The Financial Conduct Authority (FCA) has today announced a package of measures following on from their initial work on insurance pricing practices. These include:

  • comments in a Dear CEO Letter on conduct by firms they intend to address;
  • a previously announced market study on general insurance pricing practices (click here for our earlier report on this topic and here for the study terms of reference); and
  • a discussion paper on fairness of pricing in financial services more generally (click here for a copy)
  • Andrew Bailey, the FCA's Chief Executive, has stated that:
"If change is needed to make the market work well for consumers, we will consider all possible remedies to achieve this."

Comments on Conduct

In the Dear CEO Letter the FCA identified a number of issues that it felt could cause significant harm and poor outcomes for consumers and should be addressed by firms as part of their treating customers fairly obligations as follows:

  1. Firms failing to have appropriate and effective strategies, governance, control and oversight of their pricing practices and activities, such that they are unable to reliably assess and evidence whether they are treating their customers fairly;
  2. Differential pricing leading to some identifiable groups of consumers paying significantly higher prices than other identifiable groups of consumers with similar risk and "cost to serve" characteristics; and

iii. The risk of discriminating against consumers through using rating factors in pricing based (directly or indirectly) on data (including third party data) relating to or derived from protected characteristics (e.g. race, gender etc).

The FCA stressed that pricing by general insurers and relevant intermediaries is viewed as a key business activity and that 

"All firms are required to assess whether their pricing practices result in their customers being treated fairly. Firms should also be able to demonstrate how they have reached this conclusion.......... it should be clear who within the business is responsible for pricing decisions and therefore responsible for the customer outcomes that result from those decisions"

The Market Study

The FCA has been concerned that general insurance pricing practices have the potential to cause harm to vulnerable consumers. Its early diagnostic work found that some consumers who stay with their insurance providers for a long time pay prices that are much higher than those paid by new consumers and that a significant proportion of such long terms customers showed characteristics of potential vulnerability.

The intent of the market study is to give the FCA a deeper understanding of the scale of any such harm and a sense of whether (and what) actions may be required to improve the market. The focus of the study of pricing practices will be on:

  • consumer outcomes (looking at differences between prices paid for insurance by different consumers compared to the cost of providing them with insurance, assessing why this occurs, the numbers and type of consumers affected and the extent to which such consumers may be vulnerable);
  • the fairness of outcomes (do certain pricing models take advantage of certain consumers? Is clear and accurate information provided for renewals? What is the effect of auto-renewal terms? How are firms seeking to ensure fairness in the treatment of vulnerable customers?);
  • the impact of on competition (Do pricing practices increase or restrict consumers' access to good quality insurance products? Are firms are making high profits from vulnerable consumers? Does the current nature of competition leads to higher or lower costs? Barriers to entry); and
  • remedies to address any identified harms

The FCA has welcomed action taken by the industry to date to address concerns about pricing practices for their customers (in May 2018, the Association of British Insurers and British Insurance Brokers' Association published Guiding Principles and Action Points with the aim of acting on excessive differences between premiums charged to new customers and those renewing) and has made it clear that it expects the industry to continue such work while the market study is ongoing.

The Discussion Paper

The FCA's discussion paper on fair pricing in financial services markets sets out the FCA's approach to considering fairness of pricing in general. Its focus is on questions of fairness in:

  • charging different prices to different consumers based solely on differences in consumers' price sensitivity ('price discrimination'); and
  • charging existing customers higher prices than new customers ('loyalty pricing' or 'inertia pricing').

FCA is concerned that these pricing practices can potentially disadvantage some consumers significantly, in particular the most vulnerable and least resilient consumers. However, it notes that the position is complex and such practices may also benefit some vulnerable groups. The FCA recently published a research note setting out a matrix of the factors which in their view could suggest unfairness in both practices. The FCA is now, in the Discussion Paper, encouraging stakeholders to submit their own views on this approach to inform its judgment of when such pricing practices may be unfair. Comments and accompanying evidence should be submitted by 31 January 2019.