Yesterday the FCA published its General Insurance (GI) Pricing Practices Final Report. This blog summarises the report’s proposed remedies and sets out the key implications for GI firms, as well as the wider insurance market. We previously reported on the FCA’s interim report issued in October of last year. Firms have until 25 January 2021 to feedback comments on the proposals set out in the FCA’s consultation paper, with a policy statement due to be issued in Q2 2021.
The headline measure from the FCA’s final report is a proposal to ban differential pricing or ‘price walking’ in the motor and home insurance markets. This will mean that a customer renewing their insurance policy must receive the same price as a new customer buying the same policy via the same sales channel. Firms will still be able to offer different prices for different sales channels, so may continue to offer lower prices to those who chose to buy and renew online, compared to (for example), over the phone or face to face.
The FCA has identified that at present some GI firms price their insurance policies below cost in the first year, in order to win new customers. Prices then rise over time, with customers who continue to renew generating higher margins for the firm. Firms’ pricing strategies are consequently set up to generate a profit over the lifetime of a consumer’s time with a firm. With a ban on such pricing practices, much of this will need to change.
However, firms will still be able to utilise price optimisation techniques and to delegate pricing on a net-rated basis through their distribution chains, so long as there remains no difference between the price the customer would have received had they bought the policy as a new customer or a renewing customer at the point of sale.
This ban on price walking is likely to have far reaching consequences. The most significant impact will be to some insurers, brokers and Price Comparison Websites (PCWs). We outline some of the key impacts below:
- Given these new pricing restrictions, firms will have to change their entire pricing and customer acquisition strategies to ensure that they remain sustainable and are able to manage profitability in line with prudential regulatory expectations.
- As the FCA seeks to push down the prices long standing customers pay, there is likely to be a spike in the ‘year one prices’ insurance customers pay as a result.
- Firms will likely try to generate a consistent year-to-year profit margin on their insurance lines, as they will no longer be able to maintain a pricing differential between new and longstanding customers.
- Firms who compete heavily on upfront price and have less well known brands or reputations are likely to be the most heavily affected by the FCA’s proposals. This is likely to lead to increased M&A at a firm and at book of business level as insurers look to rebalance their portfolios.
- The FCA proposals might also change the long-running trend towards product standardisation, as insurers will likely look to compete for new customers through an increased product or brand range, if they can no longer differentiate between new and renewing customers for the same product. The FCA’s proposals may also lead to the introduction of multi-year, multi-product policies.
- As the advantages of shopping around reduce, aggregators and PCWs may face more pressure as they see a reduction in traffic through their platforms. Consequently, they may need to review their role in the value chain.
- Banks, building societies and firms with larger back books are likely to be among those most affected, as they will have to bring significant numbers of long term tenure customers in line with new business prices. This may lead to wholesale migration of back books onto new products.
- Those with a lean expense model, particularly in the Home Insurance market, may see the most benefit from the proposed measures as the tactic of pricing new business at a loss to then recoup at renewal is no longer feasible.
- Brokers and intermediaries may see:
- A drop in business as their importance to customer acquisition reduces, due to switching becoming less advantageous, as well as a reduction in the amount of commission they are able to charge;
- Pressure on net-rated delegated pricing arrangements.
Alongside the headline measure on differential pricing, the FCA has also set out a number of other remedies designed to increase competition and improve the value customers receive in the general insurance market. These measures will also serve to mitigate some of the potential negative consequences the pricing remedy may have on product value through increasing new business prices. These include:
- Product governance rules requiring firms to consider how they offer fair value to all insurance customers over the longer term;
- Requirements on firms to report certain data sets to the FCA so that it can check the rules are being followed;
- Introduce further restrictions on firms ability to use auto-renewals across all general insurance products; and
- Introducing an attestation provision requiring regular confirmation from a Senior Manager that the firm’s pricing practices comply with the pricing rules.
We cover the FCA’s approach to fair pricing and the background in more detail in our fair pricing blog here.
What firms should be doing:
1. Undertake a gap analysis against your current pricing practices to assess the scale of the impact the FCA’s proposed remedy may have and where action may be required to bring existing customers back in line with new business prices;
- Where caps and collars have already been put in place restricting margin and new business differentials, firms should consider revising these to align with the ban on ‘price walking’. For example, Insurers who put in place caps over differentials between renewal and new business prices of 50% or less will need to drastically revise their approach;
- Firms should consider the complexity of the system changes and the IT challenges that underpin the changes to pricing strategies and controls the ban on ‘price walking’ will require.
2. Review and update your Product Governance Framework to adequately assess the value provided to customers over a longer time horizon.
3. Perform a review of your product range, brand strategy and distribution channel approach, to reflect the expected changes in the nature of competition, including consideration of pricing with an omnichannel distribution strategy.
- PCWs and brokers may want to consider a review of their value proposition and how they can further differentiate themselves through the add-on services and the platform they provide.
4. Designate a senior manager to take overall responsibility for pricing and ensure a focus on the achievement of fair customer outcomes, rather than adherence to processes alone, as well as responding to the potential attestation request from the FCA.
5. Leveraging data analytics and technology to enable more efficient analysis of customer circumstances, identify pricing differentials and enabling a clear view on how your approach is delivering fair value to all customers over the long run.
6. Designing and implementing oversight frameworks for delegated business, particularly where this is delegated on a net-rate basis. Firms should also consider updating their Product Governance Framework to ensure that they are complying with the enhanced product governance requirements the FCA are proposing to put in place through the use of third party oversight, product governance and wordings technology.
Our OneView: Product Governance technology solution is used by insurers to manage their product governance framework in this way and our OneView: Third Parties technology solution is used by insurers to oversee delegated business in these areas – www.deloitte.co.uk/OneView
You can find out more about how Deloitte can help by contacting any of the authors of this blog