules have been extended to include products manufactured prior to 1 October 2018. Within a year of these rules coming into effect, firms are required to have applied a product approval process to any existing products that previously fell outside the PROD requirements and update their approval, taking into account the new requirements on fair value.
Where firms manufacture or distribute products considered higher risk, or aren’t delivering fair value for consumers, these products should be reviewed more frequently.
Cancelling auto-renewing policies
In supporting consumers, firms need to allow the opt-out of auto-renewal using at least the same communication methods by which they allow the purchase of a new policy. Firms must also consider consumer’s needs in determining appropriate cancellation channels. These considerations include instances where firms no longer offer new business policies, or where the product is closed to new business.
Where opt-out or cancellations are supported by telephone, the FCA expects the average call waiting for these processes to not be unreasonably longer that the waiting time to purchase a new policy.
Reporting requirements
Firms are required to submit data for a range of metrics split by sales channel and tenure for each core retail product across motor and household insurances. The reporting metrics cover eight key aspects, including; premiums (total / average, net / gross, prior year, etc); claims information, i.e. proportion of customers and expected claims ratios, claims ratios and reserve movements; fees; and premium finance specific metrics.
Reporting responsibilities
- Core products – Insurer of the core product and price-setting intermediary (where they set the final price).
- Add-on products – Only the firm setting the price of the add-on product to consumers. Where the add-on product is premium finance and the price is set by the retail premium finance provider the insurer, insurance intermediary or managing agent, which has the direct relationship with the consumer, must report he pricing data for that business.
- Fees – Only the firm charging the fee to the customer.
The final rules provided by the FCA are due for implementation on 1 January 2022, Initial reporting is required by 30 September2022, covering the first six months to 30 June 2022 followed by annual reporting. The FCA has retained the requirement for firms to submit attestations three months after the rules come into force, i.e. 31 March 2022, confirming compliance with the core pricing remedy and sales practices.
