At the end of May 2021, the FCA published its policy statement and finalised rules from the “General Insurance pricing practices” consultation paper.
This new set of rules is aimed to provide better outcomes to customers and is aimed at businesses such as insurers and distributors who set prices – but how will it affect advisers and what is Paymentshield’s response to the study? Paymentshield Sales Director James Watson answers your questions.
Why has the FCA conducted this consultation?
Following a market study in October 2019 on General Insurance practices, the FCA found that the Home and Motor insurance markets were “not working as intended for customers”. To address this, the consultation paper proposes a number of changes to ensure these markets work more fairly for the customer.
Is the FCA General Insurance pricing practices study distinct from the FCA General Insurance value measures study?
Yes. Alongside but separately to the GI pricing practices study, the FCA has consulted the insurance industry with its GI value measures study.
Like the former, the value measures study does not impact advisers directly. Instead, it will see insurers having to regularly report to the FCA on five key metrics, to demonstrate the value of their products for consumers.
Insurance firms must compile and report data to the FCA on the value of their policies, including premium data, claims ratios, repudiation statistics and complaints. The information will be annually published by the FCA, with the first report due for submission on the 28th February 2022.
What is Paymentshield doing in preparation for these new rules?
Even before the final rules were published in the May 2021 policy statement, Paymentshield was already preparing to meet the expected requirements following the study.
The implementation period end date for Product Governance Requirements will be by the end of September 2021, and the implementation period end date for Price Walking and Auto-Renewal is the end of December 2021.
As always Paymentshield intends to remain ahead of the curve to interpret the guidance in a way that ensures full and robust compliance with the FCA’s guidance.
What new rules coming out of the FCA GI Pricing study are likely to impact my business?
The areas where advisers are likely to see obvious changes when quoting and applying for insurance products from January 2022 are pricing and auto-renewal. Advisers are also likely to see some changes in response to new guidance around what is considered “fair value”.
The main change on pricing will be a ban on “price walking” which means, where a firm offers a renewal price to a consumer, this should be no greater than the equivalent new business price the firm would offer a new customer.
Auto-renewals, while not banned outright, will be more tightly controlled with a greater onus on insurance providers to clearly explain at point-of-sale and at renewal whether a policy is set to auto-renew and what this means for the consumer. Consumers will also be given more control over the decision to auto-renew or not.
Fair value rules will mean that there will be a responsibility for all companies in the distribution chain, right down to adviser level, to be able to demonstrate both initial and recurring income they receive for servicing their clients represents fair value.
Finally, other areas of the study such as a focus on product governance will impact insurance providers rather than brokers. It will remain the responsibility of product owners to ensure they are designed, managed and marketed in a compliant way throughout their lifecycle. Paymentshield already has robust processes around product governance but will continue to develop these to ensure they not only fully comply with the FCA requirements but remain market leading.
How will the new rules around price walking affect me?
The main change will see the industry coming together to tackle the widespread practice of price walking, which happens where products are discounted in the first year with increases at renewal and subsequent years.
This has now become commonplace leading to more focus on price rather than value which has ultimately created a race to the bottom. This issue can only be resolved through collective action by the whole insurance community.
With advisers operating in a market overrun with aggregators offering heavy discounting it has put a huge amount of pressure on companies such as Paymentshield to ensure the viability of our new business pricing and to give brokers the best possible chance to compete. This is why we really welcome this change to a focus on value rather than price.
Advisers can expect to see new business prices across the wider market to increase, while renewal prices will go down. This will mean a clearer and fairer proposition to the customer with Paymentshield’s customers also benefiting from our panel of leading insurers which helps keep our pricing competitive.
How will the rules on auto-renewals benefit advisers?
The FCA stopped short of banning auto-renewals outright, which is good news for policyholders as it reduces the risk of an unwanted insurance lapse that could otherwise lead to disastrous financial consequences – especially for our most vulnerable customers. The removal of switching barriers ahead of renewal will also make it easier for advisers to attract remortgage and product transfer customers with an incumbent insurer.
How will new rules on fair value impact my business?
Across the distribution channels in the industry, businesses are going to have to look very carefully at the value of the commission they pay and receive.
Distributors such as Paymentshield will be expected to contribute to, understand and respond to the Fair Value assessment, including annually reviewing products to make sure products are working as expected as well as reviewing and amending distribution arrangements. Thankfully, we’re already used to being guided by our own fair value principles, which we’ll continue to evolve to meet the latest FCA guidance, and we welcome the fact more companies will now need to embrace this way of thinking.
We’ve also always advocated the value of advice and the importance of advisers continuing to support their clients on an ongoing basis. This is one of the reasons we already provide advisers with data such as renewal and cancellation information within our Adviser Hub to help advisers proactively manage their GI book of business.
Are there any opportunities for advisers?
Absolutely! The proposed changes stand to benefit not only consumers but also advisers by creating a level playing field when clients come to purchase Home Insurance where the focus is on value rather than just getting to the cheapest possible price.
This will greatly benefit the entire community of advisers by creating a fairer marketplace in which intermediaries find themselves able to give greater value to customers.
What should be my next step to prepare for this?
We expect the new rules will really play into the hands of the adviser community. So, our advice to the intermediary community is to continue to drive home the message to consumers that when it comes to insurance, cheapest is seldom best.
One area to start thinking about is gaining more GI business from your remortgage clients. An approach of reviewing your client’s existing insurance with a focus on making sure they have the right cover for their needs rather than having the cheapest price will certainly make conversations with those clients much easier and our Defaqto compare tool is available to assist advisers with this process.
Indeed, there is no better time to promote a value-led pricing model and harness all of our experience and customer relationships to demonstrate the importance of products that truly meet consumers’ needs.
The FCA wants the industry to use the technology, data, analytics and human expertise at our fingertips to continuously improve the customer experience. This is where aggregators cannot compete.
What approach will Paymentshield be taking going forwards?
Paymentshield has always led from the front when it comes to not just meeting but exceeding FCA requirements, and these new regulations are no exception.
As I’ve mentioned, we already have our own guidance in place which we’ll now refine in line with the latest guidance and we’re already starting to support our business partners with their understanding of the study and preparations to meet the new requirements.