The 10 most important takeaways of FCA’s final general insurance pricing rules

Today the FCA published its final rules on GI pricing practices, confirming the biggest and most and wide ranging intervention by the regulator in years.

As we observed in our briefing note following the publication of the consultation in September 2020, the FCA took the nuclear option in its proposals to ban insurers from charging existing customers more than new customers. Its plans are wide reaching, with all-encompassing remedies that are designed to stop market participants from raising margins in other areas to make up for loss of profits in renewal pricing.

The regulator’s approach is holistic in that its overall focus is not just on pricing, but on fair value for policyholders. As a reminder, the key aspects of the FCA’s requirements are:

• Existing customers must not be charged more than new customers for the same product purchased through the same channel
• Firms will be required to provide robust data-based attestations of compliance each year
• Fair value assessment required in product governance process for all general insurance products (both retail and commercial) and premium finance, with an annual cycle
• Auto-renewals aren’t banned, but must be more clearly communicated, and more easily cancelled
• Rules apply to intermediaries who have control over pricing of core products, add-ons and premium finance

Now that the final rules have been published, we will be providing more detailed analysis over the coming days. It is interesting to note that the number of rules and guidance points has increased significantly since the consultation, with the pricing remedy requirements alone almost doubling from 36 to 65. In part this is due to the FCA providing additional clarity over certain aspects, as requested in the consultation responses, and reveals the huge complexity involved in achieving the intentions of the price walking ban in particular.

Whilst the overarching intention of all the requirements remains the same, the regulatory inflation means firms now face an enormous task in reviewing and implementing all the final rules, including the additions, enhancements and changes, to meet the implementation timelines of 1 October 2021 (for the product governance and fair value requirements) and 1 January 2022 for the pricing, reporting and auto-renewal rules).

In addition to the increased number of rules, we believe the most significant challenge for firms will be meeting the enhanced product governance and fair value requirements, which require a fully documented, rationalised view on how and why prices charged to customers are commensurate with the services and value being provided by every party involved across the distribution chain.

Even firms which had already begun preparation work on the basis of the consultation face a real challenge; for those that are behind in their projects and preparations, this will be greatly exacerbated.

Firms should also note in particular the FCA’s statement that they expect firms to implement the rules on or before the deadlines and that they will monitor firms’ change programmes and check progress regularly. With reference to the pricing remedy, the regulator has stated that it will “look closely at how firms change their business models”. This puts increasing important on effective change management and particularly stresses the importance of the anti-avoidance and attestation requirements, which have been enhanced to cover any potential ‘loopholes’ firms may identify.

Here are our initial key points on the new GI pricing rules:

1. Margin control by tenure In addition to the end price being paid by the customer being no higher at renewal than new business, the final rules confirm additional margin control by tenure. Thus, the non-risk element of the price (i.e., the difference between the risk price and the final selling price, or the difference between the net-rated price and the gross price) should not be systematically higher based on tenure. This means that brokers cannot earn a higher margin where the net premium from the insurer reduces and that insurers are also constrained in the gross margin between the technical and retail price. Firms will have to attest to meeting this requirement each year. This will be particularly significant for price-setting intermediaries, especially where those whose business models currently rely on foregoing commission at new business to attract customers.
2. Incentives The FCA has confirmed the types of incentives that will be allowable and effectively included any cash-equivalent incentives (e.g., % discount, ‘first month free’, ‘free add-on’, retail vouchers) in the price-walking ban. Thus, any such incentives offered at new business would also need to be offered at renewal. The regulator has provided a table of examples of which incentives are in and out of scope.
3. When is an add-on an add-on? The final rules confirm that additional products sold with the ‘core’ product will be subject to the pricing rules, but that such products sold on a stand-alone basis will not be. The FCA recognises the potential for different pricing models for the same product, depending on how it is sold, but reminds firms that the fair value provisions in the enhanced product governance rules apply to all general insurance products. The FCA states it “expects firms to be able to demonstrate that their approach to pricing delivers fair value to consumers as part of their product approval and review process, and to take action where issues are identified.” The regulator adds: “This is an area we are likely to review in our interaction with firms.”
4. Premium finance Premium finance is confirmed as in scope for product governance as well as pricing. The regulator has provided clarity on the benchmarking requirements and also confirmed for price-walking purposes, reference should be to the APR for regulated credit agreements. The FCA has also removed the disclosure to customer requirements for products which do not incur additional costs for the customer, for example where the customer can pay monthly but not pay more for doing so.
5. Reporting The regulator has made some changes to the pricing data requirements following the consultation feedback, with certain metrics being removed and a couple of new ones introduced. Notably, the proposed quarterly reporting in the first year is replaced with a single report for the 6 months ending 30 June 2022.
6. Product governance and fair value Firms face the enormous task of conducting thorough product and fair value assessments for all their policies, including for commercial customers (with the exception of contracts of large risk) on an annual basis. The PROD rules remain largely as written in the consultation, but it is only when preparing and documenting an actual assessment on this enhanced basis that firms will gain an appreciation of the sheer size and scale of the task. Firms will have until September 2022 to have completed their first assessments for their entire portfolio. There is much inter-connection between the ‘Value Measures’ data (required to be reported in February 2022), the Pricing reporting (from June 2022) and firm’s own assessments of the ‘value’ of their products and how they are distributed.
7. Oversight of other parties in the distribution chain Whilst the regulator states that the pricing rules do not oblige firms to monitor other firms, the enhanced product governance fair value assessments effectively require oversight by firms in the chain. This extends to the remuneration of every party in the distribution chain, with the requirement for firms to have access to the data on commissions and fees, rather than attestations from distributors that they are complying.
8. Auto-renewal The FCA is allowing firms flexibility to offer the cancellation of auto-renewal by the same methods that customers can purchase their product. Thus, firms with an online only offering will not have to provide a telephone option for this requirement specifically. In addition, the regulator has confirmed that the rules apply only to contracts of 10 months duration or more, thus excluding monthly products from the requirements.
9. Non-resolicitation clauses (NRCs) There were calls to restrict the use of NRCs in the feedback to the FCA. NRCs are agreements between insurers and price comparison websites (PCWs) preventing PCWs from approaching customers around the time of first renewal. The FCA notes that they potentially reduce consumer engagement and make it more likely that customers will renew with their current insurer. The FCA has written to firms informing them that they think that NRCs can be anti-competitive. This is a positive development for PCWs.
10. Individual accountability Certain points of clarity have been made to the attestation requirement, with high-level template wording provided by the FCA. However, the key consideration here for the individual making the attestation is the over-arching requirement to evidence and prove that the firm is adhering to both the letter and spirit of the regulations. Thus, firms must ensure that they have sufficient records on their pricing policies and practices, including on material decisions taken, to ensure customers are not discriminated by tenure.