FCA Action on Pricing May Cause Legacy Systems Headache for Insurers

The recent letter sent by the FCA to insurers regarding their portfolio of products, how customers make buying decisions and the crucial issue of pricing for loyal customers renewing policies, when compared to rates offered to first time customers, makes for interesting reading. In particular, the current sales model of selling car insurance via price comparison websites seems set to change, as the FCA seeks to encourage insurers and brokers alike to reward customer loyalty with lower pricing.

Here is an extract from the FCA letter;

Poor pricing practices

Our thematic report on household insurance pricing practices found that many firms’ pricing decisions appeared to focus primarily on achieving business plan and financial objectives without appropriate consideration of consumer outcomes. The report also identified the potential for harm from differential pricing where some identifiable groups of consumers are paying significantly higher prices than others with similar risk and cost-to-serve characteristics.

In response to these concerns, we started a Market Study into general insurance pricing
practices. We published our interim report in October 2019. This stated that pricing practices in the home and motor insurance market are not working well for all consumers. Industry has acknowledged the need to address concerns about pricing practices and has been taking some steps to do so. However, we are also considering potential options for regulatory intervention and will issue our final report in early 2020.
This remains an area that requires significant improvement and we expect firms to have already delivered changes to improve their governance and practices in line with relevant FCA policy and supervisory work.

We have also, for example, found that some firms’ practices might deter consumers from switching at renewal, for instance with consumer communications which might discourage consumers from making active decisions. We remind firms that communications should be clear, fair and not misleading. We also found that some firms require consumers to contact them by phone to cancel auto-renewal, even if they originally took policies out online.

Outcome 6 of the consumer outcomes that firms should strive to achieve to ensure fair treatment of customers says firms should ensure ‘consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.’ Firms should review their current practices and consider whether they are in their consumers’ interests.

GI FCA plan altus consulting insights

Mark Andrews and Steve Whitfield from Altus commented;

Whilst PCWs continue to dominate customer acquisition, this makes price the main factor for customers purchasing insurance. The consequence of this is that customer tend to get cheap/poor value products! These customers also tend to be loss-making for 3-4 years as they are acquired at an underwriting loss. This makes insurers cling on to “loyal” customers and try to drive more profit from them.

Despite the FCA introducing Renewal Pricing regulations, there are still many “loyal” customers paying too much for their insurance by auto-renewing their policies. The profit that insurers make from these customers makes it difficult for them to move away from the legacy technology that typically hosts the products. Therefore, many insurance businesses are still nursing legacy platforms which tend to have operational and resilience issues.

The FCA is considering greater intervention in their latest market study (MS18/1.2) which could go some way to fixing these issues. Additionally, a consultation paper around operational resilience (CP18/32) could also encourage insurers to move away from legacy platforms.

SMCR/Governance – the FCA see this as a catalyst for change, an opportunity to establish healthy cultures and effective governance in firms by encouraging greater individual accountability and setting a new standard of personal conduct. Therefore, I think it will be interesting to see what approach the regulator does take as they will absolutely feel this is within the scope of the new regs.

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