Fair value has now been with us for a while, but it is now becoming a tangible outcome for more insurance products as part of the FCA’s work on general insurance pricing practices.
In a recent poll, we found that 91% of firms said they’d considered fair value, and 84% said they were responding to the proposals announced in September – mostly with changes to their underwriting, compliance and product lines.
However, 50% said they were focusing mainly on pricing – and that may mean that fair value has some way to go.
We thought it was therefore time to get up to 88-miles-an-hour speed on Fair Value – to go back to basics, and to look to the future.
With no Doc Brown available, we turned to Kate Collyer, Chief Economist at the FCA, and Interim Director of Competition, who joined our recent webinar to discuss the FCA’s expectations, the evolution of fair value, and where insurance firms are expected to be in the short, medium and longer term.
Here are some of the key takeaways for insurers and intermediaries.
Fair Value is not a flash in the regulatory pan. “Fair value is one of the FCA’s business priorities,” explained Kate. “It spans all three of our operational objectives: consumer protection, market integrity, and effective competition. We expect firms to deliver fair value for consumers by providing products and service of suitable quality and price – and that’s something we strive for across all financial services.”
Ian Hughes, CEO at Consumer Intelligence added: “It’s worth noting that this isn’t the first financial sector where Fair Value has been introduced. We’ve worked with banks on their fair value journey, and watched them come out the other side of it better.”
It’s a point both Kate and Ian stressed. Fair value is about creating a better insurance industry – and not just for consumers.
Kate said: “Fair value underpins markets that work well. A well-functioning insurance sector is vital for a healthy financial services industry. It provides an impressive range of products and services which aim to protect against uncertainty and risk, which provides essential security for consumers and businesses alike.”
Kate went on to talk about the FCA’s recent Financial Lives Survey, which found insurance was a growth industry – with the number of people having an insurance product growing from 81% to 88% between 2017 and 2020. But the survey also found that trust in insurance companies is low – only 7% of adults expressed high trust in their insurance companies in February 2020.
“We need to work on restoring trust in insurance,” continued Kate. “Fair value is one of the most significant ways we can work together to do so.”
Of course, in insurance fair value means pricing models that are simpler and more transparent for consumers – but that’s not all insurers could be focusing on.
“Fair value is more than just the price paid for the product or service,” said Kate. “It is the overall benefit consumers get from a product or service relative to the costs they incur. So it needs to be thought of holistically – not just in terms of individual elements of the price, quality, or service provided.
“Importantly, fair value is something we expect to see throughout the duration of a customer’s relationship with a firm, not just when they first purchase a product or service.”
If you’re thinking about fair value holistically, you cannot think about it just within the confines of your own business.
Ian commented, “Your customers don’t care if your add-ons are delivered by someone else, if premium finance is through a different company, if claims are dealt with elsewhere. They bought a policy with YOU, and they expect YOU to treat them fairly, all the way along. That’s why this agenda is also as relevant to brokers and PCWs as it is to insurers.”
“Firms need to consider product value throughout the entire distribution chain,” Kate pointed out. “This means that product manufacturers should consider Fair Value in their product design and distribution strategy, and distributors should consider the impact that their distribution strategy and remuneration have on the overall value of the product to the consumer.”
“Fair value isn’t a tick box exercise,” said Ian. “It’s about culture, and it’s about fundamental change. Good governance is absolutely key to embedding a Fair Value mindset across your organisation. Firms should be taking a good, hard look at themselves, their products, their customer communications, their distribution channels, their call centre culture, and they should be challenging themselves on their bar of fairness.”
It doesn’t matter so much what you’re doing on fair value. It matters what the impact is on your customers.
“In assessing fair value, we’re looking at factors like what outcomes we’re seeing for customers,” added Kate. “We’re looking at how firms are treating their customers, the ease of access to relevant information - and we’re looking at who ISN’T receiving fair value, including vulnerable customers, too.”
The panel went on to look at consumer perceptions of fair value, from separate Consumer Intelligence and FCA research. Perhaps unsurprisingly, price walking was generally thought to be unfair (90% of respondents agreed) and it was generally thought to be fair that those shopping around should save money (80%).
But consumers’ perceptions of fairness, particularly on pricing practices, changed depending on the context.
“There are a range of benefits consumers will expect from products and services, and these can be different between different consumers,” explained Kate. “The value and costs to consumers can be both monetary and non-monetary.”
Ian said: “What we know is that everyone is unique. Insurers really need to get under the skin of individual customer’s wants, needs and interests. There is no one-size-fits-all when it comes to cost/value perception. That’s why getting to know your customers is such an important part of the fair value process.”
Embedded fair value assessments into all products will create future-fit businesses.
Ian concluded: “It’s important we start to see fair value as a positive thing, as good commercial practice that’s good for customers, good for clients, and actually good for profit.
“It’s very, very clear that fairness matters to your consumers. And your relationship with them IS changing as a result. What you want is them thinking, ‘if I can trust my insurer to give me fair value long term, I will be loyal, and I will buy further products from them’.
“If you give them fair value, if you switch your mindset, you will have a bigger, more loyal book - and ultimately higher profits going forwards.”
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