Managing director says the complexity and difficulty of the FCA’s pricing rules may push smaller brokers to seek acquisitions from bigger firms

BrokerFest 2021: The insurance industry needs to “get [its] act together” ahead of the FCA’s clamp down on general insurance pricing because the regulator’s upcoming influx of data arising from the reform’s additional reporting requirements will “pick up [businesses] if people are not doing what they are supposed to be doing”, said Sicsic Advisory managing director Michael Sicsic.

Sicsic’s comments formed part of his presentation at Insurance Times’ BrokerFest 2021 conference on Monday 11 October - he delivered a session titled ’Impact from the FCA pricing and product review’ as part of the event’s motor conference stream.

He thinks that although smaller brokers were “not doing bad things” before the new pricing practice rules were confirmed, there was a general belief that if businesses were “doing something that isn’t so great – nobody will know”. However, “now, there is much more transparency”.

Sicsic, who was head of supervision at the FCA for over four years, also believes that the regulator’s changes may trigger consolidation among smaller brokers - these businesses might think the reform is too big of a challenge to take on and they would rather merge or become acquired by a larger group.

These sentiments were echoed at Insurance Times’ Broker CEO Forum yesterday (21 October 2021). The audience highlighted that larger brokers are at an advantage because their well staffed compliance teams tend to have more interaction with the FCA compared to smaller firms - many of which struggle to communicate effectively with the regulator.

Sicsic continued: “People have to ask can they [invest in the pricing reform], do they have the capabilities and do they get wide support, or do they need to join forces to be able to do that?

“[The rules] are complex and difficult, but they are there for a reason”.

For brokers that take the bull by the horns, however - particularly those that provide advice - Sicsic said there is an “opportunity here to make a distinction” with businesses ”that want to look forward and support customers”. However, the “downside” of undertaking this work is the potential ”cost of compliance”, he added.

For Sicsic, there is nowhere for brokers to hide - doing nothing in response to the FCA’s rules update is not an option.

He said: “It will be very difficult for the market to argue that [it] didn’t know [about the rules] because [although firms] may not have understood [the changes], it was really clear – it took a lot of time to make all these rules.

“I don’t think challenging the design is the right thing to do now - [it is now about] catching up and implementing what you need to do.”

FCA requirements

One challenge raised at the Broker CEO Forum centred around the FCA’s newfound assertiveness - also described as “aggressiveness” by attendees - as well as the clarity of language used by the regulator.

One delegate said: “Talk to me in language that I understand and then we will be able to get [the changes] through. It’s ok to impose these restrictions, but there has to be some more guidance.”

Broadly speaking, the FCA’s reform aims to bring the concept of fair value front and centre when it comes to general insurance pricing, which includes banning the practice of price walking in the personal lines motor and home insurance markets. This means that renewal prices cannot exceed new business premiums.

To meet the FCA’s requirements, Sicsic suggests that brokers follow these three steps:

  1. Know your business model – what is my distribution and remuneration approach?
  2. Understand the process to assess fair value – how do I demonstrate that I deliver fair value to customers?
  3. Pricing rules – what do I need to do to comply with the ban on price walking?

Sicsic explained that it is important for brokers to understand their role in the insurance value chain because the more complex the chain, the more work brokers have to do to justify their value. This also applies to MGAs, sub-brokers and price comparison sites.

Furthermore, the FCA’s latest rules mean broker’s remuneration needs to be justified and disclosed – not the amount, but the type. Therefore, brokers should question whether their remuneration is commensurate with the services they delivered alongside the cost of providing the insurance product. Brokers must also evaluate whether there are any conflicts between remuneration and the customer’s best interest rule.

Sicsic said: “Does the fact that you get additional commission or additional profit sharing with your provider change the way you sell the product? Is the advice you’re giving just based on [customers’] demands and needs, which it should be? This is very important even if you’re not in the advice space”.

Brokers that use a commission-based model and don’t affect core policy pricing can still be considered a price setting intermediary, which would need to be reported to the regulator.

“There is a bit of confusion where people think because they don’t affect the price on the core [policy], they’re not price setting – they’re price setting because they are touching the add-on and premium finance,” explained Sicsic.

Price setting intermediaries will also have to meet the attestation requirement within the rules – this means a senior manager must provide an annual confirmation that the company’s pricing model complies with the pricing remedy. 

The annual percentage rate (APR) from all parties also needs to be logged under the new rules.

Point of crisis

A broker’s knowledge is key in terms of delivering fair value, Sicsic added, because they ”will know what works well and not so well from customer feedback and knowledge of the market”. 

However, he also suggested that brokers should consider the financial soundness of insurers and perform additional due diligence on unrated insurers.

He said: “The key thing around value is paying the claim. When the insurer is fragile, it will be very difficult to justify the value to the customer. When [the business] is unrated, there is more chance that the insurer is more fragile, and if it is more fragile – it may go to an extreme where they go bust.

“If you know that your policy is cheap because the insurer is not in great condition, you [should] ask yourself - particularly if you give advice - are you comfortable with that?”

Attendees at Insurance Times’ Broker CEO Forum stressed that the insurance industry needs to work together as a collective to address the struggles faced by brokers in terms of regulation.

One delegate said: “The FCA’s eyes are pointed towards politicians and [it has] no interest in the insurance industry – we are at a point of crisis.

“The FCA [has] hit the industry with far too much – [the regulator has] far too much power and not enough accountability and we need to hold [its] toes by the fire.”