FCA proposes regulatory changes to tackle 'harmful' insurance pricing practices

UK regulator the Financial Conduct Authority (FCA) has proposed a series of measures to tackle concerns about the "harmful" general insurance pricing practices. The FCA estimates that its proposals will save consumers £3.7 billion over the next ten years, while Willis and Moody's warn it could lead to less effective competition, profit erosion and worse consumer outcomes.

The regulator released its final report into GI pricing practices, highlighting the need for "significant reform" into the pricing of home and motor insurance. It noted that these markets are not working well for consumers as insurers are using "complex and opaque pricing practices".

The proposed measures seek to enhance competition, ensure consumers receive fair value, and increase their trust in these markets.

The FCA has suggested a key pricing remedy which will require firms to offer a renewal price for retail motor and home products that is no higher than the equivalent new business price for that same customer through the same sales channel.

The FCA identified that six million policyholders were paying high or very high margins in 2018 due to harmful pricing practices, while they could have saved £1.2 billion if they paid the average for their risk.

The FCA is also consulting on other new measures to further boost competition and deliver fair value to insurance customers including - 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; and making it simpler to stop automatic renewal across all general insurance products.

In the long-term, the proposed remedies are designed to improve competition. The FCA estimates that its proposals will save consumers £3.7 billion over 10 years.

The UK regulator is seeking views on its proposals by 25 January 2021. It will consider all the feedback and intends to publish a Policy Statement and new rules next year.

"We are consulting on a radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers," said Christopher Woolard, interim chief executive of the FCA. "The package would also ensure that firms focus on providing fair value to all their customers. We welcome feedback on the proposals."

Willis Towers Watson believes that the proposed remedies will require insurer and intermediaries to significantly adapt their pricing practices. "The FCA’s paper will raise as many questions as it answers. One of the biggest challenges for insurers and intermediaries alike is managing the implementation transition given current market competitive pressures, and therefore deciding how and at what point price changes should be made,” said Graham Wright, the company's UK P&C pricing product claims and underwriting lead.

Wright argued that stopping firms from price optimising completely could lead to "less effective competition and worse consumer outcomes overall".

He said, "the report appears to effectively provide an endorsement for the use of complex modelling and price optimisation techniques, stating that most significantly, it can allow firms to compete by offering different prices and products to different consumers. This can benefit consumers if it allows firms to offer a range of choice and better deals.”

Stephen Jones, UK P&C consulting lead at Willis Towers Watson, added: “As with any regulatory change, there will be winners and losers within the industry, and the winners will be those with the ability to flexibly adapt their pricing strategy. Critical to any effective adaption strategy will be strong portfolio management and governance, the need for greater operational efficiency, the ability to report clearly on the adherence to the remedy and flexible deployment.”

According to Moody's senior credit officer Dominic Simpson, the FCA’s proposals to tackle its concerns about UK general insurance pricing are credit negative for home and motor insurers’ revenues and profit margins.

Simpson said: "The proposal to cap renewal prices by tying them to the equivalent new business price will restrict insurers’ ability to increase prices amidst rising claims inflation. In theory, insurers could respond by raising new business prices, but competitive pressure may limit their scope to do so ultimately leading to profit erosion.”