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FCA announcements make it clear that unfair household insurance pricing practices will cause problems for firms down-the-line. Firms must assess their pricing practices and maintain appropriate controls to guarantee fair treatment of their customers.
The FCA is conducting a study of the wider insurance market (including home and motor insurance), with an interim report due next summer. These publications will add more weight to its thematic report on household insurance pricing practices (October, 2018) and “Dear CEO” letter, which draws attention to pricing issues in the market. The FCA believe some of these problems could cause “significant harm and poor outcomes for consumers”. For example, possible differential pricing between new and established customers and discrimination (based, for example, on ethnicity), along with a lack of governance and controls to ensure that customers are treated fairly.
The letter urges firms to act on any of the issues that might apply to them. And points out that accountability for pricing is also mandated by Senior Insurance Managers’ and Approved Persons Regime (SIMR) and Senior Managers and Certification Regime (SM&CR). Meaning, governance requirements of SM&CR could lead to specific senior managers being given responsibility for pricing issues.
Redesigning insurance pricing strategies will be a sensitive issue for many firms, however, they will need to follow these principles going forward.
Tackling the major insurance pricing issues
In practical terms, what do the three main issues identified by the FCA mean for firms?
1) “Firms failing to have appropriate and effective strategies, governance, control and oversight of their pricing practices and activities, such that they are unable to reliably assess and evidence whether they are treating their customers fairly.”
There is a general concern that firms are not paying sufficient attention to the impact of their pricing decisions on consumers. Some firms investigated by the FCA focused almost exclusively on their own business plans and financial objectives.
Firms must now identify and change any insurance pricing practices that could harm consumers, and it’s not enough to do this on an ad hoc basis – mechanisms are needed to ensure that it doesn’t happen. Specific senior managers must be made accountable for pricing decisions and conduct. Guidance about the necessary governance frameworks and processes can be found in the PRA’s SIMR and the FCA’s updated Approved Persons Regime (APR).
2) “Differential pricing leading to some identifiable groups of consumers paying significantly higher prices than other identifiable groups of consumers with similar risk and cost to serve characteristics.”
The concern here is with charging different premiums to consumers for similar products, even when the risk profile and cost to serve is comparable. A well-publicised example is where those renewing policies are charged more than first-timers, which may result in unfair treatment of older consumers since they’re more likely than average to renew without shopping around.
The first step to compliance here is to make sure the right information is available to senior managers. They need to be able to see how the firm’s insurance pricing decisions affect different consumer groups. And also to be able to demonstrate that the various groups are being treated fairly. Firms must scrutinise their management information systems carefully. For example, they should ask themselves the question: “Is the data capable of identifying potential customer discrimination?”.
3) “The risk of discriminating against consumers through using rating factors in pricing based (directly or indirectly) on data (including third party data) relating to or derived from protected characteristics.”
The FCA is concerned that some firms have incorporated data about race and ethnicity into their pricing models. This data could be influencing insurance pricing decisions via automated analysis rather than as a result of intentional discrimination. This is a controversial area due to the inconsistent approach taken by firms. Some firms believed that if the data did influence prices in this way, it would be “a proportionate means of achieving a legitimate aim, which would be permitted under the Equality Act 2010”.
So, what you need to do is show that you data is being used legitimately in line with all relevant laws and regulations. The FCA makes it clear that firms must do their own due diligence to make sure their data is not discriminatory – assurances from third-party data providers are not enough.
What firms must do now
The FCA has made it clear that firms need to take action fast, stating: “We will use our supervisory powers to require firms to tackle evidence of harm and expect firms to take immediate steps where necessary to address the issues identified…”. As the FCA notes, many firms are already taking steps to reduce pricing differentials, but more work is needed, and they also need to tackle the general accountability and discrimination issues (items 1 and 3 above).
Firms should consider the FCA report and letter in conjunction with other regulatory developments such as SM&CR. Different requirements can often be addressed together, since they share the same general principles relating to product governance, controls around pricing, and the duty of care to the customers. This strategy makes the burden of complying with the various regulatory regimes more manageable than it might seem.
How Bovill can help
Having worked with insurers on every aspect of financial services regulation, we can help you understand the latest requirements, deliver regulatory change and test your new framework and controls. Get in touch with one of our experts to find out more.
