FCA proposes 'significant reform' to insurance pricing and governance

The FCA has proposed a package of remedies designed to ensure that customers receive fair value from their insurers following its market study of the home and motor insurance sector (32-page / 542KB PDF). Some of its proposals, which include enhanced product governance rules and making it easier for customers to opt out of automatic renewals, would apply to all general and 'pure protection' insurance products, not just home and motor insurance policies.

The proposals are designed to make the market more competitive and lower prices over the longer term, and could save consumers up to £3.7 billion over the next 10 years, according to the FCA. It is consulting on its proposals (152-page / 2.4MB PDF) until 25 January 2021, and will publish finalised new rules early next year.

Insurance law expert Iain Sawers of Pinsent Masons, the law firm behind Out-Law, said: "As anticipated and repeatedly signposted by the FCA over the past couple of years, the proposed remedies are focused on ensuring that customers receive fair value from their insurance policies".

"General insurers have, over the past few years, been striving to ensure that their product approval and monitoring processes deliver fair value to all customers but as the report identifies, more is expected of the industry. We fully expect that insurers will welcome the clear guidance on pricing whilst still retaining the discretion to price products appropriately in accordance with the identified risk, the sales channels used and the needs of the target market," he said.

The FCA began its formal home and motor insurance market study in late 2018, and published an interim report last year. It found that consumers who 'shopped around' for a new policy with a new insurer at renewal were able to take advantage of lower prices, but that some insurers used 'price walking' practices to gradually increase prices paid year on year by those who did not shop around.

Its report highlighted a 'loyalty penalty' of approximately 30% for motor insurance customers, with new customers paying an average of £285 for an annual policy while those who had been with the same provider for more than five years paid an average of £370. Those who had been with their home insurer for more than five years paid around £287 for combined building and contents insurance, 75% higher than the £165 paid by new customers.

The FCA is proposing that home and motor insurers be required to offer a renewal price no higher than the equivalent price that would be available to that customer if they were taking out a new policy through the same sales channel. It has, however, dropped some of the proposals put forward in its interim report, such as requiring firms to publish pricing strategies or disclose reasons for increased premiums on renewal, on the grounds that this would be disproportionate. It has also ruled out imposing a cap on the level of margin that a firm can earn from individual customers on the basis that this would not stop 'price walking' practices, and could leave some customers without insurance.

The FCA is also proposing enhanced product governance requirements for all general insurance and pure protection products manufactured or significantly adapted after 1 October 2018, with the aims of ensuring firms actively consider the longer term value of their products to customers and comply with FCA rules and guidance. These include new data reporting requirements, and making it easier for customers to opt out of automatic renewal processes. Firms will be required to apply a product approval process to existing products which do not currently fall within scope of the current regime within a year of the proposed rules coming into effect, and to take steps to ensure products provide fair value in the future.

Iain Sawers said: "A key development is that the proposal that product governance will be extended to apply to products launched prior to 1 October 2018 is expanded to apply to the whole of the GI industry, and not just home and motor insurance policies".

"Many firms will have already been undertaking a review process of their legacy products but the new rules will oblige insurers to review all general insurance and pure protection product lines within the first year of implementation of the proposed rules. This review requirement gives rise to interesting questions on the FCA’s likely expectations of how firms should respond to products which have a policy period spanning the review process and which are not considered to offer fair value in accordance with the new rules,” he said.

Competition law expert Alan Davis of Pinsent Masons said that the FCA's report "seems to be an acknowledgement that informational remedies aimed at encouraging consumers to shop around and switch providers are inadequate to remedy the competition concerns arising from 'price walking'".

"The FCA has said that it is not relying on changes in customer behaviour alone to drive improvements. This is a significant finding and remedy which could potentially have wider repercussions across other financial services products including mortgages and cash savings. It could also have an impact on the approach in other sectors where renewal pricing is being investigated by the CMA and Ofcom following the Citizens Advice loyalty penalty 'super-complaint' to the CMA, such as anti-virus software products, computer games and mobile and broadband contracts," he said.

"Concerns have been expressed that this remedy risks higher prices for new customers and it is also possible that a reduced incentive to switch could create barriers to entry or expansion. The CMA's research on the economic impacts of loyalty penalties in markets is due to be published at the end of the year. This is intended to inform thinking about the different types of interventions to address issues associated with loyalty penalties, and the outcome of that research should therefore be taken into consideration by the FCA during its consultation on the proposed general insurance remedy," he said.