The Proposed Remedies<\/strong><\/h3>\nThe findings of the FCA lead them to conclude that customers are not being treated fairly by insurers and intermediaries through \u2018price walking\u2019 and that there is evidence that the under-pricing of new business is leading to potential new entrants finding it difficult. The approach they intend to adopt comes in a fourfold attack on current arrangements and includes remedies to tackle high prices for those who do not shop around, remedies to tackle practices which discourage switching, remedies which will improve transparency and an approach involving a longer term reform of the market using innovation. In parallel they intend to strengthen the IDD imposed Product Governance and other requirements which they anticipate will stamp out some of the more concerning pricing practices. A bi-product of that will be to increase transparency within a firm of their pricing decision making and therefore make it more obvious who is responsible for any decisions which impact customers negatively.<\/p>\n
When combined with the complimentary work the FCA is undertaking on pricing within the distribution chains (another product governance and IDD inspired FCA initiative) and SMCR the consequence could easily lead to increased risk for individuals where pricing practices are inappropriate and lead to poor customer outcomes.<\/p>\n
The following are our take on the FCA proposals. Interested parties have until the 15th<\/sup> of November to write to the FCA and comment on the report or proposals if they wish to do so.<\/p>\n1. Tackling Higher Prices for Non-Switchers<\/h4>\n\n- \n
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Restrictions on Pricing Practices<\/h5>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n
An obvious approach but one which would be harmful to insurers sees the FCA suggesting that it would impose restrictions on price increases for renewing customers or even ban \u2018price walking\u2019.<\/p>\n
Insurers who continued to offer discounts to new customers and were then unable to increase the price later may find their book of business became unprofitable in short order. The likely effect therefore would be to drive up the initial price for new customers and potentially flatten the long-term pricing curve for renewing customers. This should not preclude insurers from continuing to make a reasonable return on their capital. It would simply require them to base their pricing for all customers on the data they have as to what price is required to make a profit without offering discounts to new customers.<\/p>\n
It might also have the consequence of reducing the number of people who shop around, however, that is conjecture and without data only testing would establish any other potential consequences on both insurers and their customers.<\/p>\n
An alternative would be the use of restrictions on use of certain factors for setting premiums such as the assessment of whether a customer is likely to switch or not.<\/p>\n
The FCA has looked at similar approaches adopted by regulators in other jurisdictions so insurers and intermediaries should expect to see some activity of this nature as it seems likely that they have a good understanding of what does and does not operate to nudge a market in the right direction.<\/p>\n
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Helping Consumers find and switch to better deals<\/h5>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n
Requiring firms to move consumers who have renewed several times to better deals is an option the FCA is looking at. This might require a firm to offer a longstanding customer the same price as a new customer for roughly the same cover.<\/p>\n
This has its complications particularly for high net worth consumers who might have very individualised needs and cover. How does a firm identify a similar customer when values and types of property may very considerably and when products for such customers might be packaged. One individual with two houses three cars, a boat and an art and jewellery collection may not be the same as another with similar but very different assets. For example, the houses may have the same value but one may be several hundred years old and have a thatched roof while the other may be new and one may drive 4 x4 and have a clean driving record while the other may drive Ferraris and be on his last point.<\/p>\n
While more vanilla consumer risks and properties may be easier to deal with the underlying issues identified in the example can still arise.<\/p>\n
The FCA have also identified that campaigns to improve switching can have a positive outcome for consumers.<\/p>\n
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Strengthening Product Governance<\/h5>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n
Rules exist which require manufacturers to consider whether costs and charges are compatible with the needs, objectives and characteristics of the target market. Evidence suggests that the market is not consistently meeting these requirements which only apply to new products or products with significant changes after 1st<\/sup> October 2018. The FCA is considering whether to apply this to all live products and elongating the value issue to require manufacturers to consider the value to the target market over a longer period of time.<\/p>\nThat would require a firm to take account of its target market and how the product would perform for sub-sets within the target market including those who renew. A firm which took the view that the product was suitable and appropriate for the needs of a renewing customer when it included an automatic price increase may find it hard to justify their decision. Arbitrary reasons would be obvious.<\/p>\n
At the moment there are a variety of mechanisms used to drive automatic pricing increases on renewal. One such example is CPI increases to assess or value increase in cost or risk. Evidence suggests that the long-term risk on house losses does not increase with CPI but insurers continue to rely on the argument that this is an acceptable attempt to value or assess the increase.<\/p>\n
Similarly, cars generally devalue with age rather than increase but there are to our knowledge few policies where the premiums decrease each year to recognise this change.<\/p>\n
These may be a very good examples of where insurers will need to modify their approach.<\/p>\n
Added to this strengthening of the product governance requirement is a proposed approach which would see an individual responsible for value of products sold to a target market. This is one way of nudging firms. The individual would need to have very clear and thought through reasons for continuing automatic increases in light of the personal responsibility attaching to them and one could see this driving significantly greater focus on the underlying reasons for pricing.<\/p>\n
Where there are co-manufacturers all of the senior managers in the chain of distribution who are co-manufacturers would either need to agree the ownership of responsibility for this aspect or need to understand and be clear about the pricing decision and it may be necessary for a level of communication between them to take place for them to be able to evidence that they have acceptable and reasoned decisions for the pricing applied to a product across the chain if they are to evidence that they have fulfilled their duty of responsibility. An individual with such responsibility would need to be very comfortable about the approach being adopted by the others in the distribution chain and this would no doubt assist the FCA in its stated approach of ensuring that the manufacturers are aware of the ultimate cost to the consumer and the value provided by each distributer in the chain.<\/p>\n
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Monitoring<\/h5>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n
The FCA is looking at how it might monitor pricing differentials. This may for the subject of a separate piece of work at some point in the future, but firms should not be surprised if this includes some form of public disclosure of the prices for new and renewal customers.<\/p>\n
2. Tackling practices that discourage switching<\/h4>\n
The FCA is looking at how to deal with practices that discourage switching. They consider this to primarily be an anti-competitive issue and take account of the CMA\u2019s approach set out in its response to the Supercomplaint. The FCA does however also acknowledge that there are advantages to auto-renewal such as saving consumers time and effort.<\/p>\n
Some of the proposals being considered include a ban or restriction on auto-renewal as arises in other jurisdictions, making it opt-in only or easier to decline and ensuring that it is as easy to exit a contract as it is to sign up.<\/p>\n
With advantages and disadvantages this is an area where the market and those affected should take their time to respond to and provide comments on the proposals being considered as there may be real benefits to all if the FCA has a good and varied response on this topic to assist it in making its decision on how to proceed.<\/p>\n
3. Transparency Remedies<\/h4>\n
The FCA concludes that the consumers who do not switch and end up paying higher prices are unlikely to fully understand the implications and believe that transparency is healthy for a properly functioning market though they recognise that transparency is not always the answer.<\/p>\n
There are a series of issues with transparency and communication. Not the least of these is that many consumers, a significant portion of people within the insurance industry included, do not read the significant amount of material they are sent setting out the cover provided to them, the services offered or the inherent costs.<\/p>\n
Requiring disclosure of the reason for an increase or even explaining the existence of alternative cover at cheaper costs is not necessarily going to resolve or partially resolve this issue unless it is done in a way that a consumer will read it. That is, by highlighting the issue rather than it being lost in the fine print. The FCA would, to make disclosure effective, therefore have to mandate the where and how.<\/p>\n
The two areas being considered are set out below.<\/p>\n
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Improving Communications with Customers<\/h5>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n
The FCA is considering requiring firms to inform their customers that the reason that their cover has increased is because they have not switched for some time.<\/p>\n
To do this on a significant scale is assuming that this reason applies to all consumers who have renewed. If it does not it means that a distributor will have to assess whether the increase results from the renewal of some other reason such as a loss having occurred, there being a hardening of prices etc. This requires an ability to manipulate the data on a book of business in a way that may firms may find quite difficult at present.<\/p>\n
Firms concerned about this should respond to the FCA.<\/p>\n
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Increasing public scrutiny<\/h5>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n
As we highlighted above firms may be required to publicly disclose details of their pricing practices. This would have to be undertaken in a clear, fair and not misleading manner. The FCA consider that this may nudge firms towards lowering prices rather than face a potential backlash from consumers.<\/p>\n
4. Long Term Market Reform<\/h4>\n
The FCA believe that there may be future benefits from the increased use of technology which could help the market improve its relationship with its customers and how they interact in a more transparent environment. It is not making recommendations or proposals at this point on these potential reforms but it has set up an advisory group made up of industry experts, consumer and business representatives and academics and government employees who are working on the concept of Open Finance.<\/p>\n
This is definitely something to keep an eye on.<\/p>\n