Back in 2018, the Financial Conduct Authority investigated the efficacy of the home and motor insurance markets and how those markets serve consumers. Upon investigation, the FCA discovered that whilst customers may shop around for deals, existing and loyal customers were not getting good value. They went on to find that six million policy holders in 2018 could have saved £1.2 billion collectively had they paid the average for their risk (FCA, 2020).
On average, new motor insurance customers pay £285, while customers who have been loyal with their provider for more than five years pay £370 (FCA, 2020): a deficit for the loyal customer of 30 percent. New home insurance customers can expect to pay £130 for buildings insurance, whilst loyal customers who have been with their provider more than five years pay £238: a deficit for the loyal customer of 83 percent.
A summary consultation was published in September 2020, which has led to the latest policy statement iteration PS21/5. The new rules are expected to come into effect on 1st January 2022. The FCA goes on to estimate that the proposals will save customers £4.2 billion over 10 years (FCA, 2021).
The FCA proposals
The FCA has announced a number of changes, which are outlined below.
(1) Pricing remedy
The FCA have proposed a new pricing remedy so that firms must offer a renewal price to a customer that is equal to or no greater than the equivalent new business price (ENBP). The ban on price walking will change the insurance drastically.
(2) Product governance
The requirement is ensuring firms focus on delivering fair value to customers, which comes from strong governance and oversight arrangements. New obligations have been added to the Product Intervention and Product Governance Sourcebook (PROD): within PROD 4.5.
What does this mean for firms?
- There will be a requirement for manufacturers and distributors to consider whether products represent fair value for customers.
- Enhancing the requirement to ensure products offer fair value to customers.
- Firms must identify fair value.
- Application of price walking to products manufactured before 1 October 2018 will apply; to be implemented within 12 months.
(3) Cancelling auto-renewing policies
The FCA have recommended firms ensure a range of accessibility options to opt out of auto renewal within the term of a customer's policy. Proposals that were recommended include:
- Providing consumers with a range of accessible and easy options to stop their policy from auto renewing.
- As a minimum, allowing consumers to opt out of auto renewal by telephone, post, and email or online.
- Not placing unnecessary barriers on consumers wanting to opt out of or stop auto renewal.
- Allowing consumers to opt out of auto renewal at any point during the contract term.
(4) Reporting requirements
The FCA have recommended a requirement for firms to meet reporting requirements on information about their home and motor insurance businesses. The purpose of the reporting requirements is to help with the following subjects:
- Monitor compliance against our pricing remedy.
- Identify where customers may be suffering harm.
- Monitor the market.
The ban on price walking is likely to have far reaching consequences for insurers, brokers and price comparison websites (PCWs).
In the short term, there may be significant noise and movement in rates as insurers implement strategies and react to new business market shares moving around. As the FCA seeks to push down the prices long standing customers pay, there is likely to be a spike in the ‘year one prices’ insurance new customers pay as a result.
Over the longer term, we expect new business churn will reduce significantly, lapse rates will reduce, and retention levels increase. Ultimately there will be both less shopping around and potentially higher prices. New firms attracted by increased rates may enter the market leading to M&A at both a firm and at book-of-business level.
To address the regulation and future business implications, we recommend firms to re-think their business, product, and marketing strategies, and then implement the necessary governance, process, data, technology and reporting solutions.
For more information about the implications of the FCA’s recommendations, or to find out about how else we are working with insurers and insurtechs, please contact Matthew Hutchins, Partner & Head of Insurance, Capco UK.