The Financial Conduct Authority (FCA) confirmed new rules for General Insurance (GI) Pricing Practices – what has changed since the consultation and what now?
The FCA published policy statement PS21/5 with its final rules on GI pricing practices in May 2021. We are now in the ‘implementation period’ with the rules coming into force on:
• 1 October 2021 for systems and controls (SYSC) and product governance (PROD).
• 1 January 2022 for premium finance disclosure, pricing and auto-renewal remedies, reporting requirements, and related glossary and administrative changes.
There is some additional time to implement the changes relating to pricing and autorenewal disclosure. These rules will come into force on 1 January 2022, however the FCA has added a transitional provision that allows firms until 17 January 2022 to have the required processes in place, providing they backdate benefits to customers from 1 January 2022. There are four key areas that have been updated: Pricing, Product governance, Auto-renewal, and Reporting. We have delved further into each area below:
What has changed from the Consultation?
The pricing remedy is broadly in line with the proposal outlined in the consultation paper, however the changes include:
- Where incentives are either wholly or partly funded by a firm setting the renewal price, the cash or cash-equivalent needs to be included in calculating the equivalent new business price.
- This applies to a firm setting a renewal price that funds a cash or cash-equivalent incentive given to customers by another party in the distribution chain.
2. Closed books
- The ‘closed book’ definition was amended to reduce the risk that an actively marketed book would be classified as closed. The threshold remains at 15% for products that have been on sale to new customers for less than 5 years, and a threshold of 7.5% will apply for products that have been on sale for 5 years or more.
- The closed book rules do not apply to sales or expected sales of more than 10,000 policies per year to new business customers.
- Firms must assess if their books meet the definition when there is a material change to distribution or marketing, and at least once a year, based on the product across all distribution channels.
- Fair and proportionate adjustments can be made to the new business price to account for differences in costs between a closed book and close matched product.
3. New or missing risk information
- Firms should calculate the equivalent new business price considering all information on changes to the consumer’s risk, irrespective of its source.
- Where risk information is missing, firms can determine their own approach to calculating the new equivalent business price. However, they must demonstrate that the product offers fair value and the renewal price does not systematically discriminate by tenure.
4. Anti‑avoidance provisions
- Firms should not charge a customer a higher fee at renewal than the equivalent new business customer. This applies to both insurers and intermediaries, and current and closed books.
- This provision only applies to arrangement fees that are charged as part of insurance distribution (including those at renewals). This does not apply to contingent fees, such as fees for mid‑term adjustments.
There were minor changes to the proposed product governance rules, which aim to make sure products offer fair value to customers:
1. Considering product value for a ‘reasonably foreseeable’ period
- This is the value likely to be offered throughout the life of the product.
- There are factors firms should consider when determining the reasonably foreseeable period, including whether customers are expected to renew their policy, how renewals will be priced, and whether there could be any significant changes to the insured risk or cover provided.
2. Compatibility with other requirements
- The rules should be read in conjunction with wider legal obligations, for example from competition law.
3. Attestation requirements
- Where a firm is subject to the Senior Managers and Certification Regime (SM&CR), the person making the attestation needs to hold a relevant Senior Manager Function.
- Where the firm is not subject to the SM&CR, the person making the attestation must be a Director.
4. Reporting requirements and record keeping
- Firms must notify the FCA if they become aware of other firms in the distribution chain not complying with the new rules.
- Firms are required to retain records of their considerations under the pricing remedy to help monitor the market and ensure firms follow the rules.
The FCA proposed to allow consumers to opt‑out of auto‑renewal by telephone, post, and email or online. Some firms expressed they do not offer all these channels of communication. As such, firms need to take the following changes into account:
- To allow consumers to opt‑out of auto‑renewal using at least the same methods that they can use to purchase a new policy.
- Private health, medical and pet insurance are excluded as customers could lose cover for pre-existing conditions or acquired benefits if they unintentionally don’t renew.
The FCA had proposed reporting requirements for monitoring home and motor insurance markets to ensure compliance with the pricing remedy and identify any customer harm.
Quarterly reporting in the first year was amended to allow firms more time to make the necessary changes to systems and reporting processes. In the first year, firms are to report a single interim report covering the six months ending 30 June 2022. This must be reported by 30 September 2022.
Certain reporting requirements have been removed, including:
- Price‑setting intermediaries to report gross‑rated business
- Duplicative reporting for add‑ons
- The proportion of customers paying high or very high premiums
- Insurers to report incurred claims ratios and reserve movements by tenure
- Insurers to report large books of business
The FCA also introduced a few additional reporting requirements including:
- Price setting intermediaries to report data on closed books
- Insurers and price setting intermediaries to report data on the average prior year premium for different cohorts of renewing customers
Get in touch
If you have any questions regarding the new GI pricing rules, please feel free to get in touch via the form below. One of our Regulatory Compliance team would be delighted to help.