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As we move into May, manufacturers should have finalised their assessments of price and value, passing them to distributors for review and to overlay any additional processes and costs. Distributors in the insurance sector will be considering, in coming weeks, whether the products they distribute meet the Consumer Duty outcome around offering fair value.
The insurance sector has been subject to the general insurance pricing practices since 2021 and the Consumer Duty fair pricing and value outcome builds on the requirement for a level playing field for new and existing customers, as well as product governance rules.
The specific focus of the price and value outcome is on ensuring the price a customer pays for a product is reasonable, compared to the overall benefits. Customers experience harm when they don’t get value for money, and firms knowingly manufacturing or distributing poor value products will not be considered by the FCA to be acting in good faith.
However, fair value is about more than just price. It can involve unsuitable or unnecessary features that can also lead to foreseeable harm or frustrate the customer’s use of the product.
Reasonable pricing
Low prices do not always result in fair value and shouldn’t be considered at the expense of other factors. Manufacturers and distributors must also ask themselves:
- could elements of the pricing structure lead to foreseeable harm?
- are there elements of product pricing, fees or charges, that appear unreasonable or unjustifiably high?
- when changes have been made to a product, have they been appropriately reflected in the price?
- are all material changes to assumptions and related pricing, such as costs of servicing, reflected in changes in pricing?
Value assessments should also consider a range of factors demonstrating that the price paid is reasonable compared to the benefits, such as:
- costs incurred to manufacture and distribute the product
- market rates and charges for comparable products, and whether the product in question is a significant outlier
- whether there are products in the firm’s portfolio that are priced significantly lower for a similar or better level of benefit
- any accrued costs and or benefits for existing or closed products.
A difference in underlying costs between products may explain why otherwise similar products are priced differently, or changes in the price charged over time.
Where a product is a significant outlier in the market rates comparison, you should check that other elements of the design of, and support for, a product are functioning properly, and confirm you are still confident the price is reasonable compared to the benefits delivered.
Claims costs
Another metric to consider is the claims ratio, the percentage of claims costs incurred in relation to the premiums earned. For example, in December 2022 the FCA published data (from July to December 2021) that detailed claims costs as a proportion of premium in the insurance sector ranged from 5.21% for GAP insurance (add on) to 65.95% for motorcycle insurance. The lowest percentage of premiums paid out in claims included GAP, travel, excess protection and personal accident insurance.
The FCA also issued a Dear CEO letter in February 2023 to the General Insurance and Pure Protection sectors. Within Annex 2, the FCA provided further insight to insurance businesses on their expectations from fair value assessments. It expects firms to consider a diverse range of factors when assessing fair value. For example, a product sold as an add-on to a credit product (such as payment protection insurance) or as an add-on to another insurance product (such as legal expenses cover) may produce low claims frequencies and claims ratios.
Fair value assessments: what’s expected?
A fair value assessment should include an analysis of data that results in considered commentary and a conclusion as to whether the product provides fair value. The mere restatement of data such as loss ratios, claims frequencies, specified target markets and distribution methods, without analysis, context and a conclusion would not be sufficient to deliver an adequate assessment that a product provides fair value.
Price and loss ratios, and other similar metrics, are not the only factors that should be considered in a fair value assessment. A product may contain a service that is of benefit to customers, the cost of which may also be factored into the fair value assessment. The FCA gives an example of a provider of private medical insurance (PMI) that carried out research which found approximately 50% of people with health insurance said they wouldn’t know how to find the right consultant if they needed treatment, and 90% wanted their health insurer to assist.
The PMI provider introduced a new category of medical consultant to support customers in making informed choices about their healthcare. The consultants were rated ‘good’ or ‘excellent’ by over 95% of the PMI provider’s patients. Claims information demonstrated that customers treated by these consultants had shorter hospital stays on average than those treated by other consultants. Customers also needed fewer consultations and were less likely to have a procedure, which meant unnecessary procedures may have been avoided. The costs of providing this service and any savings in claims that could be shown to be directly attributable to the service passed on to the customer, may be factored into the product’s fair value assessment.
Meeting regulatory expectations
The FCA expects your Board and senior management to strongly challenge whether your products are offering fair value where value metrics indicate potentially poor value. If you’re offering potentially lower value products, you might be required to explain their value and the outcome of the fair value assessment to the FCA.
Commission arrangements should also be reviewed and challenged. You should consider if the level of commission provides fair value in relation to the service you compensate the distributor for. In its thematic review of the general insurance distribution chain (TR19/2), the FCA found that consumers may not always receive fair value because of parties in distribution chains earning high (and potentially excessive) levels of commission.
Whilst the FCA’s intention is not to set prices, it expects robust fair value assessments will deliver real change in the value of products provided to customers. In some cases, this will need to be evidenced by, for example, reductions in commission levels for products or by the product being withdrawn from the market.
How we can help
We are guiding a range of manufacturers and distributors on the development of their initial price and value assessment, and their ongoing review process.
Using our subject matter expertise gained through conducting various independent reviews, our team can provide you or your senior managers with insight and assurance around your process, analysis and judgements.
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