FCA points to “remarkable” insurer failings as it launches “fundamental” market review


  • Surprise at lack of pricing controls in household insurance
  • Disappointment over “patchy” implementation of renewal transparency
  • Danger of discrimination from the use of data
  • Need for leaders to be accountable and able to explain decisions
  • The thinking behind the CEO letter
  • The quest for fairness and danger of focusing only on price

Chris Woolard on why the regulator felt it had to act.

Financial Conduct Authority (FCA) board member and director of strategy and competition, Chris Woolard, has admitted it found “less than we would expect” when it investigated pricing controls at household insurers “particularly bearing in mind the wider conduct rules in place at the moment”.

Woolard spoke with Insurance Age on a busy day for the regulator and a crucial one for the industry.

It revealed the findings of its review of the home insurance market; issued a CEO letter; launched a market study into how general insurance firms charge their customers for home and motor insurance; and published a discussion paper on fair pricing in financial services markets.

No documents
The home insurance review involved sampling 18 firms covering 40% of the market.

It found pricing strategies and philosophies that suggested some firms may not consistently and appropriately consider the impact on consumers.

In fact three companies did not have any documented pricing strategy or philosophy and used their business plans as the sole driver of their pricing activities.

The regulator also uncovered that the April 2017 regulation on renewal transparency was being applied in a “patchy way”.

“The rule change around last year’s premium is a pretty simple one as far as I am concerned,” Woolard stated.

“It is certainly intended to be a very simple communication with the customer.

“The fact that in some cases this has got obscured is genuinely disappointing.”

Vulnerable people
According to the FCA, customers who renewed home insurance for five years were paying on average 70% more than new customers and of those who renewed for 10 years one-quarter were vulnerable people.

“The exam question boils down to how do we ensure everybody in this market gets a competitive and fair price?” Woolard asked.

He declined to name the individual firms involved in the home insurance review, however he confirmed there were “supervisory conversations” going on and the FCA will “make sure those situations are rectified”.

The document stated clearly that the FCA had found “no evidence of direct discrimination based on protected characteristics”.

However, the organisation warned of potential harm to consumers if firms acted in a way that broke the law and cited the Equality Act 2010 and the Rehabilitation of Offenders Act 1974.

Its main concern was the potential use of data based on race/ethnicity in pricing models.

“As the report says we weren’t finding that firms were systematically biased in some way,” Woolard began.

“But, in a number of cases we are looking at firms that are buying in data sets to use within their pricing and decision making models. There may be the prospect that some of those data sets do contain some underlying bias within them.

“If you put that into the mix then you are likely to come out with something that is frankly not good.”

In essence the FCA has called on insurers to address how they introduce new automated systems and the data put through them.

“It is an emerging field of data science at the moment but the unintended bias that can be created by just having data sets arranged in a certain way that are bought in is definitely a risk that firms need to aware of,” Woolard expanded.

“It is something that we are flagging for the future.”

The risk of discrimination was one of three points raised by chief executive Andrew Bailey in his letter to CEOs setting out the expectation that people align themselves with existing rules.

The missive also tackled dual pricing and failures to have oversight, governance and control of pricing practices.

Woolard agreed a fair summation of the CEO letter was that it stressed accountability for leaders and the need for them to be able to explain the actions a business took.

“[In the] short term it’s about restating our expectations about the industry and frankly what we would have expected to see in place over a very long period of time,” Woolard summed up.

Linking the letter to the home insurance review he further explained the thinking behind the need to send the correspondence.

“The issue from our initial work was it was remarkable that a number of firms that we spoke to could not properly account for or explain how they had reached their final pricing decisions.

“We would expect firms to be thinking quite clearly about how they treat customers fairly and the overall effect of their pricing strategy.”

Senior managers
Woolard noted that some firms were able to deliver for the review and agreed “absolutely” that in the future FCA would be making more use of the Senior Managers and Certification Regime (SMCR) regulation.

“If you are a senior individual in one of these organisations you need to take accountability for your company and what is done in the name of your company,” he summed up.

“This not a new set of rules here, the concept of having the right systems and controls to run a business have been there for many, many years.”

Complicated data?
And he held little truck with the idea that senior managers were struggling due to data and systems becoming too complicated.

Instead he called on them to ask themselves if a particular pricing strategy would cause a firm to feel uncomfortable, if it takes into account the interests of all customers and treats them fairly.

“Those are questions we would expect the senior management to ask themselves as well as thinking if they are quite properly generating a profit from these activities.

“Thinking about the systems that help them make them most of their decisions is a matter of common sense.”

Step back
Turning to the market study into dual pricing he explained: “Let’s take a step back and a fundamental look at how the markets are operating.”

Adding: “It is our way of opening up a set of questions about what does the future structure look like potentially?”

He advised that the regulator was not keen on focusing exclusively on price. It does not wish to see products “hollowed out” and consumers to end up with a competitive price that does not provide the level of cover they need.

“This is a market in which people do get good deals,” he noted defining that the study would tackle a “complex set of interactions” about products.

It may not lead to dual pricing becoming history.

Highlighting the paper on fair pricing in financial services markets, which goes beyond the insurance market, he stated that the public does accept dual pricing in different parts of life.

The discussion will seek to define what is meant by fairness and where the line should be drawn.

This May the Association of British Insurers and the British Insurance Brokers’ Association published a joint set of Guiding Principles and Action Points designed to tackle dual pricing.

Woolard pointed out the regulator was not in a position to endorse such industry initiatives but described it as a step in the right direction.

However he concluded by pointing out the FCA still felt it had to act.

“Alongside the fact that we have made a number of interventions in the market … when we step back and look at the evidence that we have from our preliminary work the right course of action is to say that we do need take a fundamental look at the way this market is operating,” he ended.

“That is what the market study is here to do.”

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