New Financial Conduct Authority (FCA) Pricing Rules
The Financial Conduct Authority (FCA) will be introducing new rules specifically focusing on the Home Insurance and Motor Insurance markets in order to address issues where loyal customers have effectively been penalised for staying with the same company for a number of years. These rules will also impact ancillary add-ons including premium finance.
This issue was also known as ‘price-walking’ and meant that new Household and Car Insurance customers often received more competitive premiums than long standing customers. Obviously, this has a direct detrimental effect to the customer financially, but the FCA also concluded that these practices distorted the way these markets worked, with many companies offering below cost prices in order to attract new customers that they thought would not switch in the future. This practice may also have negatively impacted vulnerable customers who are less likely to be able to switch easily.
As there were nearly 46 million home and motor policies written in 2019, these markets represent the largest proportion of personal lines insurance in the UK, so it is important that these markets function well, delivering good outcomes for individuals.
The new rules the FCA will be introducing to these markets are, in brief:
- Firms must not offer a renewal price that is greater than the equivalent new business price
- Firms must give most customers an easier way of cancelling automatic insurance renewals
- Insurance firms are required to consider how their products offer fair value to customers
- Home and motor insurance firms are required to report data to the FCA
Dual Pricing / ‘Price Walking’:
The FCA’s aim with these Dual Pricing rules is to try and make firms compete effectively in innovative ways in order to provide fair value (in terms of price and quality) to customers over the long term.
Retail Home Insurance and Motor Insurance providers will be required to offer a renewal price that is no higher than the equivalent new business price, for that customer, through the same sales channel. This remedy is designed to specifically stop Dual Pricing of the same policy between new and retained business and to prevent the practice of price walking whereby loyal customers’ premiums are increased over time.
This remedy should also reduce the costs involved in customers having to shop around to find a better deal, thereby making firms focus on providing fair value from the outset to all customers, rather than just targeting customer niches that provide high profits over the long term, due to inertia.
The FCA hopes that these measures should increase Trust and price transparency in the insurance market.
While these changes don’t have to be implemented fully until the 17/01/22, it is worth noting that firms will be liable to pay redress or make repayments if a customer suffers a detriment due to delayed implementation of the rules from 01/01/22.
While automatic renewals have not been prevented by the FCA’s new rules, firms will now have to make it easier for the customer to opt out of the auto-renewal of their policy. While some argued that auto-renewing was good for vulnerable customers, so they didn’t forget, the FCA felt that it posed a significant barrier to exit for many customers to leave their current insurer.
The auto-renewing of policies has likely disadvantaged those vulnerable customers, who display inertia in terms of switching products, leaving them open to price walking practices.
The FCA is expecting Firms to:
- explain clearly to customers whether their policy is set to automatically renew and what this means for them
- signpost to ensure customers know they can opt-out of auto-renewal at ANY time during the contract; and
- make it easy to opt-out of auto-renewal if that is what the customer wants to do
The FCA is keen that customers can make informed decisions, therefore they want firms to be transparent in terms of the price and quality of the product, so that customers receive fair value over the lifetime of their relationship with the firm.
The FCA feel that customers who stay with an insurance provider need to be sure that they are not being treated unfairly and being punished simply for not changing providers.
Competition should be driven by firms’ offerings, including the type of service and quality of products they offer as well as price relating to the firms’ evaluation of risks. These provide an incentive for customers to continue searching the market to find products that meet their needs.
The FCA will be implementing additional reporting requirements to enable them to monitor pricing. Intermediaries will be required to complete a REP2021.
Those intermediaries that set prices will have greater reporting requirements. The first report will be due in September 2022 and will cover the first half of the year. From then on there is likely to be ongoing reports for each calendar year due by the 31st of March.
A price setting intermediary is defined as: An insurance intermediary whose role includes setting the gross premium paid by the customer for the core product or setting the price of any add on policy, or retail premium finance
The FCA will also be requiring a Senior Manager Attestation that is likely to be issued to all general insurance firms. Even if you are not subject to the rules you will be required to send a nil return.
The FCA has provided draft wordings for the Attestation document and the first Attestation needs to be provided by 31st March 2022.
For more information, please read the FCAs webpage https://www.fca.org.uk/publications/policy-statements/ps21-11-general-insurance-pricing-practices-amendments