The end of the insurance loyalty penalty?

Hogan Lovells

Hogan Lovells

Yesterday the FCA has published its final report on its market study into general insurance pricing practices. The proposals include significant reforms including banning the so-called loyalty penalty, to prevent consumers who are less likely to shop around and change insurer from being charged a higher renewal price.

The FCA has published its final report on general insurance pricing practices today, which includes reforms designed to ensure consumers receive fair value for the insurance products they buy. Alongside this report, the FCA has published a consultation paper which sets out how the remedies they are consulting on would work in more detail and a policy statement on value measures reporting.

The FCA is proposing the following new measures to boost competition and deliver fair value to insurance customers:

  • Pricing remedy: The FCA’s study found extensive evidence of some firms gradually increasing the price to customers who renew with them year on year, referred to as the loyalty penalty or ‘price walking’. It has, therefore, proposed rules to change the way firms price home and motor insurance. When a firm offers a renewal price to a customer, that renewal offer price should be no greater than the equivalent new business price that the firm would offer a new customer. Such pricing remedies would apply to all firms throughout the distribution chain, including intermediary distribution firms who set the net price. It would also apply to additional products, such as other types of insurance and premium finance that may be sold with the home or motor policies. For those firms with closed books, the new rules would require benchmarking renewal prices against a comparable new business offer price.
  • Product governance: The FCA plans to introduce new product governance rules (in PROD) requiring firms to consider how they offer fair value to all insurance customers over the longer term. Such rules will cover both general insurance and pure protection products, regardless of when they were manufactured. This means PROD will no longer only apply to those products manufactured or significantly adapted after 1 October 2018. Firms will need to complete their product reviews within 1 year of the rules coming into effect. However, the FCA does not expect firms to assess the past performance of products against standards that were not in place at the time.
  • Reporting requirements: The FCA proposals also include requirements on firms to report certain data sets to the regulator so that it can check the rules are being followed. This brings with it the challenge of ensuring the different ways firms collect and collate data is comparable in order to provide meaningful reporting. In this respect, the FCA has identified Open Finance as a potential tool in helping handle such insurance data. The FCA is also considering whether or not to publish the data gathered on firms’ pricing practices as a ‘sunlight measure’. In addition, the regulator is proposing a rule requiring regular confirmation from a senior manager that the firm’s pricing models comply with the pricing remedy.
  • Auto-renewal: The FCA is seeking to introduce measures to stop auto-renewal being used as a barrier to switching providers across all general insurance products through requirements for firms to offer a range of accessible and easy options to cancel.

Next steps

These proposals could have a significant impact on business models. On this basis, it is important for insurance market participants to get to grips with the likely impacts of the FCA’s proposals. This will involve scenario modelling and strategic discussions around the business impacts, including consideration of how best to build customer loyalty under a new pricing regime.

Feedback on the FCA proposals closes on 25 January 2021.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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