We brought together a panel of experts to discuss their key take-aways from the FCA’s final general insurance pricing practices policy statement.
Regulars from our fair value webinar series, James Yerkess and Colin Robertson from HAL Consulting, joined our CEO Ian Hughes on last Friday’s edition – and here are the highlights of what they had to say.
Renewal pricing may have been the main focus, but underpinning everything was fair value. The report came at the end of a month in which the FCA introduced the principle of consumer duty.
Fair value is mentioned 153 times, and the FCA makes it very clear that fair value it’s applicable to ALL non-investment insurance products.
“If the ban on price walking for home and motor is the tsunami, fair value is the San Andreas fault that lies underneath it.” – Ian Hughes
So the industry can shake itself dry and rebuild, but unless brands do so understanding and accommodating for the underlying fault - the next wave will hit them even harder.
“In the language of business, fair value is grammar. It guides you on when to start, stop, slow down, put a question mark. If your grammar is poor, you’ll score low marks.” – James Yerkess
Fair value should be the foundation on which insurers and intermediaries are building their businesses. If you don’t get it right, you risk losing the clarity of your message and the richness of your prose – and getting left behind the competition.
It’s clear the FCA have listened, and made sensible amendments and clarifications such as to incentives. For those who were paying attention to the direction of travel rather than looking for loopholes, there shouldn’t have been many surprises.
“It’s a comprehensive, pragmatic response, and most will be happy at where it ended up.” – Colin Robertson
“It should be powerful for the sector to reflect on the potential of lobbying.” – James Yerkess
The panel suggested firms should be looking at not just the detail of the amendments, but at the questions the sector itself asked, to gauge how competitors are receiving the new rules, and what strategies they’re looking to employ to meet, exceed or even avoid them.
Avoidance though, might not be the best strategy – because the FCA is watching.
While most firms will be well on the way with their plans, now the final version is set in stone they need to take aim at where they want to set their aspirations: good, better or best in class.
You can just comply with the rules, look for the gaps, and play them. Or you can change what you do and how you do it, future-proof yourself for the new world and the clear direction of regulatory travel – and be amongst the first to get it right (and get a jump on your competitors).
“You can choose to be good, better, or best. It’s okay to be good. But some companies will be better. Some will be best. And in banking those were the ones that got the competitive advantage and gained market share.” – James Yerkess
“It’s not about how you can bend the rules or game the system, it’s about how you can be customer facing PLUS commercial PLUS compliant. That’s the opportunity.” – Ian Hughes
“Customer outcomes now sit alongside commercial outcomes, instead of something off to the side.” – Colin Robertson
The report makes very clear that the FCA is looking to promote customers’ best interests. For some firms, that might mean a significant shift in thinking.
“In retail the rule is, ‘Would I buy it?’. If you wouldn’t, if it isn’t good, fair value, the simple rule is not to sell it.” – James Yerkess
So it might be tempting to hollow out a product because you can’t change the premium – you might even get away with it – but it’s not in the spirit of the rules. And you might be playing an old game while everyone else moves on to a new playing field…
It’s for this reason that culture change is key. A newly balanced customer and commercial focus is needed, and it needs to run from product development through marketing, distribution partnerships, delivery and claims.
“It’s easy to change a computer system. Allegedly. But changing a culture is far harder.” – Ian Hughes
“Don’t kick the ball down the line and make this an annual check-box exercise. Take the rules, live them and breathe them.” – Ian Hughes
If you’re still not convinced, follow James’ advice and look at the banks. The banking sector has been dealing with fair value for some time – and there have been some hefty fines for breaches in recent years.
“Many of the fines in the banking sector weren’t due to the failure of fair value thinking, but down to a failure of governance.” – James Yerkess
The senior managers who will soon be responsible for reporting need to understand what’s going on down the chain before they sign off on it. While there’s likely to be a warning system to start off with – a yellow and red card system – that’s also likely to toughen up as time, and non-compliance, goes on.
“The FCA will be picking up with firms about the data they provide, and they will want to make an example of those who don’t comply. In the banking space, that cost some firms tens of millions of pounds.” - Colin Robertson
The panel looked at the next steps for the industry, and how the new rules might change the market.
“The time to discover and distil is over, it’s time to do. Firms should now be looking at ways to gain competitive advantage, gain market share and take the opportunity these changes to the sector provide.” – James Yerkess
At their core, the new rules aim to rebuild trust in the insurance sector, and the firms leaning into that are going to come out on top. It won’t just be about price anymore, but about content, quality, and clarity of communication. It will be about paying attention to retention as well as new business, and about building new relationships with customers, and brand trust. The opportunity is huge.
“Customers are not fixated on price like the industry is fixated on price. If they were the cheapest option on a PCW would always win – and we know it doesn’t. Price IS important, but it is not the only thing. Claims are important. Brand is important. Customers have always looked at value more widely - and these will be some of the things insurers will now compete on.” – Ian Hughes
“The better you understand your customers, the better your insight, the more advantage you have. It’s one of the key levers through which you can create commercial advantage in the new world.” - Colin Robertson
“Imagine a world where the PCW pulls up your quotes, and beside the price with equal prominence is a rating for claims experience. If you rank low it wouldn’t matter what the price was, you’d not get the same click throughs.” – Colin Robertson
The shift in the market means it’s all up for grabs, and the whole panel felt there was potential for substantial landscape changes.
“It will be interesting to see how large players with existing large back books react with their pricing strategies. That could create a significant gap in the market for smaller players and new entrants.” - Colin Robertson
Against this backdrop of change, you can’t be marking your own homework. Yes, you need to decide your own strategy – but you also need to be able to benchmark what you’re doing and how you’re doing it against others.
“If fair value is grammar, it’s important to note we don’t think anything of getting someone else to proof read our work, or of using Grammarly to make sure we’re not making errors.” – James Yerkess
“This is a marathon not a sprint. When you correct grammar, find mistakes, and fix them, you improve the whole script, and change the nature of the collective language you use. If you’re still behind the curve you’re going to lose out from a competitive advantage point of view.” - James Yerkess
“The FCA will have the results from every insurer and will be looking at them from an industry level. Every insurer sees the world slightly differently – and the one thing we can guarantee is that the FCA is not going to see things through your lens. Understanding the wider perspective is crucial.” - Ian Hughes
“Keeping a keen eye on the landscape as it evolves over the next 12 months will be critical to success. Having external reference points gives you assurance you’re on the right track. Commercially, it will allow you to better understand whether your response has been proportionate relative to your peer group or not. If you’re finding life challenging you’ll have a better idea why and what to do about it.” – Colin Robertson
What’s more, it’s worth remembering it might not JUST be you marking your homework…
“In the banking sector banks were looking at their competitors and reporting to the regulator who was and wasn’t complying.” – James Yerkess
And if there was one overriding piece of advice from the panel above and beyond this, it was as follows:
The rules are not going to stay the same. The market is not going to stay the same. Having a playbook of moves in your back pocket and making sure you’re ready to make them is going to be… well, make or break.
“Everybody’s guessing what the best answer is. But come January everyone is going to have to reveal their hand and there are going to be winners and losers. Some will have gotten it right, some won’t. If you haven’t done well, you need a good feedback loop in place to work out what you’ve done wrong , and then the agility to change and fix it quickly. Longer term, those able to do that will be the real winners.” – Colin Robertson
One way Consumer Intelligence is looking to help is by helping to develop a universal language for fair value. This week, the company launched two new products: The Fair Value Framework, and the Fair Value Comparison. In combination, these two services provide you with greater assurance and evidence that your approach to PS 21/5 is compliant.
“We want to help everyone mark the SAME homework – providing a Rosetta Stone everyone can use to decode and unpick what fair value means. For us it means coming at it from the perspective of a consumer, their view of what’s fair, what’s right, and what they want from insurance brands moving forwards. Watch this space.” – Ian Hughes
You can catch up on the full commentary and all the panel’s insights in our ‘Don’t mark your own fair value homework’ webinar recording here.
Stay ahead of general insurance fair value compliance and generate positive business outcomes, through our brand new fair value product pairing.
In combination, these two services provide insurers with greater assurance and evidence that their approach to PS 21/5 is compliant. When the new regulations come into force there will be winners and losers. Having an established feedback loop to understand relative performance will be invaluable, allowing you to make informed decisions on any necessary change.
Comment . . .