On 31 October the watchdog revealed the findings of its thematic review into household insurance pricing practices; launched a market study into motor and home; issued a dear CEO letter; and opened a discussion on what fairness means in financial services.
The CEO letter was especially excoriating as the FCA warned of significant harm and poor outcomes for consumers, reminded recipients of its expectations and reserved the right to take further action.
It concluded: “We expect you to show how you have considered the issues raised in the report and to be able to explain and evidence any remedial actions you have taken.”
The thematic review had begun in 2016 with expectations of a keen focus on dual pricing. But events have swept along provoking a market study with a very wide scope. Brokers should definitely not make the mistake of believing the regulator is only looking at insurers.
“You would class brokers who don’t set the prices but, within parameters can vary them, as influencers,” Andrew Gibbons pointed out.
“Ultimately the underwriters are responsible for pricing [but] there are enough brokers around who have an influence in that market to make it totally relevant to them.”
Along with being managing director of Liverpool-based Mason Owen, Gibbons is also chair of the British Insurance Brokers’ Association’s (Biba) smaller brokers’ advisory board, which has already turned its attention to the issues.
There are long standing, clear, legal and moral obligations that everyone from the smallest broker to the biggest insurer should know how to handle data and be actively engaged to avoid discrimination, both on an individual and group basis.
The FCA was at pains to say it found no evidence of discrimination as it raised concerns. However, it did find firms using datasets, including ones bought from third parties, in their pricing models that may contain factors that could implicitly or potentially explicitly relate to race or ethnicity.
When the businesses were challenged to prove they were not discriminating via their use of such data some had undertaken no due diligence of their own and many had to contact a third-party to seek reassurance.
The regulator reported that companies should have addressed the issue before using the dataset and had the answers ready.
“We expect firms to comply with their legal obligations and ensure that they have appropriate controls in place for doing so,” the FCA wrote.
As one specialist said: “The FCA, and all regulators, will not give leeway on this.”
“I am sure net rates will be an element of this,” Sparkes maintained. “I can see that being on the cards.
“The key point is that they are looking at everything in terms of pricing.”
During the course of its original investigation the FCA spoke with 18 companies representing 40% of household policies. It held over 100 meetings and made numerous requests for data.
The results did not make for pretty reading for the insurance industry.
Among the failings was a lack of appropriate oversight, governance and control of pricing. Three firms did not even have a documented pricing strategy.
Some of those surveyed were unable to check and prove they were treating customers fairly. Furthermore, groups of consumers were paying significantly more than others for similar risks. Those who did not renew for five years were paying 70% more and one quarter of people who did not renew for 10 years were vulnerable customers. And while the regulatory body found no evidence of discrimination by race/ethnicity it still had concerns over the use of third party data (see box above).
The need to put a prominent shop around message along with last year’s premium on personal lines renewal invitations has been in place since April 2017.
Insurers had years to get ready for the change and it is not rocket science.
However, the FCA found the regulation was still only being applied in a “patchy way” and struck an exasperated tone in its comments on the matter.
“The rule change around last year’s premium is a pretty simple one as far as I am concerned,” Chris Woolard, board member and director of strategy and competition at the FCA, stated.
“It is certainly intended to be a very simple communication with the customer.
“The fact that in some cases this has got obscured is genuinely disappointing.”
The watchdog appears to have run out of patience and promised that it would “explore all options” to address non-compliance and would use “the full range” of its powers.
Problems with technology were also highlighted. Policyholders renewing legacy products on old systems were not benefitting from the same level of pricing, governance and scrutiny as those purchasing new products on new systems from the same company.
The fallout has been that the home and motor market study will investigate: harm from pricing practices and what drives this; the fairness of pricing practices; the impact of pricing practices on competition.
An interim report will be published next summer as well as a final report – and if necessary consultation on the remedies – by the end of 2019.
As the FCA detailed, many pricing decisions appeared to prioritise achieving a business plan and achieving financial objectives with little or no consideration of the impact on customers.
In the view of ethics consultant Duncan Minty, the future is wrapped around culture with the regulator looking for more than just tweaks to technical data and analytics.
“They are saying don’t just sort out your pricing, sort out your whole philosophy of how you price your product,” he commented.
As the market has moved towards price optimisation using data analytics to find out just how much a customer is willing to pay, Minty pinpointed that the FCA were looking ahead to an even more technological future.
At the time of the announcement the FCA indicated it had no sympathy for the argument that the data was too complicated to manage.
Likewise Minty echoed that the more complicated a business the better the management and governance should be.
“I wouldn’t go to sea not knowing how to set my sails. I would expect a ship to be properly trimmed, ready and crewed,” he expounded.
“The information commissioner said a couple of years ago that big data is not a game played by different rules.”
Part of the FCA’s criticisms were that there was often a lack of clarity over who was ultimately responsible for a range of pricing related decisions and too great a distance from the board.
When the FCA’s bundle of documents came out, once again insurance was seen by the general public in a very poor light. It was just a month after being named and shamed by Citizen’s Advice in a super-complaint about dual pricing. The national charity slammed the practice of overcharging loyal customers and repeated its warning that consumers are being ripped off. It also criticised the mobile, broadband, mortgages and savings sectors.
David Williams, technical director at Axa Insurance, said he would prefer there was no dual pricing but accepted that discounts for new business were part of a competitive market, not just in insurance but across the economy.
“The embarrassing bit is that some people are taking it to the extremes,” he said.
He was bullish that insurance was ahead of the game and was not in need of being told how to behave.
Williams pointed out that the Association of British Insurers (ABI) and Biba’s Guiding Principles and Action Points to tackle market issues that lead to excessive differences between new customer and renewal premiums came out before the super-complaint.
“The right-minded insurers have not been following the extremes for some time,” he insisted.
The launch of the ABI/Biba document was a point accepted by the regulator, however, the FCA’s Chris Woolard told Insurance Age it still felt compelled to act.
“When we step back and look at the evidence that we have from our preliminary work, the right course of action is to say that we do need take a fundamental look at the way this market is operating.
“That is what the market study is here to do.”
Branko Bjelobaba, founder of compliance consultants Branko Ltd, pointed out that the introduction of the Senior Managers and Certification Regime for insurers on 10 December will come into play.
The legislation, which will extend to brokers in December 2019, makes individuals more accountable for the decisions of an organisation. Ignorance is no defence.
“Somebody must be prodding, pushing and pulling the tiller,” Bjelobaba stated.
He stressed that anyone in charge who had decided not to ask colleagues what they did or how they did it would be complicit with anything going wrong.
“If there is a mismatch and significant pricing differential between a [new] bit of business and the same renewing and you can’t explain why for any other reason than ‘we are just jacking it up because loyal customers are happy’ then you have got an issue.
“You cannot say someone else is responsible for that. The buck has to stop somewhere.”
There was a further line in the findings that got tongues wagging. The thematic review set out the goal of making sure that markets deliver competitive and fair pricing for consumers. “We will act as required to ensure this happens, including where appropriate, taking steps that may fundamentally change pricing practices,” the FCA reported.
So are brokers about to see the governmental body switch to being a pricing regulator?
On 22 November the authority proposed a price-cap on rent-to-own firms. While targeted at the credit agreements of businesses that supply items like washing machines or cookers rather than insurance there was a message for the sector too.
Norman Hughes, director, Compliance Management Services highlighted that this consultation proposed preventing companies increasing their charges for theft and accidental damage add-on cover as a way of recouping lost revenue. Insurance rises will be limited to those justifiable by proper underwriting increases.
“If this proposal is adopted it will be the first instance of an FCA mandated price control on a general insurance product,” he said.
Hughes and others underlined that the move to control direct pricing was very specific and that the FCA essentially remained a competition regulator.
“I don’t think they will get involved in the setting of price,” backed-up Mike Cranny, compliance consultancy director at Create Solutions.
As did Minty: “I don’t think they like pricing regulation as it can deform the market in ways that were unexpected.
“What they want is a good, prosperous and functioning financial services market and pricing regulation doesn’t always help in that.”
For Cranny, October’s insurance-focused package of documents had been pulled together fairly with a lot of thought by the FCA.
“They realise that people have got to offer discounts to get customers in,” he said adding that the watchdog was not naïve and did not want to create barriers to entry or stifle competition.
“They will be careful about what they do,” he concluded.
“However, they are not going to sit back and let firms take advantage of customer inertia.
“They have moved to trying to change the market and I think they will be really good at that.”
This article can be found here.