Last week the FCA updated the insurance industry on the timetable for the implementation of its general insurance pricing practices review.
Although it won’t publish its policy statement and final rules until the end of May, it doubled down on its commitment to see the new rules in place by 2022. Dual pricing and auto-renewal remedies can be implemented at the end of this year – but rules on product governance, which encompass fair value, must be implemented by the end of September.
So with six months to go, but no concrete rules confirmed, we held a webinar last week with our CEO Ian Hughes, and James Yerkess, Managing Director of HAL Consulting, to look at the recurring themes and explore what firms can do about fair value already.
If you missed it live, here are 10 take aways that our attendees came away with.
The FCA has been very clear that fair value is here to stay. It has been a requirement to consider for all new products and significant adaptions to existing ones since October 2018, and the good news is that most firms have already started to respond to the changes that will vastly increase its scope to include all products . The industry is now beginning to move beyond asking what fair value means, to asking how it’s going to demonstrate it.
If you want to make any sort of change, you have to measure it. CP20/19 offers a clear framework that can be used to assess, evidence and measure fair value – but it’s up to businesses to get the right governance, systems and processes in place to deliver those metrics.
Non-compliance is not an option: by the end of September, firms will be expected to be reporting. With guidance only set to be finalised in May, there’s not a lot of time to get ready. Those that don’t meet the new standards are likely to face remediation or even fines – lessons learned from the banking sector’s fair value journey.
Fair value is coming before pricing remedies at the end of the year, which makes it the more urgent issue – as well the bigger one.
While most firms are now thinking of fair value as more than ‘no price-walking’ – its full scope is still proving hard for some to grapple with.
Fair needs to apply across the entire customer journey and value chain, from acquisition to claims. That means it includes intermediaries, customer communications and service, product design and governance, pricing mechanics, web design and user experience.
With so much in scope, what the FCA is really asking is for fair value to be central to a firm’s ‘purpose, culture and actions’. It needs to be embedded in every level and every corner of operations. That culture shift is going to be greater for some organisations than others, and will of course be one of the toughest things to demonstrate.
Lots of organisations from lots of industries say they put the customer at the heart of what they do; now insurers and brokers are going to be asked to prove it.
The FCA defines fair value as the overall benefit consumers get relative to the costs they incur. But what is valuable to one customer may be different to what’s valuable to another.
For one person, auto-renewal could be an important time and hassle-saver, for another it could be an annoyance. The lowest price point might be paramount to person A, whereas person B could be looking for a particular cover feature, an add-on service like home emergency − or might be prepared to pay more for the perceived ‘quality’ of a familiar brand.
Both ‘fair’ and ‘value’ are something of a minefield, and that makes getting close to customers, understanding behaviours and motivations, more important than ever.
What does fair value mean to you?
When we asked consumers what ‘fair value’ meant to consumers, the answers were considered, and varied. Consumers knew it would be different for different people and circumstances, and felt that understanding the options and the market context was still key.
“The way I know I’ve received fair value is because I always price compare, whether it’s a service or goods I’m buying. If I feel I can get it cheaper but better spec or better service than someone else, then I know that company is going to offer me fair value. Comparing to others is how you would know you’re getting fair value.”
“I consider fair value is what an individual is prepared for a service or commodity. That can obviously vary depending on the individual involved. If an individual feels that it’s fair value, what’s fair to one person might not be to another, so it has to be personal choice.”
“When you are receiving a service or a product and you are paying what you believe is a fair price for that. The opposite of fair value is when you are paying much higher than what you believe the product or service to be worth. You know you’re receiving fair value because, when compared to competitors or the rest of the market, you are receiving an extraordinary high-quality product or great service.”
When the FCA unveiled its plans to ban price-walking, many industry commentators expected this to spell bad news for PCWs. It will negate the need for shopping around and switching, the argument goes.
Turns out this is not how insurance, shopping or human beings work.
Consumer Intelligence research shows consumers are still planning to shop around, especially if their insurance needs or their personal circumstances change, and because a lot of people just want to be able to see what else is out there, anyway.
This highlights the opportunity for PCWs to support consumers in their quest for value. The truth is that PCWs have never just compared price at face value, but have always looked at several product features with a tick list of what’s included and what’s not. Increasingly these lists are likely to evolve, as PCWs become wider VCWs – Value Comparison Sites. And they too will have fair value reporting responsibilities.
Fair value is not the death knell for premium finance as an income generator, but it will radically change the model.
It’s likely we’ll see an end to insurers or brokers under-selling core insurance products to get greater returns from their finance deals. In other words, firms cannot be the insurance equivalent of used car salesmen jacking up the APR for a better commission.
But instalment plans are of significant value to some consumers, and will continue to be important. Firms will need to look at the balance of deposits and payments and risk through a fairness lens, rather than a profit lens. They will also need to and work out whether their business is spreading risk or lending money - and what fair looks like in either case.
Fortunately, assessing credit risk and managing credit policy fairly isn’t a new thing for the financial services industry - and showing the workings to both consumers and the regulator could actually boost trust in these products, and take-up.
Fair value has to be delivered throughout the customer life cycle – and hiking prices after the first year is no longer an option. Firms need to consider what’s fair in terms of the cost of the product itself, plus the administration costs to process a renewal, all versus the cost of acquiring a completely new customer from scratch.
They also need to look at how renewals are sold, communicated and understood by the customer, and run that through the fair value process, too. Even before pricing practice guidelines come into force, it’s likely this is an area the FCA will be monitoring. Getting your renewal house in order is key.
Insurance is famed for its incentives, including free tickets and stuffed toys at the point of purchase. A stuffed African mongoose could be part of the value you’re getting from your insurance product, but organisations need to think through how that can be maintained throughout the lifetime of the policy, and how all their promotions are applied to old and new customers.
There needs to be more clarity from the FCA on how fair value impacts marketing, and firms will need to evidence how they are helping and not hindering consumers in making informed choices.
With fair value, the FCA is accelerating transformation in the insurance industry - and that’s a real opportunity for innovation.
While there probably isn’t going to be an Uber-style disruption in insurance, it is likely there IS going to be exponential growth. Organisations will be competing not just on price but on new value measures – and those ahead of the curve can corner the ‘new’ market. We could see existing firms changing their models, and new firms entering the market for the first time.
In fact, we’ve already seen insurance change – for instance with the growth of pay-as-you-drive policies – where new products and new brands are responding to changing demand and adding value to post-pandemic drivers.
If you look at fair value the right way, with a spirit of creativity and the right team to deliver it, it’s the most exciting time for the development of general insurance for decades.
Making money out of insurance is a good thing. Nowhere does the FCA say you can’t make a profit – just that you have to be fair about how you make it. It is entirely possible to construct a business that is good for customers, good for the regulator, and good for the bottom line.
Many firms are worried about how universally fair value will be embraced, and that if they’re following the spirit of the guidance rather than the letter of the law, they could be at a commercial disadvantage. But the experience of the banking sector was that the FCA used their data for benchmarking, and then used benchmarking to pull everyone up by the bootstraps and move the entire industry forwards on an evolving fair value journey. Those found to be behind lost brand impact, and consumer trust.
A vibrant market encourages profit and encourages competition – it’s essential in driving long term value for consumers. And at the end of the day, that’s the FCA’s ultimate goal.
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