A service driven market centred around fair value, rather than price, could mean 2022 is brokers’ ‘time to shine’, despite product governance compliance being ‘one of the biggest challenges’ for broking firms

The FCA’s new personal lines pricing rules have created a perfect storm for the insurance sector, after the regulator sought to achieve a new level premium playing field that benefited consumers under pressure.

Under new rules, which came fully into force last month (January 2022), insurers can no longer differentiate the price charged to homeowners and motorists based on whether they are new customers or renewing their policies.

With this action, the FCA brought to an end the practice of price walking, whereby existing customers’ premium increases were used to fund discounted rates for new business.

However, alongside the new pricing regulation has also come rules to ensure that the insurance market is offering fair value to consumers - and this may well prove just as challenging as amending pricing practices.

The reaction from the industry in the weeks since the regulations were introduced has been mixed.

For some, their response has been rapid, with established underwriters looking to deliver clarity via the introduction of tiered products that have been designed to match cover levels with premiums.

Data and analytics firm GlobalData believes that the change to pricing is unlikely to cause a major shift in the numbers of customers who will continue to shop around for the best deals.

Its 2021 UK Insurance Consumer Survey, published in quarter four of 2021, found that 30.7% of all consumers switched to a new motor insurer in 2021. However, 41.6% of the survey’s 4,000 respondents shopped around for a new policy, but ended up staying with the same insurer.

Ben Carey-Evans, insurance analyst at the firm, explained: “The new reform prevents insurers from offering cheaper policies to new customers [compared to] existing ones. The lack of preferential rates will make it harder for consumers to shop around for cheaper rates.

“This will be worrying news for the FCA, which introduced these measures to protect consumers. Typically, existing customers had faced higher rates than prospective ones because of the loyalty penalty.”

Karen Houseago, head of insurance at Consumer Intelligence, said insurers have been quick to react to the FCA’s changes, but there is still a degree of uncertainty as to how the new system will play out.

She explained that December 2021 did provide an indication of the approach some underwriters planned to take come 2022.

“What was saw was a mixed picture and that speaks to the sheer range of products and businesses in the market,” added Houseago.

“It’s easy to overlook the fact that motor and home insurance are incredibly competitive markets - a positive from a regulatory standpoint - and that’s not going to change with the new rules.

“So far, we’ve seen a host of interesting competitive strategies being deployed. They range from astute new business pricing to footprint changes, product-led activity, volume plays, back book protection and channel plays.”

Changing tactics

Houseago noted that while the new pricing regime has only been in place for a matter of weeks, the impact is already being felt across the market.

“Some of those inevitable trends that the FCA was clear to acknowledge have already materialised,” she said.

“For example, new business prices have increased on average. The increases are larger in the home market than motor, as we anticipated.

“Of course, the rule changes were predicted to deal a bigger blow to those providers with larger back books - and to an extent we see some evidence of that.

“Some have pivoted to protecting the back book instead of new business acquisition. However, others have played their cards well and will continue to be prominent players in the new business market while maintaining large back books.”

However, many market participants have also adopted a ‘wait and see’ approach, making sure they are compliant and then responding to market change as they see it.

“As a result, we expect the impact of [the pricing reform] to come in waves,” explained Houseago.

“What we can be certain of is that there will be enormous disruption caused by [the changes]. However, the bigger factor that will continue to shift and reshape the market over the longer term is fair value.”

Meanwhile, the FCA’s changes have also encouraged an increase of new market entrants that are seeking to offer more flexible products in an effort to reduce costs via the use of telematics and usage-based discounts.

Carey-Evans added: “The largest threat to insurers is likely to be from pay-per-mile motor insurers.

“These are generally startups, with companies such as Metromile and By Miles leading the way.

“Their policies offer consumers a cheap basic rate for the year and then they will pay a flexible rate based on how much they drive. This means they can control costs and it may even be more fitting anyway, with fewer consumers commuting to work on a daily basis due to Covid-19.”

Brokers’ time to shine

Picking up on Houseago’s earlier point, Sue Mallender, associate director at consultancy Sicsic Advisory, told Insurance Times that the FCA’s fair value regulations will impact insurers and brokers alike.

“The FCA are determined to ensure that every customer has a realistic understanding of the long-term costs of the product,” she explained. “It creates a situation where competition is now around product value, not just on price.”

Mallender added that the FCA is keen to “shine a light on value” and “drive firms to improve products” which will enable innovation.

“The FCA has sought to move the market away from simply profit,” Mallender said. “It is about fair value and an understanding from clients as to what they are paying for.”

The regulatory need for fair value and the resultant move to tiered products creates an opportunity for brokers to prove their worth to clients, Mallender added.

“Brokers have the opportunity to deliver supplementary information and advice to help customers make an informed choice and deliver the increased transparency that the FCA is seeking,” she said.

This is a view backed by Houseago.

“This could be the time to shine for brokers,” she said. “The business model theoretically allows for a broader range of products to meet a broader set of consumer needs, all under the same roof. So, the prospect of a market that is less price driven and more product and service driven could be favourable for brokers.

“The flipside is that the rules do bring with them meaningful change and that changes the dynamic for some revenue streams, such as premium finance, that brokers had come to rely more heavily on when pricing models were predicated on price walking.

“If those practices aren’t changed and reviewed, then there will be consequences from the regulator.

“Establishing compliance to the new fair value rules, which requires good product governance, is one of the biggest challenges facing brokers due to the complexity of their business models.”

Meeting in the middle ground

Companies will need to submit an attestation from a member of their senior management by the end of March to confirm to the FCA that they understand the new rules and are compliant.

Firms will also need to complete a half yearly review to report how the new rules are being implemented in practice and their subsequent impact on customers.

Mallender said that some underwriters are already implementing weekly reviews, to better understand how well they are meeting the new regulations.

“They do not want to have to have uncomfortable conversations with the FCA,” she added. “The FCA has been clear there will be winners and losers in the new systems.

“For some, the price of cover will increase and for other there will be a reduction. It is hoped that -similar to when the market was prohibited to differentiate on gender - we will see a meeting in the middle.”