The FCA’s final report emerged yesterday (22 September) and focuses on remedies for customer detriment arising from certain of the GI pricing practices it has been investigating in depth since it raised the topic in its 2017/18 Business Plan. The remedies proposed by the FCA include requirements for greater transparency for customers and improved reporting to the regulator. However, the most eye-catching remedy proposed is a ban on “price walking” (charging higher premiums for loyal customers), which the FCA CEO described as “radical” in the media coverage of the report.
The FCA report can be downloaded via a link in the FCA press release here. It is accompanied by a consultation – running until late January – on the proposed remedies which itself features an annex with changes to the FCA Handbook of rules and regulations on which views are sought, and which come under the less-than-elegant title of the Non-Investment Insurance: Product Governance, Premium Finance, General Insurance Auto-Renewal and Home and Motor Insurance Pricing Instrument 2021.
The size and scope of the topic is obvious from this single page infographic issued by the FCA. The regulator has spent well over three years investigating GI pricing and it has now set out a very clear direction of travel in order significantly to improve pricing practices and customer outcomes, so this is hardly a regular ‘consultation’ in which the outcome is in any way uncertain or up for grabs.
The main areas for improvement identified in the FCA’s 31 page final report focus on a package of remedies which includes:
- banning so-called “price walking” (charging higher premiums to loyal, ie non-switching, customers than for new business)
- bolstering rules on product governance
- introducing more ways for customers to cancel auto-renewals, and
- introducing new reporting obligations on regulated firms.
It is the first of these which can be properly described and “radical”, despite being set out in the report in what might, at first sight, seem to be unremarkable language:
“We propose to require that when a firm offers a home or motor insurance renewal price to a consumer, that renewal price should be no higher than the equivalent new business price the firm offers. This will stop firms from price walking customers.”
It is very difficult indeed to read this as anything other than a blanket ban on offering a renewal quotation that is higher than the premium which would be charged for the same risk if it was new, ie the “equivalent new business price” (ENBP). Furthermore, the ban will be accompanied by anti-avoidance measures and by requiring a senior manager to sign off that the firm’s practices are compliant with the remedy.
The FCA’s intention is to introduce the package of remedies next year, very probably any time from Q2 onwards. The likelihood is that they will be implemented for policies commencing or renewing after a particular date.
There is some analysis of the potential effects of the new ENBP benchmark and the other remedies on insurers’ business & pricing models in the report which is summarised in the following way:
Overall, we expect intense competition for new customers to continue and that this package of remedies will improve the nature of competition. Our remedy package will lead to lower prices for customers who are paying higher prices because they do not switch or negotiate. It will also change the incentive for firms to price walk these customers in future. Our remedy package may lead to some customers paying higher prices if they currently benefit from significant discounts as inducements to switch. However, we think this reflects prices that are unsustainably low and the extent of any increase in prices will be significantly restrained by the intensity of competition for new customers.
The ‘winners and losers’ point in this passage is well made and was drawn out in the ABI’s reaction to the report early yesterday morning. All that said, the FCA’s finding that there are annual customer ‘churn’ (switching of insurance provider on renewal) rates running at around half of the motor market and at around a third of the home market serves to underline the scale of the potential disruption this remedy could have in these main GI consumer market segments in which competition, on price, for new business has been such a key feature.