Insurance: The long (price) walk to good customer outcomes
Following a market study and consultation, the Financial Conduct Authority has confirmed a package of measures relating to pricing and competition in the motor and home insurance markets. The FCA’s policy statement PS21/5 will be a key read this summer for insurers and insurance intermediaries in order to prepare for the new regulatory requirements.
Over recent years, the FCA has identified that home and motor insurance markets are not working well for consumers. It found that millions of home and motor insurance customers lose out if they repeatedly renew with their current providers. In particular, the FCA has highlighted the danger of ‘price walking’ (also known as the loyalty penalty) where insurance firms increase the price of insurance each year at renewal. The package of new measures seeks to improve outcomes for customers and bolster competition.
The New Rules
In summary, the new measures focus on four key issues: pricing, product governance, auto-renewal and reporting. We’ve provided a high level summary of some of the new rules and obligations that insurers and insurance intermediaries can expect.
The FCA will introduce a ‘pricing remedy’ - that a firm must offer a renewal price to a consumer that is no greater than the equivalent new business price (“ENBP”). The new ICOBS rules will specify how and when firms should calculate the ENBP. They also deal with the impact of incentives and premium finance on the ENBP.
There will be a new definition of “closed books” and firms with closed books will be subject to specific rules regarding their calculation of the ENBP.
The new rules will apply to insurers and insurance intermediaries involved in price-setting.
2. Product governance
The FCA’s new rules will broaden the scope of the current product governance regime in the UK, placing new obligations on firms who manufacture and distribute insurance products.
For example, firms will be required to assess whether products represent fair value for customers. The rules specify what information the firm should use when assessing value. Firms will be required to review products every 12 months to check that they are consistent with the fair value assessment.
The new measures aim to give consumers more accessible and easy options where they want to cancel auto-renewal. The new ICOBS rules include requirements relating to cancellation methods, communication of options and provision of information.
Firms will be required to submit regular reporting to the FCA about their home and motor insurance business. The FCA’s objectives are to (i) monitor compliance; (ii) identify where customers may suffer harm; and (iii) monitor the market.
The new rules will be implemented in two stages:
- The SYSC, ICOBS 6A.5 and PROD rules will come into effect on 1 October 2021; and
- The pricing and auto-renewal remedies and reporting requirements will come into effect on 1 January 2022 with a transitional provision until 17 January 2022 for pricing and auto-renewal disclosure rules.
What do insurers need to do next?
Given the short timeframe before implementation of the new rules, we recommend that firms should consider and determine whether the new rules will apply to them as soon as possible. This will include looking at arrangements through your supply chain to determine where the responsibility for each of the elements lies.
It will then be a case of ensuring that appropriate systems and controls are in place to ensure effective implementation of the new obligations throughout your business. Firms should also be looking at their processes, customer journeys and communications to ensure that customer outcomes are improved and that any journey falls in line with the new requirements.
If you have any questions about the new rules, your regulatory obligations or general compliance with FCA requirements, please do not hesitate to contact us.
17th September 2021
We explore Authorised Push Payment (“APP”) fraud, a particularly nasty scam.
28th July 2021
Watch our legal experts explain the key concepts of the UK’s financial services regulatory regime.
14th May 2021
A look at changes to the Scheme and how financial institutions can participate.