The FCA seeks to understand the scale of any harm caused by pricing practices, including the proportion of consumers that pay high prices and who those consumers are. The FCA wants to understand what causes firms to price differently and why some consumers engage more with this (and pay less) than others. Of particular interest are issues such as the differences between prices paid for insurance by different consumers, compared to the cost of providing them with insurance, and the characteristics of consumers paying higher prices including whether they may be vulnerable.
How concerned should insurers be with the regulator’s interest in pricing?
The Financial Conduct Authority (FCA)’s statutory remit does not include the regulation of prices in a free market, but pricing practices have nevertheless been of concern to it for some time. Since raising concerns in 2015 regarding pricing transparency at renewal, pricing practices have featured consistently in the FCA’s business plans. They have also been the subject of the Citizens Advice super-complaint to the Competition and Markets Authority.
FCA’s General Insurance Pricing Practices Market Study
The FCA announced its General Insurance Pricing Practices Market Study (MS18/1) as part of a package of measures launched in October 2018 to address concerns about pricing practices in the general insurance market. MS18/1 investigates how new and existing consumers are charged for motor and home insurance. The study was undertaken as part of the FCA’s ongoing commitment to the fair treatment and protection of consumers. The interim report setting out the FCA’s preliminary conclusions and discussing potential remedies is due for publication in the near future, with a final report scheduled for the end of the year.
MS18/1 examines three key areas:
1. Harm from pricing practices
2. The fairness of pricing practices
The FCA assesses fairness from the perspectives both of firms and of consumers. MS18/1 will examine consumers’ attitudes to the fairness of pricing outcomes and their understanding of how insurance pricing works. With regard to firms, the FCA is assessing whether firms are treating consumers fairly, by considering:
- Whether pricing models and strategies adopted by firms are leading them to take advantage of certain consumers
- Whether firms are providing consumers with clear and accurate information at renewal
- The impact of certain contractual terms, such as auto-renewal
- How firms are addressing their responsibilities to treat customers fairly, in particular those considered vulnerable.
3. The impact of pricing practices on competition
The FCA shall be looking at whether current pricing practices are conducive to effective competition. In particular, the regulator will consider:
- If pricing practices are increasing or restricting consumers’ access to good quality insurance products
- Whether firms are making high profits from certain groups of consumers, particularly those who are vulnerable
- Whether the current nature of competition is leading to higher or lower costs for consumers in purchasing, and firms in supplying, insurance products
- If firms entering the market are doing so successfully or are encountering barriers. This will involve an assessment of whether different business models including those involving the sale of add-on products have delivered good outcomes for consumers.
The FCA’s focus is for the time being on home and motor insurance, two of the largest general insurance markets and ones which many consumers have effectively no, or little, option but to engage with. Even if the FCA declines to look at other lines of business for now, its findings could potentially have far-reaching implications. Attracting new customers with lower premiums and “balancing the books” by charging higher premiums to existing customers is, for better or worse, commonplace. Is it harmful? If there is a loyalty penalty to sticking with an insurer, consumers can in principle “shop around” and change provider regularly.
The FCA clearly recognises the considerable difficulties in identifying who is vulnerable and determining what harm if any pricing behaviour causes. Underpinning its approach are a number of concerns, including whether the growth in insurers’ ability to analyse data has not merely exploited inefficient consumer buying behaviour, but has ultimately led to the exclusion or limitation of access of some consumer groups to insurance. That, from the regulator’s perspective, is a consumer protection issue. However, its approach is potentially capable of being perceived as being of wider social and political significance.
It will be interesting to see whether the FCA’s preliminary conclusions are set out with reference to the Insurance Distribution Directive and the Senior Managers and Certification Regime. Both require firms to underpin their governance and control structures with clear lines of accountability and responsibility, and to act honestly, fairly and in the best interests of their customers.
Is the regulator going to signal a more proactive approach to pricing issues? Will firms be encouraged to review their approach to pricing behaviour? Will the market perceive itself as being nudged in a particular direction? Whatever the FCA’s findings, they will be scrutinized very closely. They may signify a significant step change in the regulatory climate for general insurance pricing that may give rise to considerable commercial and compliance challenges.
Related article: FCA Business Plan – 2018 update