Blog: Next steps for the insurance sector as FCA cracks down

Michael Sicsic

Former head of GI at the FCA, Michael Sicsic, reflects on the regulator’s interim report into dual pricing.

Last week, the Financial Conduct Authority (FCA) released an interim report in its continuing market study into general insurance pricing practices, highlighting that the motor and home insurance markets are simply not working well for consumers.

The report confirms that consumers who do not switch or negotiate with their provider usually end up paying higher prices for their insurance. This so called ‘loyalty penalty’ impacts around six million policyholders.

The FCA has now made it clear that it is ready to intervene in this market, proposing a range of possible, sweeping remedies. Firms should heed these warnings now and take immediate action to ensure that their business does not fall foul of regulatory intervention when the final report and guidance is delivered next year.

There are some simple, proactive steps that firms can take to reassure the regulator that they are (and will remain) focusing on pricing fairness. Businesses in this space need to display willingness to work collaboratively to improve industry practices across the board.

Respond to the report
The first step for all firms should be to respond to the interim report consultation within the next six weeks, directly or indirectly through a trade body such as the British Insurance Brokers’ Association or the Association of British Insurers.

In their responses, firms should ensure they have robust answers backed up by data and analysis. If they find they are unable to respond adequately in areas they are falling short in, they should propose viable alternative solutions.

It is important to remember that the FCA is seeking to primarily address the consumer harm caused by unruly practices. To demonstrate their understanding of this, firms should underpin all their proposed changes with the goal of delivering better and fairer customer outcomes.

Meet and exceed regulator standards
The FCA concluded its interim report by stating that various existing requirements and expectations are not being embedded fully or widely enough to mitigate customer harm. This will be the “immediate term” focus for the regulator.

As such, firms should reassess their operational processes to ensure that they meet the minimum regulatory standards expected across the industry and, if not, conduct root cause analysis to understand where they are falling short and why.

To help address this without impacting current resource, firms should consider partnering with a trusted third party with regulatory expertise who can help embed the policies, procedures and people that meet these standards.

Prepare for increased scrutiny
The interim report makes it very clear that the FCA is looking to implement some fairly drastic, customer-centric changes to rules, including restrictions on pricing practices, auto-switching of customers to better deals, ending autorenewals and requiring clearer pricing transparency.

To predict the impact of such measures and understand where the weak links are, providers need to perform stress tests and scenario analysis. By better understanding existing processes and procedures, firms will undoubtably be better prepared for more drastic changes, should they be made.

Firms should also expect the conclusion of the market study to require them to make contact with customers, inform them of any changes to accounts and perform switches for, potentially, thousands of people. To prepare for this, firms would be well advised to undertake a review of legacy books and seek flexible operational support from third parties to manage the workload.

More widely, providers need to re-evaluate how they communicate with customers, as this underpins almost every market-change the regulator will inevitably implement – particularly when it comes to tackling the ‘loyalty penalty’. One of the remedies proposed by the FCA is to require additional communication with customers at the point of renewal. This could create resourcing and capabilities gaps in firms’ operating models. Businesses should start planning now for ways to bridge these gaps.

Vulnerability remains high on the agenda
One of the most concerning findings from the study is that one in three consumers who paid high premiums showed at least one characteristic of vulnerability. This reinforces the importance of identifying and treating vulnerable customers with respect and appropriate levels of care – in line with the proposed guidance published by the FCA earlier this year.

Firms that are proactive in their response to the FCA report, making changes to operating and pricing models ahead of time, will surely place themselves as the customer-centric, trustworthy businesses that the FCA wants to see in the market.

As we head into a period of increased regulatory scrutiny and decreasing customer loyalty, now is the time to ensure your business is built for success and providing the best possible service, at the best possible price, to your customers.

Michael Sicsic, the former Head of General Insurance Supervision at the FCA, has recently joined Huntswood’s Advisory Panel.

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