FCA General Insurance Pricing Practices: How it affects brokers and policyholders

Background

In May 2021 the FCA published its final rules on Pricing Practices PS21/5 which aim to protect the consumer, create a competitive insurance market and offer great value. In this wide-ranging shake-up, FCA is making significant changes to the way the General Insurance (GI) market operates across four pillars:

1. The pricing remedy - effective 1st January 2022
2. Product governance - effective 1st October 2021
3. Cancelling auto-renewing policies - effective 1st January 2022
4. Reporting requirements - effective 1st January 2022

In August 2021 the FCA published PS21/11 making small changes to the rules as well as providing clarification through a Q&A.

Summary of the new rules

1. PRICING REMEDY

What is the pricing remedy?

The renewal price should not be greater than the equivalent new business price that a firm would offer a new customer.

Why is the FCA introducing this rule?

To make sure customers aren’t penalised by “price walking” – where new business customers get better deals than existing ones – by pegging renewal premiums to the Equivalent New Business Price.

What is in scope of the new legislation?

• The new rules apply to consumer home and motor insurance only, including add-ons such as legal expenses or premium finance sold with them.
• It will also apply to owners of commercial vehicles (such as vans or pickups) which are for social, domestic and pleasure use.
• The pricing remedy will apply to intermediaries including brokers if they set the price the customer pays, e.g. by determining their commission.

What is out of scope?

• The FCA have confirmed that as our Landlords products are for professional landlords only, the rule does not apply to them.
• It does not apply if a customer changes intermediary or insurer or they are in a scheme that moves insurer.

2. PRODUCT GOVERNANCE

What is product governance?
Manufacturers and distributors are to ensure that they are providing fair value for the parts they provide, so that customers can have confidence in arrangements proposed.  Fair value means that the product and service bear relation to the premium paid.

What is in scope of the new legislation?
Unlike the pricing remedy, the product governance changes apply to all products (aside from those for “large risks”), whether or not designed for consumers.

How will it be implemented?
Every product needs to be reviewed each year to ensure it continues to provide fair value and manufacturers need to provide various materials to distributors, e.g. Target Market Statements, to ensure products are sold appropriately.

3. CANCELLING AUTO-RENEWING POLICIES

If a policy is set to automatically renew, it must be easy and accessible for the consumer to opt back out again.  Service standards should not be unreasonably worse for those seeking to cancel as to buy. 

Although these rules apply to most retail general insurance products, they do not apply to commercial customers, nor do they currently apply to private health, medical or pet insurance due to the structural differences in those products.

4. REPORTING REQUIREMENTS

There are detailed changes to reporting requirements which are too lengthy to effectively summarise here, save to say that the FCA is requiring firms (whether manufacturers or distributors) to report data to prove compliance with the new rules.

At NIG, what are we working on?
In light of the new and updated requirements outlined above, we are:

• Refreshing our product governance processes to ensure our regular product review cycle complies with the letter and spirit of the updated FCA rules, including the requirement to deliver fair value. We do not envisage this changing the types of products or methods of distribution in the short term, although each product will be objectively reviewed within the review cycle to ensure this is demonstrably true on an ongoing basis.
• Reviewing our current Target Market Statement documents to ensure that our products are only sold to appropriate customers, in line with updates to PROD4.2.
• Understanding in greater depth the nature of premium finance offered by distributors.

What information could NIG need from intermediaries and brokers?
FCA expects manufacturers to have certain enhanced information from distributors.

This includes:

• Whether any of the products we manufacture are distributed with products manufactured by any other business – i.e. are packaged together.
• Whether intermediaries distribute our products via other firms (sub broking); if so, how they are remunerated, e.g. commission share, and what services they provide.
• Whether intermediaries are involved in activities that determine the final price the customer pays, such as commission rebating.
• Whether intermediaries arrange premium finance and, if so, whether there are incentives to sell premium finance. 

What should intermediaries, including brokers be doing?

All regulated firms and brokers involved in the manufacture and distribution of insurance must read and digest the requirements of the FCA Policy Statement and draw up an action plan of tasks, with particular immediate focus on PROD 4.3, as that relates to distributors. 

This update is only a brief summary and does not replace a detailed action plan.

Links to important information

• FCA Policy Statements and Q&As
• The updated Product Governance rules  

Please note

This is a brief précis and is not to be treated as regulatory advice.  All regulated firms must read and understand the FCA Policy Statements in full, making their own assessment of action required to ensure compliance.

If you have any questions, please get in touch with your usual NIG contact.