The regulator’s pricing reform, which includes product governance requirements, raises industry questions about whether broker schemes offer fair value to customers
Against the backdrop of the sweeping industry changes caused by the FCA’s general insurance pricing reform, broker schemes have also come into the crosshairs of the new regulation, with firms forced to study whether these solutions really offer value to customers.
The regulator’s new rules, which came into full effect from 1 January 2022, eliminate price walking – the practice whereby new insurance customers are offered more competitive premiums compared to renewing customers - and place a new emphasis on fair value and product governance, to ensure that customers benefit from every stage of the insurance value chain.
Broker schemes typically provide cover that is tailored to address the specific needs of a certain demographic. Therefore, to adhere to the FCA’s new requirements, schemes would need to demonstrate that all its policyholders are benefiting from fair value.
Paul Richmond, UK product manager at Novidea, told Insurance Times: “The FCA rules don’t differentiate between distribution channels in the market, so the same principles apply regardless of whether you are an insurer or a broker running a scheme.”
Some industry voices pinpoint technology as key to fulfilling fair value within a broker scheme, whereas other commentators believe better broking is in order.
For Paul Coleman, managing director of commercial insurer Peach Pi, some brokers have sought scale by creating a broker scheme centred around ”a homogenous product”.
In some instances, larger schemes that bring together ”a mutual interest” have even evolved into ”a new class of business”, offering a package that suits 100,000 customers, Coleman noted.
“The big guys want scale and it suits them to put things into boxes,” he said.
However, this approach has ”lost the original intent” of broker schemes, Coleman continued. With this in mind, it could be suggested that schemes with a one-size-fits-all mentality may not be adhering to the fair value mentality the FCA is attempting to promote.
Peach Pi is attempting to subvert this in its own work with brokers, looking to offer more bespoke covers.
Coleman said: “[Schemes have] become a lot more about mass marketing, reams of data, you can’t do X without Y. Where we are is almost doing the obverse of that, which is to concentrate on [brokers that] really understand the client and their business.”
Branko Bjelobaba, principal at compliance consultancy firm Branko, explained that price, the target customer and scheme services are typically ”thought about in great detail”, however, ”because there is no point in setting up a scheme unless it’s going to be a differentiator to everything else available.”
This means schemes would usually be able to demonstrate copious evidence of testing, product design and price benchmarking - all things that curry favour with the FCA.
In terms of adhering to fair value principles, Bjelobaba added that insurers would be watching any price additions brokers may make to schemes, as this could ultimately affect the value of the product.
He stressed that “really understanding your client’s needs and putting them at the forefront of all decision making” was paramount - “otherwise, what’s the point of having a scheme?”
Richmond, meanwhile, described broker schemes as a cost effective and efficient home for niche business that saves brokers from having to shop around for certain covers. In turn, this gives them time to look after bigger and more complex risks that can help to grow their business.
But, “the whole concept of this flies in the face of the FCA’s objectives”, he said. ”[It wants] and expects brokers to shop around, seeing as [that is] their role when delivering fair value to customers.”
Boosting competitiveness via niches
With the FCA’s rule change impacting home and motor pricing, Stephen Kennedy, director of insurance pricing at consultancy Pearson Ham, thinks that “brokers might be looking at specialist schemes to try and maintain competitiveness in a hardening market”.
He continued: “Schemes potentially enable more targeted pricing for niche segments, but they do limit market opportunity by the very nature of being targeted.
”An increase in specialist schemes targeting particular segments echoes what we were seeing 10 or 15 years ago in general insurance.”
During this time, insurers often operated a large number of schemes targeting relatively small segments, Kennedy explained, which resulted in large overheads as these schemes grew in popularity.
Coleman can see the benefits of niche broker schemes.
He said: “Small is beautiful because you are much closer to what the policyholder wants and needs.
”Quite often, policyholders don’t know what they want, especially when you get into indemnity where they are possibly ignorant of what could happen with negligent advice.”
Additional compliance and reporting requirements are often associated with extra costs - something Richmond believes technology can assist with.
He said: “Technology can mitigate the rising costs of FCA fair value compliance for brokers, both for open market and schemes business - particularly for brokers that are still operating with inefficient legacy systems and manual paper trail processes.”
For example, Novidea’s cloud-based broker management platform digitises the insurance distribution lifecycle, which can reduce expensive manual entry processes.
“Technology can help, because not only does it bring greater efficiency to business operations, but it also enables brokers to quickly and easily demonstrate that they have fulfilled their obligations, with each action, such as seeking alternative terms, tracked for every customer.”
Coleman, meanwhile, believes technology has a role to play in supporting pricing decisions, but he does not think broker schemes can currently be conducted via software houses.
Kennedy added that new technology could help broker schemes to flourish, however - for example, the use of pay-per-mile product schemes during the Covid-19 pandemic.
Tiered schemes on the rise
Stephen Kennedy, director of insurance pricing at consultancy Pearson Ham, said that over the last 12 months - during the run up to the implementation of the FCA’s pricing reform in January 2022 - there has been an increase in tiered products. These include individual schemes with different levels of cover and pricing.
“These can be seen as providing customers with a clearer choice, but also enabling brokers to offer alternative lower price products to those renewing.”
This helps adhere to the FCA’s new pricing rules, which require that new and renewing customers are offered the same premium for equivalent products.
For Kennedy, these tiered product schemes “would have to be genuine rather than just a means to circumvent the pricing equivalent - it must meet customer needs”.
However, he believes that “price will still be the main driver for customers, particularly in general insurance”.
Price sensitive customers will likely approach lower tiered products without too much investigation on the levels of cover being provided - the introduction of numerous tiered products is unlikely to change these customers’ thinking, Kennedy added.