Large insurers and price setting brokers ’have got a lot of work to do’ ahead of the GI pricing reform implementation deadlines, says compliance expert
While the FCA’s price walking rules apply to home and motor insurance, it is the specifics around product governance, value and distribution that will be of concern to commercial brokers, according to Branko Bjelobaba, principal of compliance firm Branko.
Speaking at a Chartered Insurance Institute (CII) webinar about the FCA’s latest pricing rules last week, Bjelobaba said the FCA is fixated on the “value” of products, with the term being used more than 400 times in the new rules, PS21/05, that were published on 23 May.
For example, he explained that a firm’s distribution rates should not result in it receiving a level of remuneration that “does not bear a reasonable relationship to the firm’s actual costs, contribution, level of involvement or the benefit added by them”. Otherwise this could be interpreted as ”backhanders or sweeteners”, he added.
Therefore, firms will need to consider the value of a product throughout its life course, which includes inception, the insured period and renewal.
Bjelobaba, said: “If you are a particularly large insurer or a price setting broker, you have got a lot of work to do.
”Insurers in their original feedback to the consultation said they would need at least 12 months. There is a huge amount to do, but it depends what type of firm you are.
“Brokers will be reporting on how much they earn under premium finance and also their fees and charges.”
He warned of the limited time that firms have to implement these rules, with some aspects due to be introduced at the end of September and the rest by the end of the year.
Under the new rules, premium finance is set to be classed as an add-on. Applying to retail business only, this definition is designed to make premium finance more “transparent” for clients.
Bjelobaba continued: “The cost of [premium] finance at renewal should be no higher than at [the] new business stage, but the cost can vary between customers if the credit risk is different.
”The rules state that you have got to explain the cost with and without premium finance and then state the cost of premium finance. You will have to state that to use premium finance costs more. You have got to state that the policy will last for 12 months but the premium finance will last for 10 months.
“The customer has to make an active election regarding premium finance. The premium finance you provide and the remuneration you receive must not conflict with the customer best interest rule to act honestly, fairly and professionally.”
The rule around acting in customers’ best interest has been in place since October 2018, but it has now been extended to include premium finance - it states that “a firm must act honestly, fairly and professionally with the best interests of its client”.
Bjelobaba stressed that firms must also regularly review their premium finance arrangements.
He added: “This will hit premium finance companies [that] give brokers a lot of flexibility in setting rates and imposing additional annual percentage rate (APR) just to make more money. This includes remuneration, inducement offered or accepted from providers – cash or cash equivalent, commission, goods and hospitality.”
Firms will have to report on this.
Bjelobaba continued: “The new rules will require firms to offer a renewal price that is no higher than the equivalent new business price for that customer through the same sales channel.”
This requirement is applicable for any firm, such as insurers and intermediaries, setting the gross price paid for the core product, as well as firms deciding any element of the premium price or providing additional products.
He said: “When it comes to premium finance, if you have an ability to manipulate - probably upwards - what you charge or the APR, you are a price setting intermediary.
”Brokers that determine their own remuneration net rates or imposed fees are also included. Gibraltar firms are also included, so anyone [that] has offshored their book [is] in scope.”
Bjelobaba noted that the Competition and Markets Authority (CMA) two years ago launched a super complaint to investigate the loyalty penalty in insurance, which addressed the issue where customers that stay with their insurer for a long time were being penalised with higher premiums compared to new customers.
This is also known as price walking or dual pricing.
Speaking about the current FCA rules, Bjelobaba said: “We are not just looking at price, we are looking at fair value, distribution arrangements and distribution remuneration.”
The rules state that the FCA is banning price walking - it estimated that six million home and motor customers would have saved £1.2bn had they paid the average price for their actual risk rather than falling victim to price walking practices.
Bjelobaba continued: “It’s a 217-page policy statement, plus 87 pages of new rules, and the word ‘value’ is mentioned more than 400 times. You have until the end of September [to implement] the systems and controls and product governance [rules]. And then at the end of the year [is the] pricing and automatic renewals [deadline].”
He deemed the rules on product governance to be “pretty meaty”.