Intended Audience

Board Members and Senior Executives of firms manufacturing or distributing general insurance and pure protection products, as well as premium finance providers.

 At a Glance

When the FCA released its General Insurance Pricing Practices Market Study (CP20/10) in September, much of the focus was, understandably, on the headline proposal to ban the practice of “price walking” by home and motor insurance providers[1]. However, various other of the FCA’s proposals have far reaching implications for other general insurance and protection providers and distributors. These include:

  • Amendments to the PROD 4 rules which would require product manufacturers to assess the value of all general insurance and protection (non-investment) contracts including those manufactured before October 2018;
  • Rules to ensure that, where firms offer or arrange premium finance to finance a contract of insurance, they are not influenced by remuneration to offer it at higher rates of interest than are available elsewhere.

Overall, the proposed amendments represent a material strengthening of the FCA’s expectations of firms’ product oversight and governance. In response, product manufacturers may need to review their product approval arrangements to identify necessary enhancements. They will also need to work closely with their distributors to ensure both parties have the necessary arrangements in place to assess value throughout the product distribution chain.

Firms offering premium finance will need to assess how the rates paid by their customers compare to those available in the market and whether the price represents value for the product they receive.

Assessing Value

To ensure that firms’ pricing practices deliver good outcomes for all consumers, the FCA is planning to amend its Product Governance rules (PROD) to require product manufacturers and distributors to consider whether all general insurance and protection products represent fair value for customers.

The FCA’s proposals define value as “the relationship between the total price to the end customer and the quality of products and services” and set out the factors a product manufacturer must take into account when carrying out an assessment of value[2]. Firms will need to assess all existing products within one year of the rules coming into effect, and take appropriate actions to ensure that products provide fair value.

The proposals build on guidance the FCA issued in November 2019 setting out its expectation that product manufacturers consider, as part of their product approval process, the value of products designed or altered after October 2018. As such, we expect some firms will have in place at least a limited assessment of value these products provide to customers. Nevertheless, the proposals represent overall a strengthening of the FCA’s expectations vis-à-vis the assessment of value. Particularly given the expansion of scope to existing as well as new products, we anticipate firms may face the following challenges:

Bundled Products and Distribution Chains

The FCA expects that where a customer buys an insurance policy and additional products as a package, value should be considered both for each individual component and in the aggregate. Product manufacturers are likely to face a complex task in disaggregating the price of bundled products and determining whether each separate component offers value, particularly where products are distributed through intermediaries who may sell additional products to the customer (e.g. premium finance products sold by brokers alongside a core insurance product).

The FCA is also proposing changes to the product governance rules for insurance distributors. These include ensuring that they understand the value assessment the manufacturer has undertaken and considering the impact that their distribution strategy and process (including remuneration) has on the value of the product. Given the obligations on both parties to consider value, product manufacturers and distributors will need to work closely together to ensure that value is adequately assessed throughout the whole distribution chain and, accordingly, that they provide each other with the information necessary to fulfil their respective obligations.

Interaction with the General Insurance Values Measures

Alongside CP20/19, the FCA issued PS20/9: General Insurance Value Measures Reporting and Publication. This sets out requirements on firms to report value measures data including claims frequencies, claims acceptance rates, average claims pay-outs and claims complaints as a percentage of claims, across a wide range of general insurance products. PS20/9 also sets out product governance rules requiring firms to take their value measures data into account when considering whether their products offer value to their customers.

The value measures product governance rules come into force on 1 January 2021, despite the fact that the wider product governance rules set out in CP20/19, if approved, will not come into force until mid-2021 at the earliest. Firms will need to be aware of this earlier deadline and ensure they have the necessary assessment in place.

Senior Manager Oversight

The FCA plans to monitor closely the outcome of its “pricing walking” remedy and will be alert to any evidence that firms are attempting to get around it by increasing the prices for other products or services. We therefore expect it will take a keen interest in firms’ product value assessments, including the extent to which they are ensuring consistent outcomes, from a value perspective, across their customer base.

Whilst it is not proposing to make any amendments to the Senior Managers Regime or require attestations around value assessments, the FCA has reminded firms that they must have a senior manager responsible for compliance with the regulatory system, including product governance and pricing. The Senior Manager in question should ensure they have sufficient evidence of how they have assured themselves that the value assessment is robust as well as the steps they take where products are deemed not to be providing value.

Premium Finance

In line with its general concerns about how commissions in the insurance distribution chain affect the overall value of products to consumers, the FCA has reminded firms that remuneration (or incentives) received in relation to the sale of premium finance must be consistent with their obligations under existing rules, including the requirement to act honestly, fairly and professionally in accordance with the best interests of its customer.

The FCA has highlighted that firms may not be acting in accordance with these requirements if, driven by the remuneration they receive, they propose premium finance at higher rates of interest than are available elsewhere in the market (for example, direct from insurance providers or other finance provider). Accordingly, it plans to introduce requirements to ensure firms do not do this.

Whilst the obligation to act in the customer’s best interest has applied since the introduction of the Insurance Distribution Directive (IDD), the FCA’s proposals nevertheless represent a material strengthening of its expectations regarding how firms should apply this rule in practice. It will have implications for the business models of GI insurance firms and brokers, many of whom make commission from selling insurance premium finance[3]. 

The annual percentage rate (APR) paid by customers for premium finance comprises the net rate from the finance provider, plus commission added by the broker/insurance firm. In our experience, the range of commissions added by brokers/insurance firms varies widely across the market. As a first step, firms will need to review their premium finance arrangements, assessing how the rates paid by their customers compare to those available in the market and whether the price represents value for the product they receive. Bearing in mind the FCA’s over-arching concerns around differential pricing, this should include an assessment of whether different groups of the firm’s own customers pay different rates for premium finance.

In many cases, the commission paid on premium finance is determined, at least in part, by the credit risk borne by the broker. However, brokers will need to challenge themselves on whether price charged for premium finance is a true reflection of the credit risk represented by the customer. In line with the FCA’s expectations around assessing the value of products in aggregate, firms will also need to assess how premium finance affects the value of the insurance product overall.

If the FCA identifies firms are not acting in accordance with the expectations set out in its CP, it is likely to take concerted action. In particular, it recently banned commission arrangements in the motor finance sector where the amount of commission received by the broker was linked to the interest rate paid by the customer, and the broker had the power to set the interest rate.

[1] Our previous blog sets out the actions firms should be taking in relation to the FCA’s proposed ban on “price walking”.

[2] These include:

•the nature of the product including the benefits that will be provided, their quality, and any limitations

•the type and quality of services provided to customers

•the expected total price to be paid by the customer including consideration of a number of factors including the pricing model, term etc.

•how the intended distribution arrangements support, and will not adversely affect, the intended value of the product

Our recent paper Good Value: A suggested framework for financial services firms to assess the value for money of their products sets out some wider considerations for firms when assessing the value of their products.

[3] The FCA’s Final Report into General Insurance Pricing Practices (MS18/1.3) states that 25% of customers in home and 51% in motor used premium finance to buy their insurance.