What does the FCA’s new Business Plan mean for GI? In this Opinion piece, Mark McDonald, Consultant at Altus, looks at the possible directions that general insurance is going to take, given the criticism of pricing for loyal customers, and the ongoing issues surrounding travel cover for those with pre-existing medical conditions.
Financial services companies work in one of the most heavily regulated industries in the world. As a result, firms need to pay close attention to the FCA’s latest Business Plan, which gives early visibility of the watchdog’s priorities for the next 12 months. From a General Insurance (GI) perspective, there’s a strong focus on pricing. The regulator has challenged insurers to tackle renewal pricing, claims inflation, vulnerable customers, access and exclusion from cover. Coupled with reviewing the value of products to end-consumers, this demonstrates the FCA’s emphasis on fair outcomes for all consumers, particularly those who do not shout the loudest.
The Pricing Problem
With a lot of negative consumer sentiment about insurance pricing, it’s understandable that the FCA is embarking on a multi-pronged attack on pricing practices, extending its previous work to the two major GI products of Home and Motor.
We’ve already seen one major insurer pre-empt regulatory action by making equal pricing for new business and renewals part of its new customer proposition, but it’s too soon to see if they have truly benefited from a first mover advantage.
It would, however, be sensible to expect more household names to launch propositions this year with renewal pricing-led messages in Home and Motor, and it will be interesting to monitor the impact of this on average premiums and volumes in the medium to long-term, in what has become a race to the bottom for many insurers.
Given that there have been some multi-year fixed price policies advertised in the past few years, and leading insurers are testing propositions to encourage customers to fix renewal premiums upfront (all of which are subject to the policyholders not making claims), there is a question around how successful these have been. We’re not yet seeing these types of policies as standard offerings, but as an established industry, we must naturally learn from these experiences and build propositions that are aligned to the FCA’s view of the world.
Beyond the impact of the FCA’s focus though, we have also seen some genuinely positive challenges to the traditional pricing models coming from Insurtech providers. Companies such as so-sure, with its give-back model, and Laka, which charges customers based on the true cost of claims, aim to ensure a customer pays a fair and open price for their respective products, all delivered with a genuine customer-led ethos. Another great example from the Insurtech world is Wrisk, providing transparency to customers through individual “Wrisk scores”, highlighting how customer information affects the price, as well as providing a true monthly subscription model – a Netflix style, cancel any time, approach.
It is hard to argue with the thinking behind a “charges indicator” to monitor the fairness of insurance products – this will hopefully lead to consumers becoming more aware of hidden fees on their heavily discounted insurance premiums. But with most consumers researching or buying via a price comparison website, the FCA should also be looking to work with the aggregators to enforce transparency to customers of these fees and charges and get this message across as fast as possible.
Access for all
Another area under the FCA’s spotlight will be access to insurance products for consumers with specific needs. The focus is on Travel Insurance, and particularly customers who have pre-existing medical conditions that a mainstream insurer would typically exclude.
Signposting of alternative providers will be key in the FCA’s view. There are opportunities here for insurers and other financial services providers to embrace an ecosystem model by extending out the signposting activities and actively partnering with specialist insurers and brokers to provide a seamless customer journey for those seeking a specialist cover. This could easily be a combination of insurers – a mainstream insurer for the travel elements and a specialist insurer for specific medical needs – all under one common experience that a customer can access quickly and efficiently both at sale and at claims stage.
Getting to grips with vulnerability
The subject of vulnerable customers has been on the regulatory agenda over the past few years and in this year’s Business Plan we see this at the fore again. The plan acknowledges that consumer vulnerability can be a fluid state and isn’t just about dealing with customers who would fit the preconceived notions of being “vulnerable”. With the FCA’s Financial Lives Survey highlighting that 50% of people in the UK show characteristics of vulnerability and 1 in 6 people have low financial capability, the scale demands that this is an important area for insurers to address.
It is often the complex issues, whether obvious, hidden, temporary or permanent, that GI businesses will find most difficult to address. With the development of a set of guidelines, the intent is there to support firms in dealing with these issues, which can only be a positive improvement.
The nature of this industry means that for some time there will be additional challenges caused by disparate systems and associated data quality, an issue we are also seeing in a number of organisations. Insurers should nevertheless continue to focus on this and look to establish the appropriate internal frameworks for managing vulnerable customers, even as the detail of managing specific scenarios is fleshed out.
As insurers embrace digital channels, we recognise that these present a real challenge for dealing with vulnerable customers; the human-to-human contact and emotional connection, which would have the best chance of spotting the signs of vulnerability, will be steadily reduced. Therefore, developing digital capability and customer journeys that support genuine understanding of, and empathy for, each individual customer will be key, as well as having a framework that provides confidence through appropriate governance, guidance and training. It is an issue that will evolve over time, so benchmarking through the regular use of self-assessment tools will be important to enable businesses to stay on the front foot in providing relevant and fair products and services.
At Altus, our work across Financial Services organisations and experience of the principles suggests that the introduction of industry guidance will ensure greater clarity and consistency of customer outcomes. We have developed a tool that will support firms in assessing their capability and the maturity of those capabilities when dealing with vulnerable customers, offering actionable insight into the critical activities firms should implement to improve.
Linking back to the FCA’s focus on pricing, statistics recently surfaced by Citizens Advice highlight the profits from loyal customers, particularly following multiple years of renewal. We support additional steps being put in place to investigate where long-term, potentially vulnerable customers continue to be exposed to premium increases at renewal despite their loyalty to an insurer.
Opportunity for positive change
In summary, the regulator has provided a clear outline plan, which will see customer loyalty better rewarded by the industry, improved accessibility to specialist products, and clearer guidance for insurers on tackling complex conduct issues. In turn, this will provide a great opportunity for insurers and insurtechs to proactively lead the way in tackling the challenges they face and improving the outcomes for customers.