Although the industry supports the aims of the FCA’s pricing review, there are unintended consequences that must be considered by the regulator and insurers alike

The loyalty penalty is very much alive and kicking. That seems to be the message according to research published by MoneySuperMarket in March.

Figures produced by the comparison website found that around two in five motor insurance customers renewed their policies with the same insurer last year.

And while the percentage of motor insurance customers automatically renewing stayed the same (41%), they paid an average £42 extra - an increase of 7% on the previous year, said MoneySuperMarket.

This increase has happened despite moves by the FCA to bring in new rules to prevent long standing policyholders from paying substantially more than the discounted premiums available to new customers.

The FCA is due to flesh out its new pricing regime in a policy paper, which is due to be published before the middle of this year. The regulator finished consulting on its proposals at the end of January. Owen Morris, global chief underwriting and data officer at Aviva General Insurance, told a break-out session at February’s ABI conference that the FCA’s intervention here is “welcome”.

“I don’t think anybody was particularly happy with renewal and new business pricing the way it was,” he said.

A response to the FCA’s final consultation, submitted by the regulator’s practitioner panel, said the pricing reform could transform how the insurance market operates.

The FCA’s proposals to end the so-called practice of price walking may have been the primary focus of its review, but the “bold” and “far-reaching” nature of the regulator’s intervention will affect each policyholder’s price, read the letter.

However, the FCA’s proposals shouldn’t be a shock for the insurance industry, said Ian Hughes, chief executive of Consumer Intelligence.

“This isn’t new; it has happened in other parts of the financial services sector,” he said.

Unintended consequences

The aforementioned ABI panel session also warned the FCA that its proposed pricing changes could have a “disproportionate” financial impact on particular segments of customers, like younger purchasers, who have been hard hit by the economic fallout arising from Covid-19.

The short to medium-term hikes some consumers will see in their premiums will impact their views of the sector too, the panel added. “The potentially negative reputational impact on the industry will need to be carefully managed,” it warned.

This comes at a time when the recent FCA Financial Lives survey showed that just 7% of adults expressed high trust in insurance products, while the sector also accounted for a fifth of complaints to the Financial Ombudsman Service in the first half of last year.

The practitioners’ panel also warned the FCA that it has not taken into account the hit on companies own balance sheets.

Graham Coutts, senior director in the EMEA insurance team at Fitch Ratings, agreed. He explained that the reforms are likely to like to dent insurers’ profits while they update pricing systems and review distribution models.

Pointing to the experience from recent reforms in the banking sector, the practitioners’ panel said it is likely these “frictional” market costs will be passed on to consumers, with potential consequential impacts on competition and innovation in the long term.

“The business case is not fully reflective of the economic reality of implementing the remedies proposed,” the practitioners said.

“This concern is from the perspective of both the absolute financial impacts on the sector versus benefits to consumers during a period of significant economic challenges and the increased ongoing costs of compliance, particularly centred on the proposed reporting requirements, which will be imposed the year following a global pandemic.”

But Coutts said the changes won’t necessarily have a long-term hit because the industry’s stretched profitability situation means insurers will have to recoup the cuts in premiums for loyal customers from those who currently enjoy discounts.

Culture change

With so many moving parts and the sheer scale of the changes required, senior management involvement is essential, said Hughes. “This is not a quick fix, it’s huge culture change,” he explained.

This will mean bringing in new people with fresh ways of thinking, as well as adopting new approaches to product manufacture throughout the value chain.

“Purpose is something that sits at strategic level of an organisation, it not just fixing a piece of code,” Hughes added.

But the upside, he argued, is that there are long-term pay offs; not just from a regulatory perspective, but from the commercial point of view in terms of profitability.

“Happy customers are good for you in the long term,” he said.

“Starting to apply these rules today sets up companies very well for the future.

“There’s an enormous cost that goes with acquiring customers in terms of distribution channels and credit scoring.

“The industry has tended to take these mostly front loaded costs and given them cheaper prices and given more expensive prices where there is less cost. That doesn’t make any sense. You have to look at the lifetime value of the policy.”

Extended implementation

How long do insurers have to implement the FCA’s pricing remedies?

On 23 March, the FCA confirmed it was extending its previously announced four-month implementation window to give insurers until the end of the 2021 to fully launch its proposed rules to rectify price walking in the home and motor insurance markets.

The final rules will be published in a policy statement, due at the end of May.

The amended implementation timetable, which will come into effect following the policy statement publication, means:

  • Firms will have until the end of September 2021 to accommodate the systems and controls (SYSC) rules and product governance rules.
  • Firms will have until the end of 2021 to implement the pricing and auto-renewal remedies, as well as reporting requirements.

The FCA said the revised timeline is to enable firms to “plan their change programmes effectively”.

Is this time frame still too short?

The Chartered Insurance Institute’s director of policy and public affairs Matthew Connell still thinks the revised timetable may not be long enough for a successful implementation.

He said: “We believe the FCA have given adequate sight and consultation of their proposals. They rightly recognise the hard work which will be involved in firms implementing finalised proposals and the subsequent changes which will need to be made.

“While we welcome their ambition for full implantation to take place by the end of the year, there is some concern that this may not be enough time for firms to get all practices in place.

“It’s important that the regulator continues to take the current pandemic into account and remains flexible in their approach, to ensure we get the right consumer outcomes.”