General insurance pricing practices market study
Consultation on Handbook changes
Consultation Paper
CP20/19***
September 2020
(Updated December 2020)
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Or in writing to:
General insurance pricing pract
market study team
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Financial Conduct Authority
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Email:
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ices
Contents
1
2
3
4
5
6
Summary
The wider context
Pricing remedy
Product governance
Cancelling auto-renewing policies
Reporting requirements
3
7
11
15
21
23
Annex 1
Questions in this paper 28
Annex 2
Cost benet analysis 30
Annex 3
Compatibility statement 66
Annex 4
Abbreviations used in this paper 70
Appendix 1
Draft Handbook text
December 2020 – To address a coding error we have
updated figures, tables and text in the Cost Benefit
Analysis. These changes affect pages 38-40, 52-54,
56-57, 59, and 62-65. Changes have been highlighted in
the text.
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Chapter 1
General insurance pricing practices market study
1 Summary
Why we are consulting
1.1 In October 2019, we published the interim report for our general insurance pricing
practices market study. We found that the home and motor insurance markets are not
working well for all customers. While many people shop around, many loyal customers
are not getting a good deal.
1.2 We have now completed our investigation into this market and have published our final
report. The final report includes more discussion on the harm we identified, a summary
of the feedback we received to the interim report and our response. In this consultation
paper (CP), we consult on the package of remedies proposed in the final report.
Who this applies to
1.3 This paper will be of interest to firms in the insurance market and trade bodies
representing them. While our focus is primarily on the home and motor insurance
markets, we propose to apply some of our remedies more broadly to all types of
general insurance and pure protection insurance.
1.4 The paper will also be of interest to consumers and consumer organisations.
The wider context of this consultation
1.5 General insurance products are important and give customers protection when
things go wrong, for example if they have a car accident or their house is damaged. It is
important that the general insurance sector works well for customers.
1.6 In 2018, we published the outcomes of a thematic review into pricing practices for
home insurance. This review raised concerns about how current insurance pricing
leads to harm. We launched the general insurance pricing practices market study to
investigate these concerns in more detail.
1.7 Our work on the market study has shown that firms use complex and opaque pricing
techniques for home and motor insurance to identify customers who are more likely
to renew with them. Firms then increase prices to these customers each year at
renewal, in a process known as ‘price walking’, resulting in some customers paying high
prices relative to their cost to serve. In addition, some firms engage in practices that
can discourage customers from shopping around. While lower prices are available
for customers if they regularly switch or negotiate with their existing provider, price
walking distorts competition and leads to higher overall prices for customers.
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1.8 Stakeholders have also raised concerns about outcomes from general insurance
pricing practices. In September 2018, Citizens Advice made a super-complaint about
loyalty pricing to the Competition and Markets Authority (CMA). Home insurance was
1 of 5 markets included in the super-complaint. We continue to work closely with the
CMA on the response to the super-complaint. However, the remedies we have decided
to consult on are based solely on the findings of this market study.
1.9 Today we have also published a policy statement on general insurance value measures
setting out requirements for firms to report and publish value measures data across a
wide range of general insurance products. These rules are aimed at addressing poor
product value.
The impact of Covid-19
1.10 We have carefully considered the potential impact of our remedies on a market that
continues to be impacted by the Coronavirus pandemic. See Annex 2 of this paper for
further analysis. Although there have been some impacts on insurance markets, for
example from reduced driving mileage under lockdown, these have not fundamentally
changed the way in which firms set their prices or altered our concerns about pricing
practices. Therefore, we believe action is still required to address the harms we have
identified. We will consider the ongoing impacts of the Coronavirus pandemic before
making any final rules and issuing any Policy Statement.
What we want to change
1.11 We are proposing a package of measures to improve competition and ensure firms
offer fair value products in the future.
• Pricing remedy (Chapter 3): we propose rules to change the way rms price home
and motor insurance. We propose that, when a rm oers a renewal price to a
customer, that renewal oer price should be no greater than the equivalent new
business price that the rm would oer a new customer.
This would stop rms increasing prices for customers based on their tenure. This
includes customers who may be unaware of existing pricing practices and are less
likely to shop around or negotiate at renewal. We do not expect the same harm
to recur in the future as rms would need to ensure they oer the equivalent new
business price to existing customers.
• Product governance (Chapter 4): We are proposing changes to the existing
product governance rules in our PROD sourcebook to ensure rms have processes
in place to deliver products that oer fair value to customers.
The current product governance rules require rms to have appropriate processes
in place when manufacturing, distributing and managing products manufactured
or signicantly adapted after 1October 2018. We propose to extend the scope
of the rules to all general insurance and pure protection products regardless of
when they were manufactured. We also propose to enhance the requirements by
proposing new rules that require rms to ensure their products oer fair value to
their customers.
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The new requirements we are proposing apply to core products and additional
products, including premium nance distributed alongside insurance products. We
also propose some disclosure requirements in relation to premium nance sold
alongside insurance products, which we consider are an enhancement of existing
requirements.
• Auto-renewal (Chapter 5): where contracts are set to renew automatically each
year, we have found that some rms do not make it easy for consumers to change
their contract. So, we propose to require rms to oer a range of accessible and
easy options for consumers who want to cancel auto-renewal on their contract. We
propose to apply this remedy to all retail general insurance products, not just home
and motor insurance.
• Reporting requirements (Chapter 6): we propose new reporting requirements to
help our ongoing supervision of the home and motor insurance markets.
The outcomes we are seeking
1.12 Our package of remedies seeks both to improve outcomes for consumers and to
change the nature of competition. If this package is successful, we would expect to see
a market where:
• Firms compete in eective and innovative ways to provide long term fair value
(reecting both price and quality) for all customers throughout the duration of their
relationship with the rm. This is ingrained in their behaviour and underpinned by
strong governance. All customers continue to receive fair value over the long term
as technological developments advance.
• Firms do not engage in practices that that limit customers’ ability to make informed
choices. They are transparent with consumers about the overall cost and quality
of products from the start. They do not impose barriers to consumers switching
to better deals. This helps consumers make more informed choices about which
general insurance products meet their needs.
• Customers can trust that rms are oering long term fair value. Consumers who
remain with their insurance provider can be sure that they will not end up paying
high prices simply because they have not switched provider. They no longer need to
search, switch or negotiate at every renewal to avoid price walking.
• Dierences in rms’ products, including the type of service and quality they oer,
in the evaluation of insurance risks, and in pricing structures, maintain the incentive
for consumers to search and switch in the market. This drives competition and
helps to ensure that all consumers receive fair value. Over the longer term, new
technology helps make it easier and quicker to search and switch to better deals.
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Measuring success
1.13 We will put in place a strong supervisory approach to ensure firms comply with any
rules we implement. We will start to monitor the impact of these remedies immediately
on implementation and undertake a longer-term evaluation to understand how our
remedies are affecting the market.
1.14 The reporting proposals, set out in Chapter 6, would help us to measure success. The
data we propose to collect from firms would allow us to track changes in the market
and to identify firms that continue to charge some customers disproportionately high
premiums. We would use this information in our supervisory engagement with firms to
hold them to account.
1.15 We also intend to review the effects of the remedies approximately a year after
implementation and to conduct a full post-implementation evaluation, 2 years after
implementation, or earlier if deemed appropriate.
Next steps
1.16 We are seeking views on our proposals. We ask questions throughout this CP, which
are also collated in Annex 1. Please send us your comments by 25January 2021. We
intend to publish a Policy Statement in Q2 2021 with our response to the consultation
feedback and our final rules.
1.17 We propose that any new rules would come into effect 4 months after we publish our
Policy Statement.
Q1: Do you have any comments on the proposed
implementation period?
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2 The wider context
The harm we are trying to reduce
2.1 The harms we have identified in the market study are:
• Distorted competition – rms do not focus on providing long term value to all
consumers: Competition can be intense to attract new customers by focusing on
oering low headline prices. These prices do not reect the true long-term cost
of home and motor insurance policies. Firms then increase margins for customers
who stay with them over time.
• Higher prices for customers who do not switch or negotiate, many of whom are
less aware of current pricing practices: Firms’ pricing practices are complex and
opaque and do not make clear the true lifetime cost of home and motor insurance
policies. This leads some consumers to believe their renewal price is more
competitive than it is. Firms also use practices that can discourage consumers from
looking for better deals at renewal. These practices do not enable consumers to
make eective and informed choices in these markets.
• Higher overall searching and switching costs for consumers: To avoid paying
higher prices than they need to, consumers must spend signicant time shopping
around and switching or negotiating with their existing provider. Shopping around
and switching is generally good for competition and can benet consumers, for
example where consumers want to nd better quality products or better service.
However, shopping around and switching merely to avoid price walking takes time
and eort and can impose unnecessary costs on consumers and rms. This can
lead to higher prices overall.
• High acquisition costs being passed onto customers: We think it is likely that rms
know that some customers will be very protable over the long-term. This may
mean they are willing to spend signicant amounts to acquire them. These costs
may then be passed on to customers through higher prices.
2.2 See the final report for the market study for further discussion on these harms.
2.3 We have also identified wider concerns in the insurance market, relating to product
governance and fair value more generally.
How it links to our objectives
Competition
2.4 Our proposals are designed to improve the way general insurance markets operate. At
present, competition is not working effectively in the interests of all consumers. This is
discussed in more detail in Chapter 3 of our final report.
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Consumer protection
2.5 Ineffective competition is leading to poor outcomes for many customers. Our
proposals are designed to reduce harm for these customers. Again, this is discussed in
more detail in Chapter 3 of our final report.
Wider effects of this consultation
2.6 Our proposals should have a significant impact on the way general insurance markets
work. We consider that intervention is needed to address the harm we have found in
the market and that it is necessary for us to impose new requirements to reframe the
way home and motor insurance is priced across the industry.
2.7 It is essential that firms’ senior management are held accountable for delivering the
desired outcome of this intervention. We propose to require a senior person in each
firm to confirm each year that the firm is complying with the pricing remedy.
2.8 Our product governance proposals complement the pricing intervention but would
also apply to a broader range of general insurance and pure protection products. They
would require firms to consider how they offer fair value products to customers. These
rules should also help drive changes in firms’ culture and behaviour.
2.9 As well as our focus on changing firms’ behaviour, we want to help competition work
more effectively in the interests of consumers and help ensure they are making
more informed decisions. We know that customers find it difficult to engage with
these issues and we are not relying on changes in customer behaviour alone to drive
improvements. However, making it easier for customers to cancel the auto-renewal of
existing contracts will remove an unnecessary barrier to customers engaging with the
market. We propose to apply this remedy to all retail general insurance products, not
just home and motor insurance.
2.10 To help us supervise the market and to check that the pricing rules are being followed,
we need to gather information on a regular basis. We are proposing to gather a
proportionate range of information from home and motor insurance firms (both
insurers and intermediaries) that would alert us to potential non-compliance issues.
Where we have concerns, we can follow-up with individual firms to request more
detailed information.
Equality and diversity considerations
2.11 We have considered the equality and diversity issues that may arise from the proposals
in this CP. Customer research for the market study by London Economics, in association
with YouGov and Kudos Research, found that, at present, younger customers are less
likely to renew their contracts with the same insurer and older people are more likely to
renew. The proposals set out in this CP might therefore have an impact on groups with
the protected characteristic of age under the Equality Act 2010.
• Where older people renew regularly with the same insurer and currently pay higher
prices than equivalent new business customers, they might nd their insurance
premiums are reduced to the equivalent new business price.
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• Where younger people currently shop around regularly for insurance, they might
nd the premiums oered by new insurers increase as a result of our proposals.
This is because new business discounts might not be as common or signicant.
2.12 In our October 2018 review of pricing practices in household insurance, we raised
a concern over the potential use of data based on race/ethnicity within firms’
pricing models to produce different offered prices. We found no evidence of direct
discrimination but we did find that firms were using datasets (including datasets
purchased from third parties) within their pricing models which may contain factors
that could implicitly or potentially explicitly relate to race or ethnicity. We remind firms
that they need to ensure that the data they use in pricing does not discriminate against
customers based on any of the protected characteristics under the Equality Act 2010.
Q2: Do you have any comments on the possible impact of our
proposals on people with protected characteristics under
the Equality Act 2010?
Application to firms based in Gibraltar and firms in the
temporary permissions regime
2.13 To ensure all firms serving customers in the UK are subject to the same rules, we
propose to apply the rules on which we are consulting to Gibraltarian firms and firms in
the temporary permissions regime.
Gibraltarian rms
2.14 Firms based in Gibraltar can sell insurance into the UK. We consider that it is important
for them to be subject to the same rules as firms authorised in the UK, to ensure
effective competition in the interests of consumers and an appropriate degree of
consumer protection. We therefore propose to apply the rules set out in this CP
to firms based in Gibraltar doing regulated business in the UK whether from an
establishment here on or on a services basis.
The temporary permissions regime
2.15 The UK left the EU on 31January 2020 and entered a transition period. During the
transition period, EU law continues to apply in the UK. Firms are also currently able
to provide services on a cross-border basis under relevant EU directives. After
the transition period, at the end of this year, firms will no longer be able to provide
passported services in this way.
2.16 The UK has a temporary permissions regime to allow inbound firms to continue
operating in the UK within the scope of their current permissions for a limited period
after the end of the transition period, while seeking full UK authorisation, if necessary.
2.17 Our approach is that any new rules we create will not apply to temporary permission
firms, unless we expressly apply them.
2.18 We are proposing to apply the rules set out in this CP to firms in the temporary
permissions regime, whether these firms are doing regulated business from an
establishment in the UK or on a services basis, as well as to firms authorised in the
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UK. This will ensure effective competition in the interests of consumers and that UK
customers are subject to the same protections if they buy insurance from a firm in the
temporary permissions regime.
Q3: Do you have any comments on our proposal to apply
the rules on which we are consulting to rms based in
Gibraltar and rms in the temporary permissions regime?
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3 Pricing remedy
3.1 In this chapter, we outline our proposal to introduce a pricing restriction for home and
motor insurance. We propose that, when a firm offers a renewal price to a consumer,
that renewal price should be no greater than the equivalent new business price that the
firm would offer a new customer.
3.2 This aims to prevent firms from price walking consumers. The remedy ties the renewal
price to the equivalent new business price. Therefore, firms would not be able to
increase prices for renewal customers without also increasing the prices they offer the
new business customers. We expect that our proposal will also tackle high prices for
existing customers who have already been price walked.
Background
3.3 In our interim report, we found extensive evidence of price walking in both the retail
home and motor insurance markets. Many firms price policies using estimates of how
much a consumer is expected to pay over the projected duration with their insurer.
This is known as lifetime value pricing. Using this method, firms win new customers
through introductory discounts and recover these initial losses by increasing the
premium over time.
3.4 This approach is not made clear to consumers and our analysis shows that many
consumers are unaware that their renewal price is not competitive. This results in many
longstanding customers, with a lack of understanding of firms’ pricing practices, paying
very high prices for their home and motor insurance. To address these concerns and
help achieve our vision for general insurance markets, we propose to introduce a
pricing remedy in both the home and motor markets.
Proposals
3.5 In the following sections, we outline our proposal to introduce a pricing remedy in
the home and motor markets to ban price walking. We explain how we expect this to
work for firms in different scenarios, for example when dealing with closed books or
giving discounts. We also propose measures to guard against firms acting in a way that
frustrates the intended outcomes and set out proposals for firms to confirm each
year that they comply with the remedy. We provide further detail of why we are putting
forward this remedy and the alternative pricing restrictions considered in Section 5 of
the final report.
A ban on price walking
3.6 We propose that, where a firm offers a renewal price to a consumer, this should be no
greater than the equivalent new business price the firm would offer a new customer.
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3.7 When calculating an equivalent new business price, a firm must assume that the
customer has approached the firm through the same distribution channel and is using
the same payment method as when they first bought their policy.
3.8 When offering a renewal price, the firm must set the price on the same basis as if the
policyholder were presenting as a new customer. This does not mean the renewal price
for a consumer could not change over time. The equivalent new business price used to
calculate the renewal quote may differ from last year’s premium due to changes in the:
• consumer’s risk since they became a customer or the last renewal
• the rm’s margin (the amount of the price charged above or below the cost of
underwriting the risk and serving the policy) for all customers
• pricing model that might alter margins across customers, as long as that change
does not systematically lead to higher prices for renewal customers
3.9 Firms may wish to consider whether using the same pricing model for new business
and renewal customers would support a firm’s approach to ensuring that the firm
does not differentiate customer prices according to tenure or any proxy for such
information.
3.10 Where more than one firm is responsible for setting the renewal price, firms should
take reasonable steps to ensure the other firms have followed the pricing rules, such as
by seeking verification from them.
Q4: Do you have any comments on our proposal to ban price
walking?
Closed books
3.11 In both the home and motor markets, some products are offered as renewal contracts
to existing customers only or are not actively marketed to new customers. These are
known as closed books.
3.12 In the market study, we identified a number of firms with closed books. Some of these
firms had an active new book as well as their closed book, while others had no active
new books.
3.13 Under our proposals, firms that have both closed books and currently active new
books must benchmark their closed book renewal prices against a comparable new
business offer price.
3.14 Firms can only use books that are actively marketed or distributed as a benchmark for
renewal prices of closed books.
3.15 In some cases, a firm may only have closed books and not have actively marketed or
distributed products to use as a benchmark. For such closed books, firms must ensure
each customer’s renewal price does not systematically discriminate against customers
based on their tenure, as well as assuring itself of the value of the product relative to
similar products available to new customers in the market.
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In this way, the remedy is designed to allow firms freedom to develop and offer new
products for sale as part of normal competition to meet customer desire or needs.
However, when offering new products, firms must still ensure that the renewal prices
offered to customers with existing products comply with the pricing remedy and offer
fair value to those customers.
Q5: Do you have any comments on how our proposal would
apply to products that are no longer actively marketed?
Anti-avoidance measures
We are also proposing that our pricing rules would make clear that operating in a way
which frustrates the intended outcomes of the pricing remedy would be a breach of
those rules. This could include, for example, arranging their business in ways that result
in consumers of longer tenure systematically being offered renewal prices that exceed
the price for a new customer or the quality of service or cover enjoyed by customers of
longer tenure being lower than that enjoyed by customers of shorter tenure
Our proposed rules would also require firms to have appropriate policies and
procedures to ensure that their pricing practices are consistent with the overall
intended outcome and objectives of the pricing remedy rules.
We will also, as always, consider whether any conduct by a firm is inconsistent with our
Principles and the ICOBS requirement to act honestly, fairly and professionally in the
customer’s best interests.
Q6: Do you have any comments on our proposals to address
practices that aim to frustrate the intended outcomes of
the pricing remedy?
Attestation
We are also proposing a rule requiring regular confirmation from a senior manager that
the firm’s pricing models comply with the pricing remedy. The first confirmation would
be required 3 months after the rules come into force. After that, we propose to require
confirmation each year.
We propose to require firms to keep records of their considerations under the pricing
remedy requirements. For example, we would expect firms to keep documentation of
sufficient detail showing how they were satisfied that their pricing model complies with
our rules.
Q7: Do you have any comments on our proposal to require
senior manager conrmation that the rm is complying
with the pricing remedy?
Q8: Do you have any comments on our proposal for rms to
retain documentation to show how they are satised that
their pricing model complies with our rules?
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3.22
3.23
3.24
3.25
3.26
Individual and multi-product discounts
Currently, some firms offer a better price or terms to a customer who contacts them
in response to their renewal offer price. Our proposed remedy does not prevent such
negotiation, so a firm would still be able to make a revised offer below the quoted
renewal offer price.
When offering multi-product pricing (such as combined home and motor insurance)
firms would be required to comply with the same pricing rules for the combined price
and any components within scope of the rules. So, firms would be able to offer a
discount for taking both policies with the same firm. However, the combined renewal
price offered to the consumer must be no higher than the equivalent combined new
business price.
Q9: Do you have any comments on our proposals for multi-
product discounts?
Distribution channels
The pricing rule would apply to all insurers and all intermediaries involved in price-setting.
This means our pricing restriction would apply to each stage in the price setting chain.
For example, insurers often provide insurance to an intermediary at what is termed a
‘net rated price’. The intermediary then then sets a ‘gross price’, which is the final retail
price the consumer pays (with the addition of Insurance Premium Tax (IPT)). An insurer
would be required to set the net rated price for renewal so that it did not exceed the
net price to an equivalent new customer. An intermediary that adds commission to a
net price would be required to set a gross price no greater than would be offered to an
equivalent new customer.
Q10: Do you have any comments on our proposal to apply the
pricing restriction rules to all stages of the price setting
chain?
Additional products
We propose to apply these rules both to the price of the home or motor policy and
to additional products, such as other types of insurance and premium finance that
may be sold with the policy. Currently, the price for additional products and premium
finance typically do not usually differ between new and renewing customers. Our
proposal is that the renewal price for additional products, including premium finance,
must be no greater than that offered to an equivalent new customer. Firms would also
have to ensure that these products offer fair value. We discuss this further in the next
chapter.
Q11: Do you have any comments on our proposal to apply the
pricing restriction rules to additional products?
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4 Product governance
In this chapter, we propose amendments to the rules on product oversight and
governance that apply to general insurance and pure protection products, such as
term life insurance. We also propose rules for firms offering or arranging premium
finance to help finance a retail contract of insurance.
These proposals are designed to ensure firms focus their behaviour on delivering fair
value products to customers and have strong governance and oversight arrangements
in place to support this. This would be achieved by both broadening the scope of the
current regime in our Product Intervention and Product Governance Sourcebook
(PROD) and enhancing it with new obligations on firms to address the harms identified
in the interim report and the wider concerns we have identified in the insurance market.
Background
4.3 We have long been concerned with how firms design and distribute their products.
The then Financial Services Authority (FSA), now FCA, introduced The Responsibilities
of Providers and Distributors for the Fair Treatment of Customers (RPPD) guidance
in 2007 to set out our expectations of firms under rules including the Principles for
Businesses. This guidance applies to all sectors we regulate, including insurance.
4.4 We have specific rules on product oversight and governance for insurance firms
in Chapter 4 of PROD. We introduced them as part of the implementation of the
Insurance Distribution Directive (IDD) and they took effect on 1October 2018. The
content of PROD 4 came not only from IDD, but also reproduced provisions from a
delegated Regulation which is directly applicable to firms in scope of the IDD that
manufacture and distribute insurance products. We also included some additional
rules where we considered them relevant.
4.5 PROD 4 applies to new products, or significant adaptations of existing products, made
on or after 1October 2018 and requires firms, among other things, to:
• Maintain, operate and review a product approval process before products are
marketed or distributed.
• Specify a target market for each product including, where relevant, identifying
groups of customers for whom the product is generally not compatible.
• Design products to be compatible with the needs, characteristics and objectives of
the target market.
• Select distribution channels that are appropriate for the target market, and take
steps to ensure that the product is distributed to the target market.
4.6 In November 2019, we published guidance on our insurance distribution rules, including
in Chapter 4 of PROD, Chapter 2 of ICOBS and Chapter 19F of SYSC, for general
insurance distribution chains. This sets out our expectation that firms should consider
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product value when designing and distributing non-investment insurance products,
including the need to act in accordance with wider Handbook rules including the
Principles and the customer’s best interests rule in Chapter 2 of ICOBS. The proposals
below build on our previous expectations, including under this guidance, and transpose
aspects of this guidance into Handbook rules.
4.7 In the market study interim report, we said that we were considering making changes
to the PROD rules. Our suggested changes included:
• applying the PROD rules to all products, not just those manufactured or
signicantly adapted on or after 1October 2018
• requiring rms to consider the value of the product to the target market, and
• that a senior manager should take responsibility for the value of products to the
target market
General insurance value measures policy statement
4.8 Alongside our final report, we have also published a policy statement on value
measures. This introduces new rules for reporting and publishing value measures data
across a wide range of general insurance products.
4.9 These rules also include product governance requirements designed to help address
the risk of firms not delivering fair product value and to reduce the risk of unsuitable
general insurance products being sold. The value measures-related product
governance requirements (based in the PROD Sourcebook) will, from 1January 2021,
introduce new requirements for firms to ensure that products offer fair value, taking
into account a range of factors. We consider that the proposals set out in this CP
complement and build on these value measures rules.
Proposals
4.10 We think that the product governance rules can be improved in some key areas, which
we have set out below.
Enhancing the requirement to ensure products oer fair value to
customers
4.11 We propose to amend our rules to require manufacturers and distributors to consider
whether their products represent fair value for customers. This would build on the
distribution chain guidance and the rules introduced as part of our work on value
measures.
4.12 Our proposals include measures to :
• Set out that value means the relationship between the total price to the end
customer and the quality of products and services. We have also set out the factors
rms must take into account when carrying out a value assessment.
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• Require manufacturers to consider the value of the product through their product
approval process. Manufacturers (whether insurers or intermediaries) would be
required to ensure that products are intended to provide fair value to the target
market.
• Introduce an evidential provision to make clear that we consider certain price
optimisation practices would not oer fair value. Examples include, pricing based
solely on whether the customer is using auto renewal or premium nance or if the
customer has characteristics that might indicate vulnerability. Firms are reminded
of the need to meet their obligations under the Equality Act 2010, including to avoid
unlawfully discriminating against actual or potential customers due to protected
characteristics when setting prices or in their insurance products.
Q12: Do you have any comments on our proposal to enhance
the product governance requirements concerning
product value?
Application to products manufactured before 1October 2018
4.13 The PROD rules currently only apply to new products being manufactured, or to
significant adaptations of existing products, on or after 1October 2018. This captures
a significant proportion of products on the market but there are many existing
products which have not been required to be put through a PROD-compliant approval
process.
4.14 We propose to apply the PROD rules, including the new rules, to all general insurance
and pure protection (non-investment) products, regardless of whether they are
newly manufactured or have been significantly adapted. Firms would need to apply a
product approval process to existing products which do not currently fall within PROD
scope. Where PROD already applies, firms would need to update their approval for any
products to take into account the new requirements on fair value. In both cases, we
expect firms to complete this within 1 year of the rules coming into effect, and to take
steps to ensure products provide fair value going forward.
4.15 Our proposed product governance rules are intended to be forward-looking and
focus on firms ensuring the products they manufacture or distribute in the future
are providing fair value, including at renewal. We do not expect firms to assess the
past performance of products against standards that were not in place at the time.
However, if, as part of its review process, a firm discovers that its products or practices
were in breach of rules that applied at the relevant time, then they should consider
taking appropriate steps to remedy any consumer harm.
Q13: Do you have any comments on our proposal to apply the
product governance rules to products regardless of when
they were launched?
Application to non-investment insurance products and additional
products
4.16 Our existing rules in PROD 4 apply to all general insurance and pure protection
products. We propose that the changes to PROD outlined in this chapter, should apply
with the same scope. In our view, the requirement to provide fair value products is
equally relevant to, and consistent with our approach for, all insurance products. This
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would apply irrespective of whether the insurance product is sold as a core product or
as an additional products.
Where a customer buys a policy and additional products, including premium finance,
as a package, value should be considered for each individual component and in the
aggregate. This includes premium finance, where this is a component of the package.
Q14: Do you have any comments on how we propose to
apply the product governance rules to non-investment
insurance products and products sold as part of a
package?
Ongoing review and remedial action
We propose to introduce a minimum requirement to review products at least every
12 months which we expect would already be the usual minimum review period for
many products. Firms would need to consider if a more frequent or ad hoc review is
necessary because a product has a higher risk of generating harm for customers.
We propose to introduce new provisions setting out the actions that firms should
consider if they find their products are not providing fair value.
Q15: Do you have any comments on our proposals for ongoing
product reviews and remedial actions rms must consider
where it is identied that the product is not providing fair
value?
Requirements on product distributors
In addition to the changes for product manufacturers, we also propose to make
changes to the product governance rules for insurance distributors. These rules
would complement the proposed changes to the requirements for manufacturers.
Distributors would be required to:
• Ensure that they understand the value assessment that the manufacturer has
undertaken, so that they can distribute the product accordingly.
• Consider the impact that their distribution strategy and process has on the value of
the product. This includes considering any remuneration they receive as part of the
distribution strategy, and ensuring that it does not result in the product failing to
oer fair value to the end customers. The rules set out a number of matters which
distributors should consider.
• Provide information to support the manufacturer in their product reviews. This includes
information on remuneration where this has an impact on the value of the product.
• Amend their distribution processes if they identify it results in harm to customers.
This should include taking appropriate remedial action.
We are also taking this opportunity to remind distributors of their existing obligation to
meet all relevant insurance distribution requirements. This includes the requirement
under ICOBS 5.2 to assess customer demands and needs before concluding a
contract of insurance. Firms are reminded in particular that ICOBS 5.2 applies at
4.21
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4.22
4.23
4.24
renewal, as well as for new business. Firms need to ensure they have sufficient up-to-
date information to be able to assess customer demands and needs before arranging a
renewal contract for long-standing customers.
Q16: Do you have any comments on our proposed
requirements for product distributors?
Premium nance
We remind firms that premium finance is an additional product and is subject to
existing rules within the Insurance Conduct of Business Sourcebook (ICOBS) and, in
particular, the requirements in ICOBS 6A.2 (optional additional products) and 6A.3
(cross-selling). When selling insurance with premium finance, we also remind firms that
the remuneration, or associated incentives, firms receive in connection with it, must
be consistent with the firm’s obligations under ICOBS 2.5-1R. Firms must not propose
premium finance arrangements to customers where this would be inconsistent with
the firm’s obligations, including the customers’ best interest rules. For instance, where
the firm proposes premium finance with a higher annual percentage rate (APR) than
would be available elsewhere (for example, directly from the insurer, or from another
finance provider), based on the remuneration the firm will receive, this may conflict
with the firm’s obligations including the customers’ best interests rule.
Where firms offer or arrange premium finance to finance a contract of insurance, we
propose to require that firms ensure that:
• They give clear information about the cost of premium nance arrangements, and
make clear to customers that the use of premium nance makes the contract more
expensive.
• When rms give customers a choice on whether or not to take out premium
nance, they must do more than simply ask the customer to choose between
paying monthly or annually.
• Firms are not inuenced by remuneration to oer premium nance at higher
rates of interest than are available elsewhere. To meet this requirement, rms will
need to review regularly the premium nance they oer to ensure that it does not
adversely impact the value of the product. We understand that many rms will have
existing arrangements with premium nance providers, and will currently receive
remuneration from them. Some of these may be exclusive arrangements. Firms
will need to consider whether these arrangements are compliant with the existing
requirement to act in the customer’s best interests and the new requirement to
deliver fair value.
We will look closely at firms increasing the cost of premium finance to offset changes
to the cost of the insurance product. Where the customer faces higher costs for the
insurance product as a result of paying on credit, for example due to a higher premium
compared to the cost if paying without credit, the additional cost may constitute a
credit charge and, if so, the APR must reflect these costs. If it does not, firms may be in
breach of the Consumer Credit Act 1974 and the associated regulations.
Q17: Do you have any comments on our proposals for premium
nance?
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Senior manager responsibility
Firms are reminded a firm’s governing body has ultimate responsibility for the product
governance arrangements for non-investment insurance products including the
product approval process. To this end, their governing body will need to ensure that
the firm is complying with all relevant product level requirements whether in PROD 4 or
elsewhere, including ICOBS 6B.
While we are not proposing to make any changes to the Senior Management and
Certification regime at this stage, we remind firms that they must have a senior manager
responsible for compliance with the regulatory system. This includes product governance
and pricing. We expect both manufacturers and distributors to set out clearly which
senior manager has responsibility for these areas. As discussed in Chapter 3, we are also
proposing that firms must confirm each year that they comply with the pricing remedy.
Q18: Do you have any comments on our proposals for senior
manager responsibility for compliance with our proposed
remedies?
Contracts of large risk and reinsurance contracts
We are not proposing to make any change to the current exclusion from PROD rules
for products which are contracts of large risks and reinsurance.
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5 Cancelling auto-renewing policies
This chapter sets out our proposals to require firms to:
• clearly explain at point-of-sale and at renewal whether a policy is set to auto-renew
and what this means for the consumer
• provide consumers with a range of accessible and easy options to stop their policy
from auto-renewing
• communicate these options to consumers at point-of-sale and at renewal, and
• not impose unnecessary barriers on customers wanting to stop auto-renewal
Background
5.2 We are concerned that some firms are using auto-renewal in a way that could
discourage consumers from switching when it would be in their interest to do so.
Some firms can impose unreasonable barriers on consumers exiting auto-renewing
contracts, for example, requiring contact by phone rather than allowing cancellation
online.
Proposals
Proposed changes to our rules
5.3 We propose to require firms to provide consumers with a range of accessible and easy
options to stop their policy from auto-renewing.
5.4 Firms would be required to provide consumers with the option to stop their contract
from auto-renewing using a range of methods including:
• by telephone
• email or online, and
• by post
5.5 Our rules would not prevent firms from offering additional channels for consumers to
stop their contract from auto-renewing, such as by text message.
5.6 We also propose guidance setting out that an easy method is one that does not place
any unnecessary barriers on the customer. For example, if a consumer ‘phones a firm
to stop their policy from auto-renewing, they should not face excessively long waiting
times or unnecessary questions to do so. Similarly, the process for cancelling auto-
renewal online or by post should be straightforward.
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The rules would require that consumers can make use of these options at any point
during the contract term.
Q19: Do you have any comments on our proposals to require
rms to provide consumers with a range of accessible and
easy options to stop their policy from auto-renewing?
Under our proposal, firms would also need to communicate the options available to
consumers to stop their contract from auto-renewing. This information would need to
be given at the point-of-sale and in good time before renewal.
Finally, to guard against consumers taking out a policy that auto-renews without
understanding the implications, we propose the addition of rules to require firms to
explain whether a policy is set to auto-renew and what that means for the consumer.
Q20: Do you agree with our proposed rules and guidance in
relation to auto-renewal?
Product scope
Our proposals for auto-renewal apply to all types of retail general insurance.
The main benefit of these proposals, that barriers to exit are reduced, apply across
all types of general insurance. Our Financial Lives Survey has shown low levels of
awareness among insurance customers about whether their policy will auto-renew. For
example, 26% of respondents with mobile phone insurance and 12% of respondents
with pet or home emergency insurance say they don’t know whether the policy
automatically renews. As such, we think our proposals are likely to have a similarly
beneficial impact on all consumers across the general insurance market.
We also consider that the proposals have a low risk of causing harm to consumers.
For example, we consider the risk that they could lead to some consumers becoming
uninsured is relatively low. This risk is one reason we are not consulting on taking
forward some of the other remedies, such as banning the use of auto-renewal, we set
out in our interim report to address barriers to switching. See the final report for more
discussion on this point.
Q21: Do you agree with our proposal to apply the auto-renewal
measures to all types of general insurance?
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Chapter 6
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Reporting requirements
6.1 This chapter sets out our proposed requirements for firms to submit regular
information to us for home and motor insurance. This reporting is designed to help us
monitor the effectiveness of our remedies package and its impact on the market.
Background
6.2 Our proposals seek to ensure a balance between getting sufficient data to help us
monitor the market effectively, while not placing an unreasonable burden on firms.
The data we propose to collect is not designed to provide a deep-dive analysis of firms’
pricing models. Instead, the data should provide a snapshot of firms’ pricing practices,
changes over time and highlight where further investigation or follow up might be
needed to get information to support a more detailed analysis.
6.3 We considered other options, including requiring all firms to provide us with
transaction-level pricing information. We do not consider this would be proportionate.
We expect the metrics set out below would provide sufficient information to enable us
to monitor the market, alongside ongoing supervision.
6.4 Reporting is one part of our overall supervisory approach to the pricing practices
remedy package. As set out in Chapter 3, we propose requiring that a senior person
at a firm confirms that they are complying with our pricing rules and that their pricing
practices do not discriminate against customers of longer tenure. Where we have
deeper concerns, or want to test implementation of the new rules, we may also use
other supervisory tools, including requiring that firms undertake a skilled person’s
review, using the approach set out in SUP 5 of the Handbook.
6.5 We are not proposing to publish any data we collect through monitoring requirements
on a regular basis. However, we may choose to do so in future if we consider there
would be value in doing so, for example to increase scrutiny of firms’ pricing practices.
6.6 We consider that our reporting proposals are complemented by the value measures
rules that we published today. These rules require firms to report and publish value
measures data, including claims frequencies, claims acceptance rates, average claims
pay-outs and claims complaints as a percentage of claims, across a wide range of general
insurance products. These rules give an indication of the value consumers receive from
general insurance products and help support our assessment – alongside the reporting
proposals set out in this consultation – of how well the market is working for consumers.
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Proposals
Proposed scope of the reporting requirements
6.7 We propose to require firms to submit regular reports to us for retail home (home-
only, contents-only and home and buildings) and motor insurance. Where firms sell
additional products, including premium finance, alongside this insurance, we also
propose to gather information about those products.
Q22: Do you agree with our proposed scope for the reporting
requirements?
Reporting granularity
6.8 Consumer outcomes can vary depending on a range of factors, including sales
channel, tenure and book of business. We propose to require firms to submit data split
by these factors to better reflect consumer experiences.
6.9 In order to understand the impact of our remedy package on customers we propose to
gather information for each product, split by:
• The sales channel, including direct (phone, online and branch), intermediated,
intermediated via price comparison websites, and anity/partnership channels.
This will allow us to see if customers experience dierent pricing outcomes
depending on the distribution model that rms use.
• The length of time a customer has held their insurance with the rm. For example,
we would ask for information for new business customers and for customers who
have held polices from 1 to 10 or more years. This would allow us to see if prices
continue to rise with tenure.
6.10 We will also ask firms to provide us with information for each product by:
• Large books of business (100,000 or more policies).
• Closed books of business.
6.11 Information on these books of business will need to be split by product and tenure but
not by sales channel.
6.12 We also propose to require insurers and price-setting intermediaries to split out parts
of their reporting on a net-rated and gross-rated basis. This is to ensure we gather
information to understand the differences in outcomes for customers that may occur
under different business models. We are not requiring that price-setting intermediaries
report data on large books and closed books of business.
Q23: Do you agree with our proposed reporting granularity?
Reporting metrics
6.13 The metrics set out in this section aim to help us assess whether prices are higher for
some groups of customers relative to others and where there may be value issues.
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Monitoring compliance against the pricing remedy
6.14 To help monitor compliance against our pricing remedy, we propose to require firms to
report the following data:
• The total and average premium charged to customers, net of Insurance Premium Tax
This information would show how much, on average, customers are paying by
tenure and for dierent sales channels.
• Net and gross price for intermediated and anity/partnership sales
This information would help show the dierence between the net price charged
for a product (the technical price set by an insurer) and the gross price the nal
customer pays.
• The number of policies sold/renewed during the reporting period
This information will help us understand changes to customer numbers.
• The number of policies in force at the reporting date
This information would show the distribution of customers across rms, by tenure.
• Expected claims cost
This shows how much an insurer expects to pay out in claims. By comparing this to
the total premium, it can give an indication of the product’s expected value.
• Expected claims ratio
The expected claims ratio estimates how much of the premium paid by customers
is expected to go towards the costs of claims and other operational costs. Looking
at the expected claims ratio across tenure and over time could provide an indication
of where some customers may not be receiving value for their product.
Identifying instances of consumer harm
6.15 To help identify where there may be instances or pockets of consumer harm, we
propose requiring firms to submit the following data:
• The proportion of customers with average expected claims ratio 10 percentage points
and 30 percentage points below the average for the reporting channel
This information would help us understand whether some customers within a
tenure group are paying much more than others in that same group. Typically, home
and motor products would have expected claims ratio of 50% or higher.
Where a rm has an average claims ratio of 50% for a reporting channel, they
should report the proportion of customers with expected claims ratio 40% or below
and 20% or below for that reporting channel.
• Gross incurred claims ratio at an aggregated level
This information would help us understand the actual claims experience of rms. It
shows the ratio of claims settled against the premiums collected in a year. Higher
ratios indicate that more money is being paid out in claims, so this is an indication
that the product could represent better value to customers.
• Total prior year’s reserve releases
Reserve releases come about where the amount held in reserve to pay notied
claims in the prior year was greater than the amount actually paid out in claims. This
data will help us understand where rms have had to release surplus reserves to
manage incurred claims ratios.
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• Total prior year’s reserve strengthening
Reserve strengthening comes about where the amount held in reserve the prior
year to pay notied claims in the prior year was set below what was actually paid
out. This data will help us understand where rms have had to strengthen reserves
to manage incurred claims ratios.
• The proportion of customers paying high and very high premiums, dened as a
premium 1.5 times to 2 times (high) or more than 2 times (very high) the average
across the product.
Firms would be required to report the percentage of their customers, by product,
paying premiums considered high and very high. This information would show
where some customers may be paying more than average for their product and
whether paying above average is linked to tenure. For example, if the data shows
that in one of a rm’s books of business, more longstanding customers pay high
or very high premiums than shorter-tenure customers, we might want to explore
this further with the rm. We would seek to assess this metric alongside average
expected claims costs or average claims ratio.
Monitoring the market
6.16 We are concerned that some firms may seek to respond to our remedy package
by raising prices for premium finance, additional products, or fees and charges to
compensate. So, in addition to the metrics laid out above, we propose to gather the
following information:
• Premium nance charged to customers (total charged, number of policies sold with
premium nance, APR range)
We would be asking rms to provide us with information on the total amount
of premium nance charged during the reporting period and the number of
policies sold with premium nance. Gathering information on APR would help us
understand the changes to the costs of policies with premium nance.
• Additional products (total charged and number of additional products policies sold)
Additional products are products sold alongside the main insurance policy. We
propose to ask rms to provide us with information on the total amount charged
for all additional products sold with the core product during the reporting period
and the total number of additional product sales.
• Pre-contractual fees and charges (average charged, total charged and number of
policies sold with charges)
We would be asking rms to provide us with information on all pre-contractual fees
and charges separate to the premium (eg policy administration charges, brokers’
fees, partner/anity charges) to monitor changes over time.
• Post-contractual fees and charges (average charged, total charged and number of
policies sold with charges)
We would be asking rms to provide us with information on all post-contractual
fees and charges separate to the premium (eg midterm adjustments and
cancellation fees) to monitor changes over time.
6.17 We will analyse the metrics we are gathering to monitor compliance against our pricing
remedy on an ongoing basis to understand market compliance. We intend to use
metrics on pockets of consumer harm and market changes to analyse trends over time
to understand outcomes.
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6.18
6.19
6.20
6.21
6.22
6.23
6.24
Q24: Do you agree with the list of metrics we propose to ask
rms to report?
Q25: Are there any other metrics we should consider asking
rms to report?
Reporting responsibility
Responsibility for reporting the data in paragraphs 6.14 and 6.15 would fall on insurers
and price-setting intermediaries. The data in paragraph 6.16 would be required from
insurers and all intermediaries, not only price-setting intermediaries.
We propose that intermediaries working with Gibraltarian or temporary permissions
regime insurers must report in the same way as firms working with UK authorised
insurers, as explained above.
Both insurers and intermediaries would be expected to report even where data may
overlap.
Q26: Do you agree with our proposals on reporting
responsibility for insurers and intermediaries?
Reporting period and frequency
We propose to collect data on an annual basis, using calendar years (1January to
31December). We consider annual reporting appropriate as most insurance products
provide cover for 12 months.
We propose that firms must submit their pricing practices report on or before
31March each year.
Initially, we would need data from firms soon after any rules come into force in order
to monitor market changes. So, we propose that firms should submit quarterly data,
using a secure FCA mailbox. We will expect firms to submit quarterly reports until the
12-month transition period has elapsed and firms are able to submit their first full
annual report. For example, if the rules come into effect in June 2021, we would expect
firms to start submitting quarterly data to us from September 2021 until they submit a
full-year report during the 12-week window from 2January 2023.
We also propose to ask that firms notify us if they make significant changes to their
pricing models that might lead to potential problems for customers.
Q27: Do you agree with our proposals on reporting periods and
frequency?
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Annex 1
General insurance pricing practices market study
Annex 1
Questions in this paper
Q1: Do you have any comments on the proposed implementation
period?
Q2: Do you have any comments on the possible impact of our
proposals on people with protected characteristics under the
Equality Act 2010?
Q3: Do you have any comments on our proposal to apply the rules
on which we are consulting to rms based in Gibraltar and rms
in the temporary permissions regime?
Q4: Do you have any comments on our proposal to ban price
walking?
Q5: Do you have any comments on how our proposal would apply
to products that are no longer actively marketed?
Q6: Do you have any comments on our proposals to address
practices that aim to frustrate the intended outcomes of the
pricing remedy?
Q7: Do you have any comments on our proposal to require senior
manager conrmation that the rm is complying with the
pricing remedy?
Q8: Do you have any comments on our proposal for rms to retain
documentation to show how they are satised that their
pricing model complies with our rules?
Q9: Do you have any comments on our proposals for multi-
product discounts?
Q10: Do you have any comments on our proposal to apply the pricing
restriction rules to all stages of the price setting chain?
Q11: Do you have any comments on our proposal to apply the
pricing restriction rules to additional products?
Q12: Do you have any comments on our proposal to enhance the
product governance requirements concerning product value?
Q13: Do you have any comments on our proposal to apply the
product governance rules to products regardless of when they
were launched?
Q14: Do you have any comments on how we propose to apply the
product governance rules to non-investment insurance products
and products sold as part of a package?
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Q15: Do you have any comments on our proposals for ongoing
product reviews and remedial actions rms must consider
where it is identied that the product is not providing fair
value?
Q16: Do you have any comments on our proposed requirements for
product distributors?
Q17: Do you have any comments on our proposals for premium
nance?
Q18: Do you have any comments on our proposals for senior
manager responsibility for compliance with our proposed
remedies?
Q19: Do you have any comments on our proposals to require rms to
provide consumers with a range of accessible and easy options
to stop their policy from auto-renewing?
Q20: Do you agree with our proposed rules and guidance in relation
to auto-renewal?
Q21: Do you agree with our proposal to apply the auto-renewal
measures to all types of general insurance?
Q22: Do you agree with our proposed scope for the reporting
requirements?
Q23: Do you agree with our proposed reporting granularity?
Q24: Do you agree with the list of metrics we propose to ask rms
to report?
Q25: Are there any other metrics we should consider asking rms to
report?
Q26: Do you agree with our proposals on reporting responsibility
for insurers and intermediaries?
Q27: Do you agree with our proposals on reporting periods and
frequency?
Q28: Do you have any comments on our cost benet analysis?
Q29: Do you have any comments on the way we have estimated the
impact of the pricing remedies?
Q30: Do you have any comments on the way we have estimated the
impact of the non-pricing remedies?
Q31: Do you agree with the assumptions we have made in our
analysis?
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Annex 2
General insurance pricing practices market study
Annex 2
Cost benefit analysis
Introduction
1. FSMA, as amended by the Financial Services Act 2012, requires us to publish a cost
benefit analysis (CBA) of our proposed rules. Specifically, section 138I requires us to
publish a CBA of proposed rules, defined as ‘an analysis of the costs, together with an
analysis of the benefits that will arise if the proposed rules are made’.
2. This analysis presents the analysis and estimates of the impacts of our proposals. We
provide monetary values for the impacts where we believe it is reasonably practicable
to do so.
3. This cost benefit analysis is set out in the following sections:
• Problem and rationale for intervention
• Our proposed interventions
• Baseline and key assumptions
• Summary of costs and benets
• Costs
• Benets
• Distributional eects between customers
• Revenue eects on other rms in the distribution chain
Problem and rationale for intervention
4. In October 2019, we published the interim report of our general insurance pricing
practices market study. The interim report found that the home and motor insurance
markets are not working well for all consumers.
5. Alongside this Consultation Paper, we have published our final report for our General
Insurance Pricing Practices Market Study. The final report sets out the harms in the
market and the underlying drivers on both the demand-side and supply-side. These
interact with one another to generate the outcomes we see in the market today.
Together, these drivers cause harm in the form of high prices for consumers who do
not switch or negotiate at renewal, and high overall switching costs. We observe these
drivers of harm in both the home and motor insurance markets, though to a larger
extent in the home market.
6. The scope of some of the proposed remedies is wider than home and motor to ensure
consistency in related markets. We are applying our remedy on auto-renewing policies
as barriers to exiting auto-renewing polices apply across all types of general insurance.
The requirement to provide fair value products is equally relevant to all insurance
products.
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Our proposed interventions
7. Our package of interventions includes:
• Pricing remedy: We are proposing that when a rm oers a renewal price to
a consumer, that renewal price should be no greater than the equivalent new
business price that the consumer would be oered by the rm. The remedy ties
the renewal price to the equivalent new business price. Therefore, rms would not
be able to increase prices for renewal customers without also increasing the prices
they oer the new business customers.
• Product governance: We propose to apply the amended PROD rules to all non-
investment insurance products, not just those manufactured or signicantly
adapted after 1October 2018. Firms will need to assess all existing products within
1 year of the rules coming into eect, and take appropriate actions to ensure that
products provide fair value going forward. The proposed changes would apply in
the same way to both the core product and additional products, including premium
nance sold with insurance. We have also proposed new disclosure requirements
where insurance distributors oer customers retail premium nance and the need
for rms to consider their remuneration arrangements in relation to premium
nance.
• Cancelling auto-renewing measures: We propose to require rms to provide
customers with a range of accessible and easy options to stop their general
insurance policy from auto-renewing. Firms would be required to provide
customers with the option to stop their contract from auto-renewing by telephone,
online (including via email), and by post. Firms will also need to tell customers of
the options available to customers to stop their product auto-renewing. This
information would need to be communicated in good time before any contract is
entered into, whether on rst sale or on renewal.
• Reporting requirements: We also propose to collect data from rms on an annual
basis to support our supervision of compliance with the pricing remedy. In the rst
year the data will be submitted quarterly.
8. Our remedy proposals affect different insurance products and different customer
groups:
• Our pricing remedy applies to consumer motor and home insurance and additional
products sold alongside them (including premium nance), as do our reporting
requirements.
• Our proposals on cancellation of auto-renewal apply to all general insurance.
• Our proposals on product governance apply to all retail and commercial GI and pure
protection insurance, as well as premium nance sold alongside insurance.
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Table 1: The scope of our proposed remedies
Remedy
Pricing
Products subject to the
proposed rules
When sold to consumers (except when
arranged as group policies as dened in the
FCA Handbook) the following products would
be subject to the proposed rules:
• home insurance: buildings, contents and
combined buildings and contents
• motor insurance: insurance for any vehicle
sold to a consumer
Additional products sold alongside the above
products, including premium nance
Types of rm subject to the
proposed rules
Applies to rms, including
intermediaries, that have a role
setting any part of the premium for
insurance products within scope of
the remedy, or any other element of
the nal price paid by the consumer
Product The following products, whether sold to retail Applies to rms manufacturing or
governance or commercial customers, would be subject
to the proposed rules:
• all general insurance policies and additional
products sold alongside them, including
premium nance (except contracts of large
risk and reinsurance)
• all pure protection insurance (except
reinsurance)
distributing products within scope of
the remedy.
Auto-renewal All general insurance products would be
subject to the proposed rules.
Applies to all rms selling products
within scope of the remedy.
Reporting As for the pricing remedy, the following
products, when sold to consumers, except
when arranged as group policies (as dened in
the FCA Handbook), would be subject to the
proposed rules:
• home insurance: buildings, contents and
combined buildings and contents
• motor insurance: any vehicle sold to a
consumer
Additional products sold alongside the above
products, including premium nance
Most of the proposed requirements
apply to rms, including
intermediaries, that have a role
setting any part of the premium for
products within scope of the remedy.
Some of the proposed requirements
apply to intermediaries that do not
have a price-setting role.
9. In figures 1 to 3, we set out how we expect our proposed intervention, if implemented,
to lead to a reduction in the harm. We have not included a causal chain for the reporting
remedy as the reporting remedy enables us to effectively monitor the impact of the
other remedies in the motor and home insurance markets.
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Figure 1: Causal chain for our pricing remedy
The FCA mandates that when a ÿrm oers a renewal price to a consumer, that
renewal price should be no greater than the equivalent new business price that
the consumer would be oered by the ÿrm
Harm reduced
Higher prices for new
business consumers
Increased competition
as ÿrms have to oer
long-term value to
consumers rather than
exploit consumers
who renew
Lower prices oered to
consumers in the back book
Consumers accept lower
oered back book price
Lower prices
for consumers
in back book
Reduction in time spent
by consumers on
searching, negotiating
and switching insurance
Lower average
prices
Firms amend pricing models so that
oered price is not aected by
whether consumer is a new business
consumer or renewing consumer
Oered prices are not aected by
the tenure of the consumer
Fewer consumers search,
negotiate, or switch to a
dierent provider at renewal
Lower switching and
acquisition costs
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Figure 2: Causal chain for our product governance remedies
The FCA introduces proposed product governance remedy:
• Extend product governance rules to cover all GI and protection products
launched and adapted prior to October 2018
• Rule that requires products o€er fair value over their lifetime to the
end customer
Firms ensure that their existing product
governance systems and controls are amended to
meet the new requirements
Firms‘ strengthened systems and controls
support compliance ‘in spirit‘ with the core
pricing remedies and help to prevent gaming
and avoidance
Firms change the products they are o€ering
or change their product pricing to meet the
new rules
Harm reduced
Lower prices and fair prices for consumers
Figure 3: Causal chain for our remedy to make cancelling auto-renewal easier
The FCA requires ÿrms to allow existing consumers to stop a policy from
auto-renewing using a range of suitable options (and for information about
these options to be presented clearly on renewal notices)
Firms provide more competitive quotes
as consumers can more easily switch in
the face of higher prices
Consumers are able to stop their policy from
auto-renewing more easily
Harm reduced
The costs of switching are reduced for
these consumers (while the beneÿts of
auto-renewal are retained for those
that want/value it)
More switching by consumers who
previously renewed puts pressure on
ÿrms to develop value-added/
innovative products
Lower prices
for consumers
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Baseline and key assumptions
Analysis of baseline
10. To assess the impact of our proposed remedies we need to compare the remedies
we are proposing with what would happen absent our proposals. We have qualitatively
assessed the baseline but also modelled the development of the motor and home
insurance sectors. We describe our modelling of the baseline in the next section (and in
more detail in Annex 2: Simulation of remedy impact).
11. As part of the interim report, we published an annex on future trends in insurance.
In the coming years, we might expect that there will be changes that impact on the
motor and insurance sectors. For example, changes in technology (such as self-driving
cars) or the impact of climate change on the risk associated with home insurance. It
is difficult to predict with any certainty how the market will change over time but we
expect that while the market will change in the longer term we do not foresee any
material changes in the next few years that would affect the nature of our analysis or
assessment of the appropriateness of the proposals in this Consultation Paper.
12. We have now also published our GI value measures rules. These include requirements
that firms have in place procedures to ensure that, on a continuing basis, GI products
offer fair value to customers in the target market, and take into account a number of
things such as the value measures information. We did a cost benefit analysis when we
consulted on those rules so we do not assess the impact of the value measures rules in
this cost benefit analysis.
13. Our proposed remedies build on existing requirements. In the following paragraphs,
we consider how these existing requirements are captured in our baseline and in our
assessment of the impact of our remedies.
14. Prior to October 2018, insurance products were subject to the guidance in the
Responsibilities of Providers and Distributors for the Fair Treatment of Customers
sourcebook (RPPD), which set out expectations under our rules including various of
the Principles. Since 1October 2018 and the introduction of the Insurance Distribution
Directive (IDD) in PS18/1, PROD 4 of the Product Intervention and Product Governance
Sourcebook (PROD), relating to the manufacture and distribution of insurance
products, has been in place setting out rules, guidance and reproducing provisions of
directly applicable EU legislation. Any products that were either newly developed, or
significantly adapted, on or after 1October 2018 are subject to these PROD rules (and
where relevant the directly applicable provisions in the IDD delegated act on product
governance). Products manufactured before that date remain subject to product
governance requirements under our high-level rules explained in non-handbook
guidance in the RPPD and elsewhere.
15. In November 2019 we published The GI distribution chain: Guidance for insurance
product manufacturers and distributors (FG 19/5) which set our expectations of how
firms should consider the value of the insurance products they offered.
16. In this CBA, we intend to estimate the costs and benefits of the remedies proposed
in this Consultation Paper only, and not those of the above, already existing,
requirements. In this section, we outline whether any costs or benefits brought about
by existing requirements could, however, have been included in our estimates of the
impact of the proposed remedies.
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17.
18.
19.
20.
21.
22.
23.
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We asked firms to provide us with costs estimates for potential remedies. When
responding to our survey, firms would have already implemented any necessary
systems and controls changes to meet the requirements of PROD 4 and therefore we
would expect that firms took PROD 4 and the subsequent guidance on value as given
and provided us with estimates that relate to the additional costs of our remedies.
Given that the value measures rules have only now been confirmed, firms may not
have used these rules as the baseline for assessing the additional cost of complying
the proposals set out in our interim report. Therefore, we might expect that we are
overestimating the costs of our proposed package here.
Our benefit estimation is based on data collected prior to the rules and guidance
introduced in FG19/5 and PS18/1, as well as the value measures rules. Therefore, to
the extent that some of the benefits we present here were brought about by these
previous initiatives, there might also be some overestimation of our benefits.
We do not think that the impact of any of the new PROD rules, the guidance and value
measures would materially affect our estimates of the costs and benefits of the
package of remedies assessed in this cost benefit analysis.
Impact of Coronavirus
Coronavirus has affected the GI and protection markets. We consider these effects
and how this affects our baseline.
We have identified three main effects:
• During the early part of the crisis and during the peak of lockdown, there was a
signicant reduction in the number of journeys by car and therefore a signicant
reduction in the risk that car insurers had to cover for their customers (see
Transport use during the coronavirus (COVID-19) pandemic). This was temporary
in nature but may lead to longer term changes in behaviour. For example, there has
been an increase in the use of cycling during the crisis. In August, the number of car
journeys had broadly recovered to previous levels and therefore broadly we would
not expect to see material changes in risk over the longer term.
• The pandemic has led to a signicant impact on the economy and nancial
position of insurance customers, both in the short-term but also in the coming
year. There will likely be an increase in the amount of signicant nancial distress
for some households. This might reduce demand for insurance. For example,
people might stop driving (and therefore no longer require cover) or reduce their
insurance coverage for their property. There might also be greater numbers of
uninsured drivers or uninsured property owners (even when required by mortgages
contracts). More uninsured drivers may increase costs for insured drivers and their
insurance in the event of crashes (as the costs of uninsured drivers falls on insured
drivers through funding for the Motor Insurers’ Bureau).
• There was a signicant reduction in the level of switching and use of price
comparison websites during the initial stages of the crisis. We would expect this
impact to be short-term and switching levels to have recovered by the time of
implementation of our remedies.
We collected the data used to inform this cost benefit analysis prior to the coronavirus
situation. We have considered whether there are any of the above effects of the crisis
that we should take into account in our analysis. We have considered the impact of
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24.
25.
26.
27.
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General insurance pricing practices market study
coronavirus and current economic conditions, and whilst these have clearly had an
effect on general insurance and pure protection markets, they have not materially
impacted their structure or the way they function. Nor is there clear evidence to
suggest that coronavirus will lead to long term impacts on the size of the affected
markets and hence materially affect our baseline. Therefore, we believe that our
estimates of the impact of our remedies remain a reasonable prediction of the
outcome from our proposed remedies.
Simulation of the pricing remedy
To estimate the impact of our pricing remedies, we have simulated the pricing against
the baseline (where we do not implement the pricing remedy). The simulation exercise,
which is described in more detail in Annex 2: Simulation of remedy impact, lets us
compare market outcomes in the baseline scenario to the proposed pricing remedy
scenario. We also use the results of this modelling to estimate the impact of our
remedy to make it easy for consumers to stop their motor or home insurance policy
from auto-renewing for motor and home insurance.
The process shown in Figure 4 describes the simulation exercise at a high level.
The process consists of several steps that involve a combination of empirical and
theoretical models, described in the boxes.
Figure 4: Overview of simulation exercise
1. Predict
premium proÿles
at contract level
Expected Cost of
Claims prediction
model
Premium prediction
models
2. Adjust
premium proÿles
for remedy and
scenarios
Calculate new price
proÿles under
remedy constraints,
in dierent
scenarios
3. Switching
Predict and
implement
consumers‘
year-on-year
propensity to
switch
Allocate front book
market shares
4. Outputs
� Premiums
� Number of
consumers
aected by
remedy
� Switching rates
� Firm revenues
Key assumptions
To enable estimation of the impacts of the remedies, we have made some assumptions.
As with any data analysis, there has to be a point at which data collection ends and
data analysis begins. The data we collected and analysed ends in July 2018 so captures
the nature of the market up to this point in time. We acknowledge that the industry
has taken steps to reduce prices for consumers paying very high margins in the
recent past. ABI and BIBA published their ‘Guiding Principles and Action Points for
General Insurance Pricing’ in May 2018. The review of this initiative found that there
were pricing interventions across motor and home of £641 million over 20 months.
We would expect that this has reduced the prices some consumers have paid when
renewing insurance, especially those paying very high prices. This would have the
effect of reducing harm we have identified and lower the benefits to consumers of
lower back-book prices we set out in the benefit section of this cost benefit analysis.
Nevertheless, without the regulatory measures proposed in this consultation paper,
we would expect incentives for firms to charge higher prices to renewing consumers
to remain. As the data we collected ends in July 2018, it is unlikely to identify much of
the effect of the May 2018 guidance. We do not think it would have been proportionate
to collect significant further amounts of data to try to include the effect of these
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principles in our baseline. This is because the data collection would have been a
significant burden for firms and for us and we do not believe having more recent data
would materially affect our assessment of the overall proportionality of our remedies.
28. As part of the market study, we are also developing our approach to open finance in
the insurance sector. Any proposals we bring forward on this will have a cost benefit
analysis at the time we consult on our proposals and have not been included as part of
our baseline here.
29. We have also made some important assumptions in our simulation, as described in
Annex 2: Simulation of remedy impact. One important assumption in the simulation
is how firms rebalance prices under the pricing remedy. To model this, we consider
two scenarios. In the first scenario, to set the margins for front-book customers,
we assume firms multiply the premiums of new contracts under the baseline with a
market-level ‘uplift’ factor such that the expected profit (i.e. the margin) of policies
starting after the remedy is introduced remains the same as in the baseline. In the
second, we cover a situation in which greater competition, due to consumers being
better able to compare premiums for longer tenures, drives a reduction of the average
profit of new contracts. We apply the same method as in Scenario 1, but now the uplift
factor is calculated on the assumption that the new margin level will yield 80% of the
expected profit compared to the baseline. With these scenarios, we can illustrate the
potential effects of our proposed pricing intervention. They should not be taken as the
upper and lower bounds of the expected impact. Rather, the two scenarios provide
two different illustrations of the impact of the pricing remedy. It is important to note
that the two scenarios are based on empirical inputs: notably the market-level cost
information provided to us by firms. We chose 80% because operational cost data
submitted to us by firms indicated losses below this level.
30. We have discounted the estimated costs and benefits that occur in the first ten years
of the remedies to enable comparison between costs and benefits falling at different
times over these 10 years. We have used a 3.5% discount rate. In our simulation, we
assume a 2% increase in claims costs per year. Hence, the simulation outputs of
revenues and prices are nominal rather than real variables. We must put them into
a single price base to enable comparison with other costs and benefits in this cost
benefit analysis so we convert them to real prices assuming a 2% rate of inflation.
Summary of costs and benefits
31. Costs and benefits are estimated in present value terms over ten years.
32. We have estimated the main costs as compliance costs of implementing our package
of proposals of £1.06bn.
33. It is not possible to quantify all of the benefits from our remedies, but the key benefits
are:
• £4.2-11.2bn in the form of lower prices as a result of increased competition from
our pricing remedy and the reduction of prices for consumers in the back book in
motor and home insurance. This saving is a transfer from rms to consumers and
is therefore also a cost to rms in the form of a reduction in revenue. The range
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reects the two scenarios we have used in our simulation model rather than a lower
and upper bound.
• A reduction in inecient switching from our pricing remedies in motor and home
insurance (£513.3–593.6m in lower costs to rms and an additional £299.1-345.4m
for consumers in time savings).
• A direct saving in time for customers for our remedy on auto-renewals in general
insurance (because customers will spend less time having to go through the
process of cancelling auto-renewal) (£192.3-194.2m).
• Eciency benets from competition, which are likely to be substantial but we
may not have fully estimated. Competition benets are included in one of the two
pricing remedy simulation scenarios, but our simulation only gives an indication of
the potential price reductions for consumers from greater competition. It is not
reasonably practicable to estimate how improvements in competition will lead to
eciencies in the supply of insurance or bring new consumers into the market. But
we have explained why and how we think these will materialise.
34. Further unquantified benefits from the governance remedies and premium finance
requirements. These benefits arise across all general and pure protection insurance
(including additional products and premium finance) as customers buy fair value
insurance and consequently pay lower prices or purchase insurance with greater
coverage or better service.
Table 2: Summary of costs and benets for package of remedies (discounted over
10 years)
Firms
Costs
Compliance
costs –
£1.06bn
Transfers from rms
to customers and
between rms
Reduction in revenue –
£4.2-11.2bn
Loss of prot within the
distribution chain – not
quantied
Benets
Reduction in cancellation and new policy
costs as customers switch less –
£513.3-593.6m
Customers Lower average prices for customers
renewing – £4.2-11.2bn
Customer time saving from fewer
switches– £2 99.1-345 .4 m
Time saving for customers who stop
their insurance policy from auto-
renewing – £192.3-194.2m
Further benets of competition –
Not quantied
Fairer value and more suitable
purchases in general and pure
protection insurance – Not quantied
35. There are important distributional effects within the costs and benefits in terms of
transfers between firms and customers (as described above), transfers between
firms and transfers between customers. These considerations are important for
understanding the likely impact of our proposals:
• Transfers between rms: the largest revenue eects will be felt by rms that have
engaged in price walking most in the past. We would expect that the insurance
market will change as a consequence of this package of remedies, with rms
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successfully adjusting their business models. Improved competition will redistribute
market shares, revenue and prots between rms and potentially across the
distribution chain as switching falls and rms ensure customers receive fair value
from the distribution chain.
• Transfers between consumers: consumers overall gain considerably from our
proposals, both from a reduction in the average prices they pay and in avoiding
the time and eort taken to switch insurance policies. Some of those consumers
who switch regularly, though, may be worse o. The extent of any upward pressure
on prices will be signicantly constrained by the intensity of competition for new
customers, which we expect to continue to be strong.
36. We consider that the policy package is net beneficial. The overall impact of the
proposed remedy package is to lower prices for consumers and reduce the time
spent switching. We estimate the total benefits from reduction in inefficient switching
and inefficient auto-renewal cancellation (£1.0-1.1bn) to be at least as high as the
estimated compliance costs to industry. We also expect benefits for consumers of
£4.2-11.2bn from lower prices. Although this is a transfer from firms to consumers, we
note that the revenue loss for firms is a direct effect of tackling the price walking harm
identified in our Market Study. Finally, as noted above, we have not been able to fully
quantify all the competition benefits resulting from the package of remedies.
Costs
37. This section sets out the costs of our package of remedies. We consider:
a. the compliance costs of each individual remedy and the costs to rms of familiarising
themselves with the proposals
b. the revenue costs to rms from the pricing remedy, which are a transfer to
consumers and a benet to them as a result of tackling the harms identied in the
market study
c. the revenue impact of the auto-renewal remedy.
Compliance costs
38. Firms will incur costs in implementing and operating processes to comply with the
remedies. Some of these costs will be one-off as firms adjust their systems and
processes, while other costs will continue beyond the first year for firms to meet the
requirements on an ongoing basis.
39. This section sets out our approach, analysis and estimates for the compliance costs of
our package of remedies.
Approach to estimating compliance costs
40. To investigate the costs of potential remedies, we sent out a survey to 30 firms who
supply motor and home insurance in October 2019 and received 21 responses in
December 2019. The survey asked firms to estimate the costs to implement several
different potential policy proposals that would seek to address the harms identified in
the market study.
41. We used the responses from firms to refine and assess our approach to the
development of the remedies. Therefore, the proposals we are consulting on do not
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42.
43.
44.
precisely match the remedies for which we asked firms to provide cost information.
We have used the costs from this survey to estimate costs of our proposed remedies
where we believe those costs are reasonable estimates of the costs imposed by our
remedies.
To avoid bias, the sampling unit we used for the survey was at group level. We
group together insurers, distributors and managing general agents where they are
subsidiaries in the same group. Collecting information from only underwriters or
distributors would have created biases in our estimates and would have ignored the
overall cost of the proposals on industry. This is because the compliance costs from
the remedies are likely to arise at different stages of the supply chain of insurance. For
example, our requirements on pricing may lead an underwriter to change their pricing
approach. Equally, where a distributor sets prices, costs from the pricing remedy will
fall on the distribution stage. Costs will fall differently on underwriters or distributors
depending on the business model that is used by a particular provider.
We estimate that there is a population of 66 groups of companies providing motor or
home insurance. For assessing the costs of the remedies, we have split these firms
into two categories: small and large. Large groups are those providers who have more
than £500m in Gross Written Premium in motor and home insurance. We use this
distinction as there are significant differences in the size of different groups in our
sample and in the population of groups. In response to our survey, larger firms typically
reported much larger costs. These differences can be seen in our cost estimates
where the average costs for large groups are much larger than for smaller groups.
While our survey covered only a relatively small number of firms we have captured a
significant part of the overall insurance market with these firms.
Our non-pricing remedy proposals affect different numbers of groups:
• Our proposals on cancellation of auto-renewal apply to all general insurance sold to
customers, rather than only motor and home insurance. We expect that up to 200
retail insurance groups will be aected by these proposals.
• Our proposals on product governance apply to all general and pure protection
insurance (both retail and commercial), which we assume aects around 390
groups.
• As well as applying to the groups aected by the pricing remedy, some of the
reporting requirements apply to intermediaries that don’t set prices for motor and
home insurance. We estimate there are up to 2,100 rms aected.
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Table 3: Number of groups aected by our remedies and motor and home insurance
groups responding to our compliance costs survey
Small
Number of groups
Responded
to the survey
(motor &
home)
11
Aected by
the pricing
remedy
(motor and
home)
55
Aected
by the easy
cancellation
of auto-
renewal
remedy
185
Aected
by the
governance
remedy
365
Aected by
the reporting
remedy
(motor and
home)
55 groups (plus
up to 2,000
distributors
of motor
and home
insurance)
Large 10 11 15 25 11
Tot al 21 66 200 390 c. 2,100
45. We have estimated the costs of all groups involved in the supply of the affected
insurance products. Within our sample are groups that have entities in Gibraltar or
passporting EEA firms. We have also included these types of firms in our overall
assessment of the costs of our proposed remedies.
46. In the survey, we asked firms to provide cost information on a variety of remedies
covering pricing, governance, changes to auto-renewal, sunlight, reporting. For
each remedy, we asked firms to report costs in the following categories: analysis
and modelling, IT, training, terms and conditions, strategy, governance, customer
transaction and sales, inbound customer engagement and other. For our governance
and auto-renewal remedies, we asked firms to report the costs of applying remedies to
all general insurance.
47. In their responses, respondents sometimes did not classify their expected costs
among the categories, but provided an overall estimate of the costs by remedy. This
was often because it was not straightforward to provide detailed cost estimates for
the high-level description of a potential remedy. Some respondents did not provide
cost estimates for all remedies as they felt they needed more information and more
time to consider the impact of particular options to come up with cost estimates but
most firms provided an estimate even if uncertain about the precise impact. Whilst
it is possible that the non-respondents on the costs of particular remedies might
incur higher than average costs for particular remedies, it is also possible that some
may incur lower than average costs. We do not expect our estimates to be severely
biased one way or another by these non-responses. We consider that the number
of responses we had is a sufficiently sound basis to extrapolate costs for the entire
industry.
48. We have made several assumptions in how we use the costs provided by survey
responses to provide an estimate of the costs of our proposals. Where we have
needed to make assumptions to estimate costs, we have made assumptions that will
likely overestimate the costs rather underestimate them. The assumptions we have
made are:
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• Where rms have provided ranges, we have used mid-points for the cost estimates.
Additionally, some rms provided only upper bounds for their cost estimates. In
these instances, we have used this upper bound as the cost estimate.
• We assume that the costs are additive and that there are no synergies from
implementing remedies together. This is because we collected information on
remedies individually without asking how costs would change if implemented
together, because at the time of asking there were too many permutations to ask
rms to respond in this way. In reality, we would generally expect some synergies
from implementing the package of remedies together. However, in some instances,
implementing remedies together may increase costs as additional resources may
need to be used. For example, external consultants may need to be used to enable
multiple remedies to be implemented. We do not attempt to adjust costs for these
impacts.
• We have used the costs reported by home and motor insurance groups and
applied them to the whole industry for the non-pricing remedies. We asked motor
and home insurance groups about the cost of applying our renewal and product
governance remedies to all their general insurance business. We then apply these
costs to non-motor and home groups. We believe the costs of motor and home
insurance groups are a reasonable proxy for the costs to the wider set of groups
aected. We think this is reasonable as similar processes are likely to be used for
dierent products.
• Our product governance remedies additionally apply to pure protection insurance
so in our cost estimates we have reected the greater coverage of these remedies
by applying the survey costs also to groups which provide pure protection only.
We have also adjusted costs to recognise that groups selling general insurance will
incur higher costs than reported in the survey. This is because our remedy covers
pure protection as well as general insurance, but in the survey we only asked rms
about the costs of applying these rules to general insurance. We have assumed
that the additional cost of applying the remedies to pure protection is proportional
to the relative size of pure protection to general insurance. Again, we think this is
reasonable as similar processes are likely to be used in reviewing and monitoring
pure protection and general insurance.
• We asked rms to provide the costs of any other adjustments they expected to
make to their business as a consequence of each pricing remedy proposal in our
costs survey. Most providers did not provide any additional costs for this category.
Those rms that did report additional costs reported either redundancy costs or
additional costs from reviewing partner contracts to ensure compliance. There
may be redundancy costs as rms adjust business models but also as pricing
may be simpler under our proposals and hence less resources may be required to
set prices. We have not included the redundancy costs, as over time redundancy
reduces the ongoing resource costs that rms would incur rather than purely
increasing one-o costs. We would expect the ongoing saving to outweigh the
one-o cost and therefore we are overestimating the costs by doing this.
• We have not split the costs between motor and home insurance or other types of
insurance. This is because we asked rms to provide costs of the pricing remedies
for motor and home combined. Most providers in our sample sell both motor
and home insurance. We expect that there will be some synergies implementing
our remedies together for dierent types of insurance and hence the costs of
implementing the remedies together for dierent types of insurance will not be the
sum of implementing the remedies separately for motor and home insurance.
• We have omitted a large ongoing cost saving for one rm who reported that there
would be a reduction in rm calls. This is because the benets of lower transaction
costs from our pricing remedy are estimated separately in our assessment of
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the reduction in switching. However, we note that we may underestimate these
benets as we have not explicitly measured the benets from reduced customer
complaints or queries that arise from our pricing remedies.
• Part of our reporting remedy applies to intermediaries who do not set prices, in
addition to those intermediaries that set price. We assume that reporting costs for
these rms are 25% of the cost of groups for the wider reporting remedy. We think
this is reasonable as the data requirements are smaller. We might also expect that
the data collection required by these rms needs fewer resources to collate.
Summary of compliance costs
49. The following tables set out our overall estimates for the compliance cost of our package
of remedies. We then explain the compliance costs of each of these remedies in turn.
Table 4: One-o costs by remedy and group size
Pricing
Average costs, £ 000 Total costs, £m
Small
group
1, 740
Large
group
5,770
Small
group
95.6
Large
group
63.5
Tot a l
159.1
Product Governance 170 840 60.9 21.0 82.0
Auto-renewal 220 2,680 40.8 40.3 81.1
Reporting 20 120 37. 9 1.3 39.3
Tot al 235.3 126.1 361.4
Table 5: Ongoing costs by remedy and group size
Pricing
Average costs, £ 000 Total costs, £m
Small
group
120
Large
group
170
Small
group
6.4
Large
group
1.8
Tot a l
8.2
Product Governance 80 150 28.4 3.8 32.3
Auto-renewal 90 330 17. 0 5.0 22.0
Reporting 10 70 20.8 0.7 21.5
Tot al 72.5 11.4 83.9
Pricing remedy
50. We have analysed and estimated the costs of implementing the pricing remedy in
two parts to reflect the fact that we asked for cost estimates separately in our cost
survey, when the precise nature of the intervention was still being determined. Firstly,
we consider the one off and ongoing cost of implementing the ban on price-walking.
We then consider the one-off compliance costs from applying the pricing remedy to
existing customers.
A ban on price walking
51. We did not specifically ask firms for costs on this remedy in our survey. We therefore
estimate the costs of this remedy using the estimates for the closest remedy that we
asked information for in our survey. We asked firms to provide estimates of the costs
of fixing the margin charged at the first purchase of their policy. This potential remedy
option has a similar effect to the remedy we are proposing – rather than fixing the
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margin over time, firms have to offer a renewal price no greater than the equivalent
new business price to the consumer. We think the costs of this similar proposal provide
the best indication of the likely costs of our remedy.
52. We note that our remedy also applied to additional products sold alongside motor
and home insurance. We are not aware of any insurers that price walks additional
products sold alongside motor or home insurance and therefore we do not believe any
compliance costs arise from this element of the remedy.
53. The costs of the remedy are presented in Table 6.
Table 6: Costs of implementing a ban on price walking
One-o
Average costs, £ 000 Total costs, £m
Small
750
Large
2,430
Small
41.1
Large
26.7
Tot a l
67. 9
Ongoing 120 170 6.4 1.8 8.2
54. Most firms’ one-off costs arise from firms changing their IT systems and undertaking
the analysis and modelling to comply with the remedy. Firms that sold insurance
through intermediated channels said that there would be significant IT costs in
complying with any pricing remedy for these channels.
55. The ongoing costs of the proposals are more evenly spread over different cost
categories. Firms still allocated significant costs to IT and analysis. We might expect
that these additional costs would reduce over time as pricing under the remedy
becomes business as usual and because pricing decisions will be simpler under
our proposals. However, in our analysis we have not made any adjustment for this
reduction in costs over time.
56. One large respondent only provided costs for some parts of their business. This was
because assessing the impact on some elements of their business was particularly
challenging. We do not think that this omission will materially affect our cost estimates.
Applying the pricing remedy to existing customers
57. In this section, we consider the one-off compliance costs from applying the pricing
remedy to existing customers.
58. In our survey, we did not ask firms for the costs of the precise remedy we are proposing
to implement to address high back-book costs. We asked firms to report on the costs
of resetting customers to the new business prices once they had renewed three or
more times. We have therefore used cost estimates for this similar potential remedy
to estimate the costs of this particular remedy. Although different in terms of effect
on outcomes in the market, we think the implementation and compliance costs are
likely to be similar. This is because the changes required to systems to reset prices will
be similar, even if the changes apply to a different cohort of customers. We also note
that we might be overestimating costs as our analysis estimates the cost of the pricing
remedy by aggregating the costs of two different remedies but, in reality, there is only
one pricing remedy.
59. To estimate the costs of our proposed intervention, we therefore assume that firms
incur (i) the one-off costs from implementing this potential remedy and (ii) only one
year of the ongoing costs reported in the survey, as consumers in the back-book have
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their prices reset to the new business premium. We add in this one year of ongoing
costs as some of these ongoing costs may be incurred in resetting the prices of
consumers in the existing back book in the year after we implement this remedy as
consumers come up for renewal. There will not be any ongoing compliance costs from
this element of the pricing remedy as it is a one-off exercise.
60. There is an argument that these costs might underestimate the costs of this remedy.
This is because we are applying the remedy to all back-book consumers rather than
only those who have renewed three or more times. We do not think this will mean we
materially underestimate the costs as the implementation costs will be largely fixed in
nature. For example, changing systems to ensure that the prices set comply with the
requirement.
61. We report our estimated average and total costs in Table 7. We have included one
year of reported ongoing costs in the one-off costs. There are no ongoing costs in
subsequent years.
Table 7: Costs of applying the remedy to existing customers
One-o only
Average costs, £ 000 Total costs, £m
Small
990
Large
3,340
Small
54.5
Large
36.7
Tot a l
91.3
62. Where firms did categorise costs, they mostly related to IT or analysis costs. In
cases where this is outsourced, firms indicated an increase in transaction costs to
software houses to calculate both new business price and renewal price. Respondents
apportioned the largest share of costs to IT development (45%). Other costs indicated
included calling up customers for additional information, making inferences about
customers who do not respond to data requests, broker price engine changes (i.e.
changing IT for sending prices sent to brokers) and testing requirements.
Attestation
63. We also propose that a senior person attests to the fact that their firm’s pricing meet
the pricing rules. As part of this process, we propose to require firms to keep records
of their considerations under the pricing remedy requirements and to consider
appropriate expert input and advice to check they are complying with the rules. We
acknowledge that firms may incur some additional costs to ensure this senior person
is satisfied that the obligations are met. We do not believe that the new requirements
significantly increase the costs of our remedies. This is because we would expect
firms to ensure that their business is complying with the proposed new rules and to
have evidence of their actions under existing high-level systems and controls rules,
regardless of whether there are specific requirements on a particular senior manager,
for records to be kept or expert input to be sought. The cost of the attestation itself is
minimal once a senior person has satisfied themselves the requirements are met.
Product Governance remedies
64. This section provides analysis and estimation of the compliance costs of the product
governance remedies. We provide costs for the changes to the scope of PROD and the
requirement for firms to ensure products offer fair value. We also consider the impact
of the additional product governance requirements.
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Changing PROD scope
65. The FCA Handbook contains a Product Intervention and Product Governance
Sourcebook (PROD). Chapter 4 of PROD applies to insurance intermediaries and
insurers, with respect to product governance arrangements they must have in place
for manufacturing and distributing insurance products.
66. Product governance relates to the systems and controls firms must have in place for
the design, approval, marketing and ongoing management of products throughout
their lifecycle.
67. Currently, PROD 4 only applies to products introduced or significantly adapted after
1October 2018. The proposed remedy would introduce a new application provision in
PROD to the effect that PROD 4 will apply to all general insurance and pure protection
products (life/sickness/personal accident policies with no investment element)
regardless of when the product was introduced.
68. Some firms reported that all their products were already compliant with PROD 4, as it
was applied regardless of when it was introduced or adapted, and hence they would not
incur additional costs from this requirement. This is likely to be because for these firms
it is easier from an organisational perspective to have one process that applies to all
products irrespective of when they were manufactured. However, other respondents
would incur additional costs.
69. The costs are presented in Table 8. These costs apply to all GI and pure protection
rather than only motor and home insurance. As explained above, the costs are
extrapolated from our firms’ cost survey.
Table 8: Costs of change in PROD scope
One-o
Average costs, £ 000 Total costs, £m
Small
90
Large
480
Small
34.1
Large
11.9
Tot a l
45.9
Ongoing 50 80 16.4 1.9 18.3
70. For large groups that said they would incur costs from this remedy, they reported
that the majority of one-off costs arise from reviewing or changing their terms and
conditions, and from adapting current IT systems or implementing new ones. Large
firms also told us that they expected their ongoing costs also to be largely made up
of costs of changing terms and conditions, however increased costs from internal
governance procedures were expected as well.
71. Many of the small firms that said they would incur costs from this remedy attributed
a large proportion of the one-off costs incurred from this remedy to ‘other costs’,
without specifying what these would be. For the costs that were specified, significant
expenses included IT costs and costs arising from reviewing internal governance
procedures. The ongoing costs were also largely attributed to analysis and modelling.
Revising internal governance procedures also contributed to rising ongoing costs and
there was an expectation of a small increase in ongoing IT costs.
Enhancing the requirement to ensure products oer fair value to customers
72. We are proposing to amend our rules to require manufacturers and distributors to
consider whether their products represent fair value for customers.
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73. These requirements apply equally to core products and additional products including
premium finance distributed alongside insurance products. This will involve the
manufacturer obtaining all available value related data (for example, distributors’
remuneration and a breakdown of the overall cost to customers) in order to carry out
a value assessment of the products. Whilst the new rules and guidance will require
firms to obtain additional data, we would not expect significant extra costs from
this requirement as manufacturers should already have access to some of this (for
example, manufacturers should already know the final premium paid by customers for
Insurance Premium Tax purposes) and have processes in place to obtain other sales
related information from distributors to satisfy the existing requirements under PROD
4 (for example, under PROD 4.3.10EU). We have estimated the average and total costs
for small firms and large firms and we present these costs at Table 9. These costs
apply to the whole of GI rather than only motor and home insurance. In our survey, we
did not ask for the costs of including additional products and premium finance within
these proposed rules. There may be additional costs from applying these rules to
these products that we have not estimated.
Table 9: Costs of a requirement for rms to ensure products oer fair value over their
lifetime to the end customer
One-o
Average costs, £ 000 Total costs, £m
Small
70
Large
370
Small
26.9
Large
9.1
Tot a l
36
Ongoing
30 80 12 2 13.9
74. For large groups, respondents reported that costs arising from this remedy would be
from reviewing or changing their terms and conditions, analysis and modelling and
reviewing internal governance procedures both for one off and ongoing costs. We
expect that the terms and conditions cost category includes costs that arise as firms
change their products to ensure customers receive fair value.
75. Some of the small firms that responded to our survey gave high cost estimates that
were not attributed to a specific cost category. Therefore, we cannot say how this
large proportion of the costs will arise. Costs from changing or revising existing internal
processes are a significant proportion for both the one-off and ongoing costs. Analysis
and modelling costs were the other significant category of costs for small firms.
Other governance proposals
76. The new rules propose reviews of products and distribution arrangements for
products at least once a year. Firms must also consider whether more regular or ad
hoc reviews may be required – for example if the product is deemed to be of high risk of
customer harm. We do not expect significant additional costs from our requirements
on ongoing regular reviews and distribution arrangement reviews after the product has
been approved for continued distribution. This is because current PROD 4 rules already
require ‘regular review’ of products. Consequently, we would expect firms already to
be undertaking regular reviews of their products and distribution arrangements for
products within scope of PROD 4. In our survey, when firms reported the additional
costs of bringing other products outside PROD 4 within scope, we expect that they
also included the ongoing costs of regular reviews within their estimates.
77. In addition to the changes for product manufacturers, we also propose to make
changes to the product governance rules for insurance distributors. The changes
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78.
79.
80.
81.
82.
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include: understanding the value assessment, consideration of the impact of the
distribution arrangement on the overall value of the insurance product, providing
information to manufacturers to support regular reviews and amending distribution
arrangements if they identify harm. We do not expect significant additional costs from
these requirements as in FG19/5 we set out our expectation that under existing PROD
4 requirements we expect distributors to consider the impact that their distribution
strategy and remuneration has on the overall value of the product to the customer.
Also, we would expect distributors to have processes in place to provide relevant sales
related information to manufacturers to support their product reviews, under existing
PROD 4 requirements (for example, under PROD 4.3.10EU).
Nor do we expect significant additional costs associated with the requirements
applicable to premium finance sold together with insurance products. This is because
these requirements expand on existing requirements rather than placing significant
new responsibilities on firms. Premium finance falls within the definition of ‘additional
products’ in ICOBS 6A.2, which requires that firms must not charge for additional
products unless the customer has actively elected to obtain that product. Additionally,
ICOBS 6A.3.1R requires that, where a non-insurance ancillary product is sold as
part of a package with an insurance product, firms must provide customers with
an adequate description of the different components and provide customers with
separate evidence of the costs and charges of each component. We expect that firms
will not need to provide new information to consumers but will need to change the way
information is presented and so there may be some costs that arise from this change
in presentation.
Cancelling auto-renewing policies
We are proposing a new rule requiring firms to provide customers with a range of
accessible and easy options to stop their policy from auto-renewing for all retail general
insurance products. Firms would be required to provide customers with the option to
stop their contract from auto-renewing (by telephone, online (including via email), and
by post). We also proposed that firms will need to tell customers if their product is set to
auto-renew, what this means in practice and how customers can opt out.
In the survey we sent out to firms, we asked them to provide estimates of the one-off
and ongoing costs arising from a requirement that they allow customers to cancel
auto-renewal at any point for all general insurance policies by each and all of the
following methods: online, by telephone, by text message or in writing.
This is not identical to the remedy we are proposing, as we do not propose to require
firms to offer cancellation of auto-renewal by text. This means that our estimates are
likely to overestimate the actual costs of implementing this remedy. For example, one
firm told us that to include text capability to cancel renewals would drive a significant
proportion of the costs.
In the survey, firms reported significant ongoing costs from customer contact from
these proposals, both in terms of additional costs in the sales process and ongoing
customer contact. We do not believe that firms will incur these additional costs from
easy cancellation of auto-renewal as we would expect the changes to mean that
cancelling auto-renewing policies will be much cheaper for firms in the future. For
example, the additional costs of cancelling an auto-renewing policy online will be close
to zero. Additionally, we see no reason why customers will contact their insurer more
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often as a result of our proposals (other than for cancellation). We have therefore
excluded these costs of additional customer contact from our estimates.
83. Cancellation online will reduce resource costs for firms in the longer term. We deal with
these savings in the benefits section. We note one large firm reported that there will
be a reduction in inbound customer engagement costs such as calls.
84. Our estimates of the average and total one-off and ongoing costs are shown in Table 10.
Table 10: Costs of a requirement for rms to oer easy cancellation for auto-renewal
One-o
Average costs, £ 000 Total costs, £m
Small
220
Large
2,680
Small
40.8
Large
40.3
Tot a l
81.1
Ongoing 90 330 17. 0 5.0 22.0
85. For the industry, a significant majority of one-off costs arise from having to update or
change a firm’s IT infrastructure. These costs will be incurred in changing systems to
enable consumers to cancel by the means required (for example, the costs incurred
in changing telephone systems to enable easy cancellation by consumers). Our
estimates suggest there will be minimal expenditure in other categories. Most ongoing
costs were not allocated to a particular category of cost.
Reporting Requirements
86. We are proposing to implement a requirement for firms to report information to the
FCA on an annual basis on motor and home insurance. Our proposals cover insurers,
price-setting intermediaries and non-price setting intermediaries.
87. In the survey we sent to firms, we asked them for the costs relating to this remedy.
While the survey gathered information on the costs of reporting data for the core
insurance product, we are also proposing to require firms to report data in relation to
additional products sold alongside the core product, premium finance and additional
fees and charges. We do not expect these additional data requirements to add
significant costs beyond those for reporting on the core product only.
88. In our survey, we asked for cost estimates for a high-level reporting remedy at brand
and book on expected cost of claims, margin, Gross Written Premium and tenure. We
also asked firms to consider the costs of undertaking calculations on premiums across
different consumers profiles. This broadly matches the requirements we propose here.
89. In the first year of this remedy, firms will be required to report quarterly rather than
annually. This may have the effect of increasing costs in first year. Overall, we do not
think that this increased frequency in the first year will materially increase the costs
above those we have estimated.
90. The costs of the reporting requirement are shown in Table 11.
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Table 11: Costs of a requirement for rms to report to the FCA on an annual basis
One-o
Average costs, £ 000 Total costs, £m
Small
20
Large
120
Small
37. 9
Large
1.3
Tot a l
39.3
Ongoing
10 70 20.8 0.7 21.5
91. Most of the one-off costs arise from the need to implement or adapt IT systems.
Analysis and modelling, and adapting internal governance procedures also make up a
significant proportion according to our estimates.
92. Ongoing costs were a similar spread to one-off costs for this remedy in the survey.
Familiarisation and gap analysis
93. We expect that firms will incur costs from familiarising themselves with the remedies
we are proposing.
94. In total, we expect there are up to around 30 large groups and up to 2,400 small
groups and other distributors of insurance that may be affected by our package of the
proposals.
95. We are using our standard approach to estimating familiarisation costs. These are in
addition to the significant costs we have already estimated for the remedies. Firms
may have included familiarisation costs in their estimates above but we present these
costs here to ensure they are captured.
96. We use standard assumptions to estimate these costs. We anticipate that there will
be approximately 30 pages of policy documentation with which firms will need to
familiarise themselves.
97. Assuming that there are 300 words per page and a reading speed of 100 words per
minute, it would take around 1.5 hours to read the policy documentation. It is further
assumed that 20 compliance staff at large groups and 5 staff compliance staff at
small groups read the document. Finally, using data on salaries from the Willis Towers
Watson UK Financial Services survey, the hourly compliance staff salary is assumed to
be £57 at large groups and £61 at small groups, including 30% overheads.
98. Using these assumptions, we expect total one-off industry-wide costs of
familiarisation of approximately £1.1m.
99. We also expect those affected will undertake a legal review of the new requirements
against current practices. We, again, use standard assumptions to estimate these
costs. There are around 70 pages of legal instrument to review. It is assumed that
4legal staff at the largest groups, and 2 legal staff at small groups, will review the legal
instrument. It is further assumed that each legal staff member will review 50 pages of
legal text in 28 hours at large groups and in 21 hours in small groups. Finally, using data
on salaries from the Willis Towers Watson UK Financial Services survey the hourly legal
staff salary is assumed to be £67 at large groups and £53 at small groups, including
30% overheads.
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100.
101.
102.
103.
104.
105.
106.
107.
108.
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Using these assumptions, we estimate that the total one-off gap analysis costs would
be £9.8m.
In total, we estimate one-off familiarisation and gap analysis costs of £11.0m.
Industry revenue reduction from the pricing remedy
We have modelled the impact of the pricing remedy on motor and home insurance
over 10 years (see Annex 2: Simulation of remedy impact). Our remedy package may
lead to some customers paying higher prices if they currently benefit from significant
new business discounts as inducements to switch. Price setters could rebalance these
prices so that they do not lose any revenue over the lifetime of these new business
consumers. Alternatively, firms may be unable to rebalance prices fully and so they will
lose revenue. In our modelling, we assume price setters will rebalance prices so they
can recoup all (100%) or some (80%) of the lifetime profits they would lose on new
business consumers for whom they can no longer increase prices over time.
The 100% scenario describes a scenario with no increase in the intensity of
competition compared to the baseline, where firms are able to design new premium
schedules such that the expected profit of policies starting after the remedy is
introduced remains the same. This is a relatively conservative scenario, as it does
not assume a downward pressure on premiums from increased competition (e.g.
due to easier price comparisons or other aspects of the remedy package). The 80%
scenario represents a more competitive situation leading to a reduction of average
lifetime profit per policy. This scenario was designed to model a situation where there
is downward pressure on premiums from greater competition. We chose 80% because
operational cost data submitted to us by firms indicated losses below this level.
Our range of assumptions for this rebalancing leads to the range of estimates
presented here as the change in firms’ revenue.
We note that the revenue changes are not true costs but transfers from industry to
consumers. The costs to industry are benefits to consumers that stem from tackling
the harm identified in the market study.
The impact on industry profits is similar to the effect on revenues in our estimation.
This is because the number of contracts in all individual home and motor is fixed
in our modelling. Consequently, changes in revenue broadly directly impact profit.
Small differences do arise in the modelling as consumers’ expected claims costs
(ECC) change slightly when a consumer buys from a different provider. This change in
expected cost of claims is explained in the section on the ECC prediction model in the
technical annex.
We consider the effect of our pricing remedies on firms’ revenue from the existing
and new business separately. Overall, we expect firms’ revenues to be lower by
£4.2-11.2bn (discounted) over the first ten years of the pricing remedy from the
combined first and second effect. The range reflects the two scenarios we have used
in our simulation model rather than a lower and an upper bound.
First eect: on existing policies
We first assess the impact on revenues from consumers who have purchased a policy
prior to implementation of the pricing remedy and who continue to renew this policy.
Here we present the revenue earned on these policies under the baseline and the
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pricing remedy. Once a policy is cancelled, we do not report the revenue from these
consumers at different providers. This enables us to illustrate the impact of the pricing
remedy on revenue from consumers in the back book prior to implementation.
109. The pricing remedy would result in a direct reduction in firms’ revenue from consumers
in their pricing at the time of implementation. This remedy would provide an immediate
benefit to customers who have been price walked over several years by significantly
reducing the prices they are paying.
110. The impact of this remedy on the existing back book is dependent on how firms
set new business prices in future as back-book prices will then be set to this new
business price. This creates some uncertainty in our estimates of the effect on the
current back-book over the first 10 years of our proposed remedy. The higher the new
business price set, the lower the revenue loss from current back-book consumers over
the first 10-years of the policy.
111. Overall, our modelling suggests that firms’ revenue from back-book consumers will
be £4.7-6.0bn (discounted) lower over the first 10 years of the remedy (undiscounted
£6.0-7.6bn). The table sets out the reduction in revenue that arises from the remedies
for the different types of insurance product affected. The estimates reflect the two
(100% and 80%) scenarios discussed above, with the first figure in the ‘revenue under
the pricing remedy’ column representing the 80% revenue recoupment scenario, and
the second figure the 100% revenue recoupment scenario.
112. We note that revenue falls even under the 100% revenue recoupment scenario. This is because
for existing policies the remedy reduces revenue from renewals as there is no opportunity
to raise new business prices to maintain revenue overall for this cohort of consumers. This is
because these consumers have already received any new business discount and therefore the
only impact of the remedy is to reduce their ongoing renewal prices.
Table 12: Future revenue loss from existing policies (discounted)
Home – building
Revenue under
the baseline,
£bn
1.5
Revenue under
the pricing
remedy,
£bn
1.3 - 1.4
Reduction in
revenue,
£bn
0.2 - 0.2
Home – building and contents 13.7 11.8 - 12.1 1.6 - 1.9
Home – contents 1.6 1.2 - 1.3 0.3 - 0.4
Motor 26.5 23.0 - 23.9 2.6 - 3.5
Tot al 43.4 37.4 - 38.7 4.7 - 6.0
Second eect: on policies initiated after implementation
113. Our pricing remedy will also affect the revenue firms earn for new business introduced
after the remedy is implemented. Here we consider the revenue from consumers that
switch to a new provider after the implementation of the pricing remedy.
114. We have considered 80%-100% revenue recoupment from higher new business prices
in our analysis.
115. The following table sets out the forward-looking impact on revenue from sales of
policies that are first purchased after we implemented the pricing remedy.
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Table 13: Future revenue change from policies initiated after implementation (discounted)
Home – building
Revenue under
the Baseline,
£bn
1.5
Revenue under
the Pricing
remedy,
£bn*
1.4 - 1.6
Change in
revenue,
£bn
-0.2 - 0.1
Home – building and contents 11.9 10.9 - 12.2 -1.0 - 0.2
Home – contents 1.9 1.7 - 2.0 -0.2 - 0.1
Motor 68.9 65.2 - 69.0 -3.7 - 0.1
Tot al 84.3 79.2 - 84.8 -5.1 - 0.4
* The low range corresponds to the 80% scenario and the high range corresponds to the 100% scenario
116. We observe that, for policies that are initiated after implementation, revenue may
fall or increase depending on the rebalancing of prices. This is because the pricing
remedy has the effect of bringing forward revenue into the period we consider in our
analysis. For example, for a consumer purchasing insurance in 2027 their new business
price may be higher than it would have been but after this they will pay lower prices
than without the remedy. However, some of these lower prices will occur outside our
simulation period and therefore in the data presented we only observe the effect of
those prices that are higher than without the remedy (i.e. before the point at which
the benefits kick in for that consumer over their time with the firm in question).
Additionally, there are fewer new business customers as, due to the reduction in
switching, fewer consumers switch from the back-book under the remedy. This lowers
the total revenue earned from these consumers.
Revenue impact of the auto-renewal remedy
117. Our remedy on auto-renewal has the effect of reducing the time and effort it takes for
a customer to stop their general insurance policy from auto-renewing. In addition to
reducing the time it takes for customers to cancel policies, we also expect a change in
customer behaviour. We would expect customers to learn that it is easier to cancel an
auto-renewing contract, albeit it may take time before they take this fully into account
in their decision-making. This may result in a range of effects that may affect the
extent of switching in the market:
• Some customers may be more likely to cancel an auto-renewing policy and switch
to another policy. This will lead to an increase in switching relative to our expected
level of switching under our pricing remedies (or under the baseline). This will have
the eect of increasing competitive pressure on rms and hence providers will
need to oer lower prices to prevent customers from switching. This will mean
providers will lose revenue and prots from these lower prices and lower retention
rate, because of the auto-renewal remedy.
• Some customers may be more likely to choose an auto-renewing policy. More
customers having auto-renewing insurance will benet rms if it means that some
customers who otherwise forget to renew now do so. This will remove periods
where customers are uninsured and therefore more policies will be purchased. It
will also benet customers that decide to renew as they avoid the costs of taking
action to renew policies and the risk of being uninsured.
118. Given that this change will occur alongside our pricing remedies for motor and home
insurance and the difficulty in predicting how customers will change their decision-
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making in general insurance, we do not think it is reasonably practicable to estimate
the revenue impact of these behavioural changes. We do not think that in the short-
term the effects will be particularly large as it will take time for customers to change
behaviour in response to the remedy.
Benefits
119. This section on benefits is arranged as follows:
a. Benets arising from the pricing remedy
ii. Reduction in average prices
iii. Lower levels of switching
iv. Competition benets
b. Benets arising from the product governance remedy
c. Benets arising from the auto-renewal remedy
120. We have not estimated the benefits of reporting remedy. This is because the reporting
remedy supports the pricing remedy and helps ensure the benefits from that remedy
arise.
Lower average prices
121. We expect average prices overall to fall as a result of our pricing remedy. Figure 5
shows how we simulate average price may change relative to the baseline (please see
Annex 2: Simulation of remedy impact). These lower prices arise from two effects.
First, prices for existing customers fall as they now pay the lower new business price
rather than the higher prices that result from price walking. Second, the increase in new
business prices for new customers offsets the fall in renewal prices.
122. Figure 5 shows the trajectory of average prices under the baseline and our two
scenarios under the pricing remedy. We note that prices are increasing under the
baseline. This is because in our simulation we assume a 2% increase in claims costs per
year. This is to ensure that the nominal values of initial ECCs and premiums account for
inflation.
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123.
124.
125.
126.
Financial Conduct Authority
General insurance pricing practices market study
Figure 5: Average Prices
Home Building
Home Building and Contents
Average price, £
260
220
250
210
240
200
230
Home Contents
Motor
110
460
105
100
440
95
420
90
400
2020 2022 2024 2026 2028 2030 2020 2022 2024 2026 2028 2030
Year
Baseline Scenario 80% uplift Scenario 100% uplift
To give an indication of the change in average prices we simulate that in the 10th
year after implementation we estimate average pri
ngs, £6-18
ces to be £13-31 lower for home
buildi l
ower for home contents, £21-37 lower for home contents and
buil
dings combined, and £15-38 lower for motor insurance.
Over the first ten years following the implementation of the remedies (2022-2031) we
estimate the discounted total savings for consumers to be between £4.2-11.2bn.
As noted above, this is a transfer from firms to consumers. Although this is a transfer
from firms to consumers, we note that the revenue loss for firms is a direct effect of
tackling the price walking harm identified in our Market Study.
Lower levels of switching
Switching, and the ease of switching when better alternatives are available, is
important to the function of competitive markets. However, we found in the market
study that there are inefficient levels of switching due to the pricing structure we
observe in the market. Switching entails costs to both customers and firms:
• on providers, through cancellation costs, policy set up costs and acquisition costs.
• on customers, through the shopping around and switching or negotiating with their
existing provider.
Our modelling of the pricing remedy shows that the total number of policies switched
will fall by approximately 9.1-10.3 million over the next ten years. We model the realised
premiums, and do not simulate negotiation. We are therefore unable to estimate any
benefits from lower levels of negotiation. Figure 6 shows switching in the buildings,
contents, buildings and contents, and motor insurance markets under the baseline
and the pricing remedy. We note there is a short-term spike in switching for insurance
post remedy. This is because in our modelling price rises for new customers prompts
customers to switch (as customers in our model switch when price increases from the
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previous year). In practice, we might not expect to see such a jump in switching, but
more customers may shop around in the first year of the pricing remedy.
Figure 6: The number of customers switching under our pricing remedies
Home Building
Home Building and Contents
Home Contents
Motor
2,000,000
2,250,000
2,500,000
2,750,000
3,000,000
8,500,000
9,000,000
350,000
400,000
450,000
500,000
1,000,000
1,100,000
1,200,000
Number of switches
2020 2022 2024 2026 2028 2030 2020 2022 2024 2026 2028 2030
Year
Baseline Scenario 80% uplift Scenario 100% uplift
127. We consider the cost savings from this reduced switching for firms and customers in
the following sections.
Customer time savings from reduced switching
128. Customers incur time costs from searching for alternatives to their existing policy
and switching if they identify a better offer. They must notify their current insurer of
their decision if their policy would otherwise auto-renew. They will often spend time
negotiating and refusing new offers, or providing their new insurer with their relevant
details to provide a quote. Under our pricing remedy fewer customers will switch as
they will no longer face price rises if they do not switch.
129. In our customer survey for the interim report, we asked respondents how much their
price would need to increase to justify switching policies and the average response
was about £40. We consider that this reflects the cost to the average customer of
switching. This implies that for each switch that no longer occurs because of our
pricing remedy, the customers save time costs of £40 from avoiding the hassle and
time lost from the switch.
130. We apply this £40 estimate to the 9.1-10.3 million fewer switches we expect under
the pricing remedy to estimate the total customer time savings. We estimate that the
discounted time cost saving for customers from the pricing remedy is between
£299.1-345.4m.
Firm cost saving from reduced switching
131. Firms incur significant additional costs when customers switch compared to when they
renew. Given our remedies reduce inefficient switching, firms will make substantial
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132.
133.
134.
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General insurance pricing practices market study
cost savings. Compared to renewal, firms overall incur more significant costs when a
new policy is taken out. These are:
• Costs arising for the existing provider from cancelling a policy
• Costs for a new provider setting up the new policy
• Costs of acquisition for this new policy.
As for the customers’ time saving above, in our survey of firms, we asked firms to
provide estimates of the costs arising switching or renewing policies. We use these
estimates for the following analysis. Again, the extent of saving depends on whether a
policy is usually auto-renewed:
• Cancellation costs saved: If a customer chooses to cancel an auto-renewing policy,
a rm must receive and process this cancellation. If a customer’s policy does not
auto-renew and they choose not to renew, they will do so by taking no action and
letting their policy expire. Therefore, for customers without auto-renewing policies,
we assume rms do not incur any additional costs which are unique to those
customers who chose to cancel rather than renew.
• Renewal costs incurred instead: A policy that is not switched will need to be
renewed. If a customer’s policy auto-renews then rms are obliged to provide
customers with a renewal notice showing the price during the previous policy
period, and the price for the next policy period. If a customer takes no action then
the policy will renew. If a customer’s policy does not auto-renew, rms are still
obliged to provide customers with a renewal notice showing the price during the
previous policy period, and the price for the next policy period, but the customer
must then notify the rm of their wish to renew, so the costs of activating this
renewal are higher than in the case of auto-renewal.
Costs of acquisition and of setting up a policy are not altered by whether a customer
chooses to auto-renew.
We have omitted a large customer-specific acquisition cost for home insurance from
one firm as it was much higher than other respondents and it was not clear this was
representative of the wider market. This has the effect of lowering the benefits set out here.
Table 14: Firm savings for each policy no longer switched
Cancellation (A)
Home, £ Motor, £
Auto- Non-
renewing auto-
renewing
4.38 0
Auto- Non-
renewing auto-
renewing
4.38 0
Firm setting up a new policy (B) 38.61 25.56
Customer specic acquisition (C) 47. 45 42.14
Renewal (D) 4.06 35.93 4.06 13.70
Total (A+B+C-D) 86.38 50.13 68.02 54.00
135. We use these estimates to calculate the saving to firms overall if a customer no longer
switches between policies. E.g. for each auto-renewing home insurance customer that
no longer switches, we estimate firms save £86.38. We note that this analysis looks at
the additional overall costs to the industry of a switch, rather than to a particular firm.
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Cancellation and renewal costs (A and D) affect the existing provider and new policy
and acquisition costs (B plus C) affect the potential new provider.
136. In the interim report, we found that 68% of motor insurance policies and 59% of home
insurance policies auto-renew. Applying these savings to the approximately 9 .1-10 .3
million fewer sw itches over the next ten years, we can estimate total firm savings.
Over ten years (2022-2031), firms will save between £513.3-593.6m (discounted), with
£342.1-403.2m coming from the home insurance market and £ 171 . 2-1 9 0 . 4 m coming
from the motor insurance market.
137. In our simulation model, overhead costs and other components of the margin above
expected claims costs are recovered over the lifetime of the policy. Where overheads
are spread over a longer period the average price over the lifetime of policies fall. Some
of this change in revenue may arise because consumers will, on average, switch less
and stay with their insurer for longer reducing the costs of bring about new policies.
Hence, the estimates here may capture some of the benefits arising from lower prices
and reduction in overall revenue that arise in the simulation model. We nevertheless
consider that it is important to identify these cost savings as part of the impact
of the remedy. We do not consider that the partial overlap here between the cost
savings identified here and the price reductions identified previously alter our overall
assessment of the costs and benefits of the proposed remedies.
138. Total, firm and consumer savings from lower switching are reported in Table 15.
Table 15: Total ten-year switching and renewal discounted savings range – Home and
Motor, £m
Home Motor Tot a l
Consumers 191.3-225.5 107.8-119.8 2 99.1-3 45 .4
Firms 342.1-4 03. 2 1 71 . 2-1 9 0 .4 513.3-593.6
Tot al 533.4-628.8 279.1-310.2 812.4-939.0
Competition benets
139. The effect of our remedy package depends on the impact on the nature and intensity
of competition for new customers. Our pricing remedy will constrain the way that firms
set prices by tying the renewal price to the equivalent new business price. This will
mean that it will only be possible for firms to increase prices to customers that do not
switch or negotiate by also increasing prices to new customers.
140. Competition for new customers is intense and we expect that to continue. We expect
the nature of competition to improve, with consumers having more clarity on the cost
of the product when they choose an insurance provider and firms more focused on
delivering fair value to customers.
141. In our interim report, we noted that firms told us that they compete intensively to
attract customers who they expect to be more profitable over time (lifetime value). We
expect this to continue.
142. Because our pricing remedy links the renewal price to the new business price, if a firm
were to set high prices to customers who do not switch or negotiate they would lose
new customers.
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143.
144.
145.
146.
147.
148.
149.
150.
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General insurance pricing practices market study
We also note that different firms have different business models and different
competitive and pricing strategies. This includes some firms that do not charge
higher prices to customers who do not search or negotiate. We expect these firms to
constrain the pricing behaviour of the firms most affected by our remedy.
Our pricing remedy will mean that consumers will be able to make more informed
decisions when they switch. The quote that a consumer receives from a firm will be a
better indication of the price that they will pay in future years if they do not search or
negotiate. This will intensify competition and improve the nature of competition.
We anticipate that our remedy will most affect firms who price walk steeply, those with
large back books, and those with lower attrition rates. Consequently, more intensive
competition may affect these firms more than firms that price walk less steeply.
Consequently, under our pricing remedy there may be a redistribution of market
shares, revenues, and profits between firms as competition evolves.
Other parts of our remedy package will make it easier for customers to switch and
this will also intensify competition. Our proposed package of remedies addresses the
potential misuse of auto-renewal by firms to discourage customers from switching.
This will be reduced by remedies that make it easier for customers to decline auto-
renewal and to cancel the auto-renewing feature during the life-time of the contract.
Our remedies package will reduce some of the switching costs that consumers incur
in order avoid being price walked. Regular switchers spend time searching, switching
and/or negotiating with their firm each year, even if they are happy with their current
provider and nothing has changed with their risk.
Our remedies package will also help drive changes in firms’ culture and behaviour and
this will support the improvement in the nature of competition. We want to promote
good governance and reduce potential harm to customers by making senior individuals
more accountable for firms’ conduct. Senior manager oversight of fair value for
customers should help to embed cultural improvements within the firm. We expect
these proposed rules to ensure firms focus on offering fair value to all customers in
their target market over the longer term.
Overall, we expect intense competition for new customers to continue and that this
package of remedies will improve the nature of competition. Our remedy package will
lead to lower prices for customers who are paying higher prices because they do not
switch or negotiate. It is difficult to predict to what extent the changed competitive
dynamics will reduce the cost of supplying insurance and how these lead to lower
prices for customers. We would expect that competition that is focussed on delivering
fair long-term value to customers will improve outcomes in insurance markets.
However, we are unable to predict how competition will intensify.
As discussed above, our 80% scenario accounts for intensified competition, but
it is uncertain whether the 80% scenario accounts for all or only for some of the
expected competition benefits in motor and home insurance. Therefore, we do not
think it is reasonably practicable to estimate any further benefits that arise from
this competition in motor and home insurance. For other insurance markets, it is not
reasonably practicable to estimate the extent to which competition will be affected be
improved by our remedies. This is because it is not possible to predict how the market
dynamics will be affected by the remedies.
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151.
152.
153.
154.
155.
156.
157.
Benets arising from our product governance proposals
The product governance remedies ensure firms focus on providing fair value insurance
to customers across all general and pure protection insurance. This reduces the
number of customers in GI and pure protection markets who purchase poor value
products. As a result of the product governance remedies, customers will be assured
that their general insurance or pure protection product offers fair value.
The product governance remedies also help to ensure that the benefits from the
pricing remedy are brought about in motor and home insurance.
We do not believe it is reasonably practicable to estimate the benefits of our
governance remedies. This is because estimating the benefits depends on estimating
the extent to which firms would sell poor value or unsuitable products under the
baseline and it is not possible to predict this.
Benets arising from our auto-renewal remedy
Our remedy on auto-renewal has the effect of reducing the time and effort it takes for
a customer to stop their general insurance contract from auto-renewing.
We assume this policy is applied alongside the pricing remedy. We take the switching
behaviour as a given under the pricing remedy and then calculate the time savings to
customers from the increased ease in which they can stop their contract from auto-
renewing. For non-motor and home insurance products, we estimate switching rates
from our Financial Lives survey. We expect this policy will affect customer behaviour.
Customers will learn that it is slightly easier to cancel an auto-renewing contract. This
should result in two effects:
• Some customers may be more likely to choose an auto-renewing policy
• Some customers may be more likely to cancel an auto-renewing policy and switch
to another policy.
Switching costs restrict customers’ ability to switch and hence reduce competition.
1
Reducing switching costs will have the effect of increasing competition. This will occur
gradually as it will take some time for customers to change their behaviour: they would
need to become aware that it is easier to exit auto-renewal and begin to take this into
account in their decision-making over whether to switch provider. We expect that
competition benefits from easier switching will improve quality and decrease average
prices. However, it is not reasonably practicable to estimate these benefits (and, as
noted above, for motor and home insurance some of these benefits may already be
accounted for in our 80% scenario).
If customers can easily exit auto-renewing insurance then some customers may be
more likely to choose auto-renewing insurance and this will benefit them in two ways.
Firstly, it will prevent some customers who otherwise forget to renew from being
left uninsured. We would expect that the difficulty, or perceived difficulty, of exiting
auto-renewing contracts would have put off customers from purchasing an insurance
policy that auto-renews. Secondly, renewing is costless in terms of time and energy for
customers with auto-renewal once the choice has been made to renew or not.
1 See https://www.nuffield.ox.ac.uk/users/klemperer/competition.pdf for a survey of the effects of switching costs on competition.
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158.
159.
160.
161.
162.
163.
164.
Given that our proposal would be implemented alongside our pricing remedies and the
difficulty in predicting how customers will change their decision-making, we do not
think it is reasonably practicable to estimate the effect of these behavioural changes.
Auto-renewing also benefits firms in the form of significant cost savings. Using
the costs reported from firms, we estimate that, compared to manual renewal,
auto-renewal is about £28-35 cheaper (about 85%) for home insurance and £7-12
cheaper for motor insurance. We are unable to predict the increase in use of auto-
renewal and therefore the overall savings to firms but if significant numbers of
customers change behaviour the saving could be considerable.
Even under our remedy, customers will spend some (albeit less) time stopping their
contract from auto-renewing. As part of our survey of firms, we asked firms how
long it took customers to stop a policy from auto-renewing. Using these responses
provides an estimate of 8 minutes for motor and home insurance. We assume that
this is a reasonable estimate of the time it takes to cancel other forms of insurance.
We assume that under our auto-renewal remedy we would reduce this time by 50%
as it will still take some time for a customer to cancel. This means that for every
cancellation of insurance the customer saves approximately 4 minutes.
We use our estimates of the number of switches and the proportion of auto-renewing
polices to estimate the number of switches affected by the auto-renewal remedy (68%
of motor insurance policies and 59% of home insurance policies auto-renew). We use
our estimate of customer time from our survey, where we estimated that customers
would need to save £40 to search and switch. Assuming searching and switching takes
1 hour (a shorter time would increase the benefits), this implies each hour of customer
time to search and switch a policy costs £40. Multiplying this by 118.0 -119.2m switches
over 10 years resulting from our simulation model, we estimate that the discounted
benefit to customers of the quicker cancellation time is approximately £171.4-173.2m
in motor and home insurance (£205.5-207.5m discounted).
These remedies also apply to other products as well as motor and home. To provide
an estimate of the benefits associated to these other products we use estimates of
the number of multi-trip travel insurance and pet insurance policies written in 2019
from the ABI, 9.4m and 3.4m respectively. We use these products as to estimate
the benefits in other general insurance products, as these products are a significant
proportion of the remaining general insurance market affected by auto-renewal.
We also use information from our Financial Lives survey, to estimate the number of
customers of these products who have auto-renewing contracts and who switched
in the last year. We estimate around 940,000 customers of multi-trip and pet
insurance had auto-renewal contracts and switched last year. Assuming this number
of customers switch each year, the benefits from this remedy for these products is
around £20.9m over 10 years discounted.
In combination, the benefit for customers from the time saving from easier
cancellation is £192.3-194.2m over 10 years (discounted).
We might expect this is an underestimate as we would expect more customers to use
auto-renewal under the pricing remedy. This is because under the remedy customers
will not be worried about the difficulty of cancelling a policy that they expect to be price
walked upwards.
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Distributional effects between consumers
165. The pricing remedy will lead to changes in prices for many consumers. The impact of
these changes will depend on the consumer’s insurance purchasing behaviour – at one
extreme, there are those that are currently regular switchers who will receive a new
business price each year; and at the other extreme there are those that have been
on the back book for a long time and have been price walked to a very high price. This
section gives an indication based on our simulation (see Annex 2: Simulation of remedy
impact) as to how these different consumers might be affected following the remedy.
We consider:
• The impact on consumers that currently switch each year
• The impact on existing customers that are being price walked
• The impact on consumers that switch to a new business price in future and then
continue to renew
Impact on consumers that currently switch each year
166. In our simulation model, consumers buying new policies under the pricing remedy
will, on average, face higher prices than compared to the baseline. Figure 7 shows the
trajectory of average new business prices over the first 10 years of the pricing remedy
based on our simulation.
167. The higher new business prices under our pricing intervention will affect those
consumers who in the baseline would regularly purchase a new policy at the new
business price. Consumers may continue to purchase these new policies and pay the
higher price or they may decide to renew their existing policy. The modelling does not
estimate any effect on consumers who decide no longer to buy insurance.
168. There is significant uncertainty in the modelling but it does provide an insight into the
potential distributional impacts of the pricing remedy. There is a steady increase in the
average new business price in the baseline. This reflects the assumption used in the
modelling to increase claims costs at 2% each year to reflect inflation.
169. As can be seen, the simulation model predicts that new business prices will increase
following the introduction of our pricing remedy. In the 100% scenario, in the first
year of the remedy, we have simulated that average new business prices may increase
by £45 for bu ilding and contents insurance, £31 for buildings insurance and £22 for
contents insurance. For motor insurance, we simulate that new business prices may
increase by £47. In this scenario, over the 10 years from 2022 to 2031, we simulate that
the average new business pr
ice relative to the baseline may be up to £52 higher for
buildings and contents insurance, £33 higher for buildings insurance, £29 higher for
contents insurance, and £54 higher for motor insurance.
170. These results from the simulation model are based on a mechanical application of
the model and do not take into account the effects of competition pressure that may
constrain increases in front book prices. In the 80% scenario some allowance is made
in the simulation for an increase in competitive pressure.
171. In this 80% scenario, in the first year of the remedy, we have simulated that average
new busi
ness prices may increase by £30 for building and contents insurance, £15 for
building insurance and £10 for contents insurance. For motor insurance, we simulate
that new business prices may increase by £21. In this scenario over the 10 years
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172.
173.
174.
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from 2022 to 2031, we simulate that the average new business price relative to the
baseli
ne may be at least £28 higher for buildings and contents insurance, £10 higher
for buildings insurance, £9 higher for contents insurance, and £20 higher for motor
insurance.
Figure 7: Average new business prices
Home Building
Home Building and Contents
220
275
200
250
180
225
200
160
Home Contents
Motor
Average price, £
120
600
110
550
100
90
500
80
450
2020 2022 2024 2026 2028 2030 2020 2022 2024 2026 2028 2030
Year
Baseline Scenario 80% uplift Scenario 100% uplift
Impact on existing consumers that are being price walked
Consumers who have purchased motor or home insurance and paid a new business
premium prior to the introduction of our pricing remedy, and who continue to renew
their insurance, will pay lower prices over the lifetime of their renewals with that
provider, relative to the baseline. These consumers benefit from the reduction in
prices when the pricing remedy is introduced and after that, as they are no longer price
walked.
We simulate that consumers who purchased a new policy prior to the implementation
of our pricing remedies (whether it be just prior or many years prior) and who then
continue to renew, save significant sums relative to the baseline in both scenarios of
the modelled remedy. We present the lowest price reduction, for the 100% scenario,
and the highest price reduction, for the 80% scenario, that can be seen during the
10 year period from 2022 to 2031: in the 100% scenario, we simulate the average
premium is at least £17 less for buildings insurance, £20 less for contents insurance,
£20 less for buildings and contents insurance and £31 less for motor insurance
every year. In the 80% scenario, we simulate the average premium is up to £80 less
for buildings insurance, £48 less for contents insurance, £86 less for buildings and
contents insurance and £86 less for motor insurance.
Impact on consumers that switch to a new business price in future and
then continue to renew
Consumers who purchase insurance with a new provider after the implementation
of the remedy and thereafter continue to renew will also pay lower prices than they
otherwise would under the baseline over the period modelled.
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General insurance pricing practices market study
175. Initially we simulate that these consumers pay higher prices (as the new business price
is higher under our pricing remedy scenarios). However, over time we see that the
average prices consumers pay are lower than the baseline. As an example, we look at
consumers who buy a new policy a year after we implement the remedy (in 2022 in
our simulation). At the fourth renewal , the average premium for these consumers is
£26-44 less for buildi
ngs insurance, £18-31 less for contents insurance, £16-31 less
for buildings and contents insurance and £45-66 less for motor insurance. At the ninth
renewal, the average premi
um is £46-80 less for buildi
nsurance, £59-71
ngs insurance, £36-46 less for
contents i less for buildings and contents insurance and £55-76 less
for motor insurance. Again, the range reflects the two scenarios we have used in our
simulation model rather than lower and upper bounds.
Revenue effects on other firms in the distribution chain
176. Other firms in the distribution chain (eg price comparison websites and brokers) are
likely to have less business as the level of switching falls due to the pricing remedies.
This is likely to be especially true for price comparison websites whose business
models rely on customers switching between providers. We are not anticipating
fundamental changes in the use of brokers as they are not reliant on switching in the
same way as price comparison websites.
177. Lower switching will lead to lower revenues, costs and ultimately profits for firms
whose businesses rely on switching. Some of the switching cost savings will represent
lower costs for the distribution chain. The reduction in costs represents a benefit, but
the reduction in profits in the supply chain represents a transfer from the distribution
chain to insurance providers and customers. This redistribution of profits depends on
the level of competition distributors face.
178. We might also expect to see manufacturers removing products from a particular sales
channel where there are concerns about the value to customers. Additionally, there
may be changes to the use of premium finance or switches in the provider of premium
finance. Some firms may lose revenues from this reduction in sales.
179. We do not think it is reasonably practicable to estimate the costs to the distribution
chain from our package of remedies. This is because it is not possible to predict how
firms will adjust their offering as a result of the new rules, nor to predict how prices in
the distribution chain will adjust and affect profits along the distribution chain.
Q28: Do you have any comments on our cost benet analysis?
Q29: Do you have any comments on the way we have estimated
the impact of the pricing remedies?
Q30: Do you have any comments on the way we have estimated
the impact of the non-pricing remedies?
Q31: Do you agree with the assumptions we have made in our
analysis?
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Annex 3
General insurance pricing practices market study
Annex 3
Compatibility statement
Compliance with legal requirements
1. This Annex records the FCA’s compliance with a number of legal requirements
applicable to the proposals in this consultation, including an explanation of the FCA’s
reasons for concluding that our proposals in this consultation are compatible with
certain requirements under the Financial Services and Markets Act 2000 (FSMA).
2. When consulting on new rules, the FCA is required by section 138I(2)(d) FSMA to
include an explanation of why it believes making the proposed rules is (a) compatible
with its general duty, under s. 1B(1) FSMA, so far as reasonably possible, to act in a
way which is compatible with its strategic objective and advances one or more of its
operational objectives, and (b) its general duty under s. 1B(5)(a) FSMA to have regard
to the regulatory principles in s. 3B FSMA. The FCA is also required by s. 138K(2) FSMA
to state its opinion on whether the proposed rules will have a significantly different
impact on mutual societies as opposed to other authorised persons.
3. In addition, this Annex explains how we have considered the recommendations made
by the Treasury under s. 1JA FSMA about aspects of the economic policy of Her
Majesty’s Government to which we should have regard in connection with our general
duties.
4. Under the Legislative and Regulatory Reform Act 2006 (LRRA) the FCA is subject to
requirements to have regard to a number of high-level ‘Principles’ in the exercise of
some of our regulatory functions and to have regard to a ‘Regulators’ Code’ when
determining general policies and principles and giving general guidance (but not when
exercising other legislative functions like making rules). This Annex sets out how we
have complied with requirements under the LRRA.
The FCA’s objectives and regulatory principles: Compatibility
statement
5. The proposals set out in this consultation are intended to advance the FCA’s
operational objectives of:
• Promoting eective competition in the interests of consumers: At present,
rms often discount premiums to attract new customers and then increase
premiums when customers renew, targeting increases at those who are less likely
to switch. Our remedies aim to ensure that competition works eectively in the
interests of all consumers. For example, we propose to require rms to ensure
they oer fair value products and that renewal oer prices on home and motor
insurance must be no greater than the equivalent new business price.
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6.
7.
8.
9.
10.
11.
12.
Financial Conduct Authority
General insurance pricing practices market study
• Securing an appropriate degree of protection for consumers: by improving
outcomes for consumers who are less aware of current insurance pricing practices
and pay a high price relative to the risk being insured. We aim to secure an
appropriate degree of protection for all consumers.
We consider these proposals are compatible with the FCA’s strategic objective of
ensuring that the relevant markets function well. For the purposes of the FCA’s
strategic objective, ‘relevant markets’ are defined by s. 1F FSMA.
In preparing the proposals set out in this consultation, the FCA has had regard to the
regulatory principles set out in s. 3B FSMA.
The need to use our resources in the most ecient and economic way
We will put in place a strong supervisory approach to ensure firms comply with
any rules we implement. The reporting requirements will assist with the efficient
supervision of these rules.
The principle that a burden or restriction should be proportionate to
the benets
We have carried out a cost benefit analysis, set out in Annex 2, and are satisfied
that the benefits of implementing the remedies are likely to be significant and
proportionate to the potential costs involved.
The desirability of sustainable growth in the economy of the United
Kingdom in the medium or long term
We have had regard to this principle and do not believe our proposals undermine it. Our
proposals will make this market more competitive and deliver greater overall consumer
benefits.
The general principle that consumers should take responsibility for
their decisions
At present, while many customers shop around for the best insurance prices, others
do not and are subjected to a significant loyalty penalty. While consumers should take
responsibility for their decisions, the current market is not working well for everyone
and the consumers suffering harm are often less aware of current insurance pricing
practices. Customers will still need to decide which insurer to use but firms will need to
ensure that they do not exploit customers who are less able to protect themselves.
The responsibilities of senior management
Our proposals will lead to review of product pricing and value by senior managers. This
will improve senior management oversight and monitoring, and, where appropriate,
encourage them to make improvements to their products.
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The desirability of recognising dierences in the nature of, and
objectives of, businesses carried on by dierent persons including
mutual societies and other kinds of business organisation
13. Differences between firms do not affect the need to improve competition and
consumer outcomes from home and motor insurance. Our proposals would allow
different models to operate, subject to measures designed to promote effective
competition in the interests of customers and to secure an appropriate degree of
consumer protection.
14. We have proposed to apply the auto-renewal remedies to all general insurance
products, and the product governance remedies to all retail general insurance and
pure protection products, as we believe they are relevant across the market. We do not
consider that it would be appropriate to require firms to consider these issues only for
some products but not others.
The desirability of publishing information relating to persons subject
to requirements imposed under FSMA, or requiring them to publish
information
15. As set out in Chapter 6, we will consider whether it would be appropriate to publish
any of the information reported to us. If we decide to do this, we would expect the
information to help drive competition in the market, demonstrating compliance with
the rules and helping lead to improved product value and consumer outcomes.
The principle that we should exercise of our functions as transparently
as possible
16. By consulting on the remedies, we are acting in accordance with this principle. We
have also taken account of feedback to the interim report in developing our proposals.
Stakeholders should also review the final market study report for more information on
our work.
17. In formulating proposals, the FCA has had regard to the importance of taking action
intended to minimise the extent to which it is possible for a business carried on (i) by
an authorised person or a recognised investment exchange; or (ii) in contravention of
the general prohibition, to be used for a purpose connected with financial crime (as
required by s. 1B(5)(b) FSMA).
Expected effect on mutual societies
18. The FCA does not expect the proposals in this paper to have a significantly different
impact on mutual societies. We have engaged with mutual societies throughout the
market study.
Equality and diversity
19. We are required under the Equality Act 2010 in exercising our functions to ‘have
due regard’ to the need to eliminate discrimination, harassment, victimisation and
any other conduct prohibited by or under the Act, advance equality of opportunity
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General insurance pricing practices market study
between persons who share a relevant protected characteristic and those who do not,
to and foster good relations between people who share a protected characteristic and
those who do not.
20. As part of this, we ensure the equality and diversity implications of any new policy
proposals are considered. The outcome of our consideration in relation to these
matters in this case is set out in Chapter 2 of this paper.
Legislative and Regulatory Reform Act 2006 (LRRA)
21. We have had regard to the principles in the LRRA for the parts of the proposals that
consist of general policies, principles or guidance and consider that the proposals
will be effective in helping firms understand and meet regulatory requirements
more easily. We consider that this will lead to improved outcomes for consumers
and addresses the issue identified in the market. We also believe the proposals are
proportionate and will result in an appropriate level of consumer protection when
balanced with impacts on firms and competition
22. We have had regard to the Regulators’ Code for the parts of the proposals that consist
of general policies, principles or guidance. This consultation is a way for firms to let us
know their views of our proposals. We have identified the potential risks of not taking
action by articulating potential harms and how firms’ behaviour could cause those
harms. The CP and instrument will allow firms to understand the requirements of
them. We are also setting out transparently what our policy aims are so that firms can
take those into account.
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Annex 4
General insurance pricing practices market study
Annex 4
Abbreviations used in this paper
APR Annual percentage rate
CBA Cost benefit analysis
CMA Competition and Markets Authority
CP Consultation Paper
ECC Expected claims cost
FCA Financial Conduct Authority
FSA Financial Services Authority
FSMA Financial Services and Markets Act 2000
ICOBS The Insurance Conduct of Business Sourcebook of the FCA Handbook
IDD Insurance Distribution Directive
IPT Insurance Premium Tax
LRRA Legislative and Regulatory Reform Act 2006
The Product Intervention and Product Governance Sourcebook of the
PROD
FCA Handbook
The Responsibilities of Providers and Distributors for the Fair
RPPD
Treatment of Customers guidance in the FCA Handbook
SUP The Supervision of the FCA Handbook
The Senior Management Arrangements, Systems and Controls
SYSC
Sourcebook of the FCA Handbook
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request for non-disclosure.
Despite this, we may be asked to disclose a condential response under the Freedom of Information
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Appendix 1
General insurance pricing practices market study
Appendix 1
Draft Handbook text
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FCA 2021/XX
NON-INVESTMENT INSURANCE: PRODUCT GOVERNANCE, PREMIUM
FINANCE, GENERAL INSURANCE AUTO-RENEWAL AND HOME AND MOTOR
INSURANCE PRICING INSTRUMENT 2021
Powers exercised
A. The Financial Conduct Authority (“the FCA”) makes this instrument in the exercise
of the following powers and related provisions in the Financial Services and Markets
Act 2000 (“the Act”):
(1) section 137A (The FCA’s general rules);
(2) section 137T (General supplementary powers);
(3) section 138C (Evidential provisions); and
(4) section 139A (Power of the FCA to give guidance).
B. The rule-making provisions listed above are specified for the purposes of section
138G(2) (Rule-making instruments) of the Act.
Commencement
C. This instrument comes into force on [date].
Amendments to the Handbook
D. The modules of the FCA’s Handbook of rules and guidance listed in column (1)
below are amended in accordance with the Annexes to this instrument listed in
column (2) below.
(1)
(2)
Glossary of definitions
Annex A
Senior Management Arrangements, Systems and
Controls sourcebook (SYSC)
Annex B
Insurance: Conduct of Business sourcebook (ICOBS)
Annex C
Product Intervention and Product Governance
sourcebook (PROD)
Annex D
Supervision manual (SUP)
Annex E
Notes
E. In this instrument, the notes shown as “Note:”, “Note:” or “Editor’s note” are
intended for the convenience of the reader but do not form part of the legislative text.
Citation
F. This instrument may be cited as the Non-Investment Insurance: Product Governance,
Premium Finance, General Insurance Auto-Renewal and Home and Motor Insurance
Pricing Instrument 2021.
FCA 2021/XX
By order of the Board
[date]
Page 2 of 79
FCA 2021/XX
[Editor’s Note: the text in this instrument is based upon the version of the FCA Handbook
which will be in place at the end of the transitional period.]
Annex A
Amendments to the Glossary
In this Annex, underlining indicates new text and striking through indicates deleted text,
unless otherwise stated.
Insert the following new definitions in the appropriate alphabetical position. The text is not
underlined.
additional product
an optional additional product or mandatory additional product.
affinity/partnership
where a firm forms a scheme with another business (usually a brand
scheme
whose main business is not insurance) to distribute home or motor
insurance products to consumers under the partner’s brand name.
Examples of partners include banks, building societies, trade
associations, charities, membership organisations and franchise
networks.
channel
(in ICOBS 6B and SUP 16.28) the distribution method through which
the customer purchases a policy. Examples of channels include:
(a)
direct sales where the customer and insurer communicate
directly without a third party present. This would include (as
separate channels) sales:
(i)
by telephone;
(ii)
via the internet;
(iii)
through a branch;
(b)
sales through a specific price comparison website;
(c)
sales through a specific insurance intermediary; and
(d)
sales via a specific affinity/partnership scheme.
close matched
a home or motor insurance product which provides a customer with
product
core cover and benefits which are broadly equivalent to the core cover
and benefits enjoyed by the customer under their existing policy.
Page 3 of 79
closed book
equivalent new
business price
Gibraltar-based firm
gross incurred
claims ratio
gross price
home insurance
mandatory
additional product
motor insurance
FCA 2021/XX
(in ICOBS 6B and SUP 16.28) an individual home insurance or motor
insurance product which meets the following criteria:
(a)
its policies may be renewed by existing customers, and
(b)
either:
(i)
its policies are not available for purchase by other
customers; or
(ii)
the firm has not sold, or does not expect to sell, on an
annualised basis, more than 15% of active policies
under the product to new business customers.
the price a firm would offer to a customer to purchase a particular
policy if the customer were a new business customer.
has the same meaning as in the Gibraltar Order.
the proportion of the premiums (gross of reinsurance) received paid out
as claims (gross of reinsurance).
(in ICOBS 6B and SUP 16.28) for intermediated sales, the gross retail
price charged to consumers (excluding insurance premium tax). The
gross price includes the net rated price and all elements of the price
charged to consumers set by the insurance intermediary.
(in ICOBS 6B and SUP 16.28) a contract of insurance that provides
insurance against loss of or damage to any of the following:
(a)
the structure of domestic properties,
(b)
the contents of domestic properties,
(c)
cover against risks of incurring liabilities to third parties where:
(i)
the liabilities arise out of injuries sustained within the
boundary of a domestic property; and
(ii)
the cover is provided in relation to either the structure or
contents of a domestic property.
a good, service or right of any description, whether or not financial in
nature, that a customer is required to obtain in connection with or
alongside a non-investment insurance contract.
(in ICOBS 6B and SUP 16.28) a contract of insurance within the
motor vehicle liability or land vehicle class, where the contract of
insurance was purchased by a consumer.
Page 4 of 79
net rated price
new business
customer
non-investment
insurance product
optional additional
product
renewal price
retail premium
finance
RPPD non-
investment insurance
product
tenure
FCA 2021/XX
(in ICOBS 6B and SUP 16.28) for intermediated sales, the price set by
an insurer or managing agent which includes the risk price and the
insurer’s or managing agent’s profit margin.
a prospective customer for a policy where the policy being taken out is
not a renewal.
an insurance product sold or underwritten as individual non-investment
insurance contracts.
[Note: PROD 1.4.2G indicates that an insurance product may be read
as being a reference to the product for distribution to customers
generally and is not intended to refer to each individual contract of
insurance being sold or underwritten (unless the context indicates
otherwise).]
(in ICOBS and PROD 4) a good, service or right of any description,
whether or not financial in nature, that a customer may obtain (or not,
as the case may be) at their election in connection with, or alongside, a
non-investment insurance contract. This includes retail premium
finance.
the premium offered by a firm to renew a home insurance or motor
insurance policy. This includes where more than one policy is sold
together as part of a package.
a credit agreement (whether a regulated credit agreement or not)
entered into with a view to its use by a retail customer to finance all or
part of the premium for a non-investment insurance contract.
(in PROD) a non-investment insurance product:
(1)
that was manufactured prior to, but not significantly adapted on
or after, 01 October 2018; and
(2)
is either:
(a)
still being marketed or is available to be distributed to
customers (including in the form of a renewal of an
existing policy); or
(b)
not still being marketed or distributed but there are
policies under the product that remain in force.
the number of years a customer has held their policy, including any
renewal of the policy.
Amend the following definitions as shown. Underlining indicates new text and striking
through indicates deleted text.
Page 5 of 79
FCA 2021/XX
APR
(1)
…
(2)
…
(3)
(in CONC for all other credit agreements, ICOBS 6A.6 and in
SUP 16.28) the annual percentage rate of charge for credit
determined in accordance with the rules in CONC App 1.2 and
CONC 3.5.13R.
distribute
(1)
…
…
(2)
(in relation to ICOBS 1, ICOBS 6B, PROD 1.4 and PROD 4)
advising on or proposing a contract of insurance to a customer.
remuneration
…
(3)
(in SYSC 19F.2, PROD 4, ICOBS and, in relation to a life policy,
in COBS 6.1ZA) any commission, fee, charge or other payment,
including an economic benefit of any kind or any other financial
or non-financial advantage or incentive offered or given in
respect of insurance distribution activities.
[Note: article 2(1)(9) of the IDD]
renewal
(1)
(except in ICOBS 6B) carrying forward a contract, at the point of
expiry and as a successive or separate operation of the same
nature as the preceding contract, between the same contractual
parties.
(2)
(in ICOBS 6B) the entry into by, a customer of a general
insurance contract which:
(a)
is of the same product type as that customer’s existing
general insurance contract,
(b)
is obtained from the same firm (including an insurer,
insurance intermediary or managing agent) as that
customer’s existing general insurance contract, and
(c)
will take effect following the termination or expiry of the
customer’s existing policy.
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FCA 2021/XX
Annex B
Amendments to the Senior Management Arrangements, Systems and Controls
sourcebook (SYSC)
In this Annex, underlining indicates new text and striking through indicates deleted text.
19F
Remuneration and performance management
…
19F.2
IDD remuneration incentives
…
Retail premium finance
19F.2.3
R
The requirement in SYSC 19F.2.2R applies to remuneration an insurance
distributor receives in relation to retail premium finance.
19F.2.4
G
ICOBS 6A.6 includes further guidance on remuneration in relation to
retail premium finance.
…
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FCA 2021/XX
Annex C
Amendments to the Insurance: Conduct of Business Sourcebook (ICOBS)
In this Annex, underlining indicates new text and striking through indicates deleted text,
unless otherwise stated.
1
Application
…
1 Annex
1
Application (see ICOBS 1.1.2R)
Part 1: Who?
Modifications to the general application rule according to type of firm
…
6
…
7
Gibraltar-based firms and TP firms
7.1
R
The following parts of this sourcebook apply to Gibraltar-based firms and TP
firms carrying on regulated activities in relation to policies marketed or
distributed in the UK, whether or not they are carried on from an establishment
in the UK:
(1)
The provisions on automatic renewal in ICOBS 6.2 and ICOBS 6A.5;
(2)
The provisions on retail premium finance in ICOBS 6A.6; and
(3)
Home insurance and motor insurance pricing provisions (see ICOBS 6B).
7.2
G
Where the provisions in 7.1 apply to a Gibraltar-based firm or a TP firm it
applies to its regulated activity business in relation to policies marketed or
distributed in the UK or to UK customers whether this is done via an
establishment in the UK or from outside the UK.
…
Product information
Page 8 of 79
6
FCA 2021/XX
…
6.2
Pre-contract information: general insurance contracts
…
6.2.5
R
…
Auto-renewal
6.2.6
R
(1)
A firm must:
(a)
inform a customer whether the terms and conditions of their
policy provide for the policy to automatically renew at the end
of the term;
(b)
provide a customer with an explanation of the effect of
automatic renewal for the customer, and
(c)
provide a customer with information on the right to cancel the
automatic renewal element of the policy at any time.
(2)
The information on the right to cancel the automatic renewal element
must include:
(a)
the existence of the right;
(b)
the conditions for exercising it;
(c)
the consequences of exercising it; and
(d)
the practical instructions for exercising it.
(3)
The information in (1) and (2) must be provided:
(a)
in good time before conclusion of the contract, and
(b)
in writing or in another durable medium.
…
6.5
Renewals
Renewals
6.5.1
R
…
(3)
…
(c)
a statement alongside (a) and (b) indicating that the consumer:
Page 9 of 79
FCA 2021/XX
(i)
should check that the level of cover offered by the
renewal is appropriate for their needs; and
(ii)
is able, if they so wish, to compare the prices and levels
of cover offered by alternative providers; and
(d)
a statement informing the consumer whether the contract will
automatically renew or whether the consumer needs to take
action to accept the renewal offer.
…
…
6A.2
Optional additional products
Restriction on marketing or providing an optional product for which a fee is
payable
6A.2.1
R
(1)
…
(7)
An optional additional product is a good, service or right of any
description, whether or not financial in nature, that a customer may
obtain (or not, as the case may be) at their election in connection with,
or alongside, a non-investment insurance contract.
…
6A.2.5
G
Firms are reminded that retail premium finance is an optional additional
product for the purposes of ICOBS 6A.2.1R.
For “optional additional product”, substitute “optional additional product” in the following
provisions. Where the term is used in the plural, maintain the pluralised form in the
substituted italicised term. The new text is not shown as underlined and the deleted is not
shown as struck through.
6A.2.1R(1)
one instance
6A.2.1R(2)
one instance
6A.2.1R(3)
two instances
6A.2.1R(5)
one instance
6A.2.1R(8)
one instance
6A.2.1R(9)
one instance
6A.2.1R(10)
three instances
6A.3.5G
one instance
Insert the following new sections ICOBS 6A.5 (Cancellation of automatic renewal) and
ICOBS 6A.6 (Retail premium finance: disclosure and remuneration), after ICOBS 6A.4
(Travel insurance and medical conditions). The text is not underlined.
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FCA 2021/XX
6A.5
Cancellation of automatic renewal
Application
6A.5.1
R
This section applies in relation to all general insurance contracts which
have an automatic renewal feature.
Purpose
6A.5.2
G
The purpose of this section is to support TCF outcome 6 – “Consumers do
not face unreasonable post-sale barriers imposed by firms to change
product, switch provider, submit a claim or make a complaint”, by making
it easier for customers who wish to prevent their policy from automatically
renewing to cancel this feature of their policy.
Requirement for a range of cancellation methods
6A.5.3
R
A firm must provide a customer with a range of different easy and
accessible methods for cancelling the automatic renewal feature in the
customer’s contract.
6A.5.4
R
The methods provided by a firm in accordance with ICOBS 6A.5.3R must
include, but are not limited to:
(1)
telephone;
(2)
post; and
(3)
email or online.
6A.5.5
G
An easy and accessible method for cancelling an automatic renewal feature
is a method that does not place any unnecessary barriers on the customer
who uses it. Unnecessary barriers may include one or both of the following:
(1)
significantly longer call waiting times to cancel the automatic renewal
feature than to purchase a new policy;
(2)
unnecessary questions or steps before the customer is able to confirm
their instructions to cancel the automatic renewal feature.
The times a customer may cancel
6A.5.6
R
A firm must allow the customer to exercise their right to cancel the
automatic renewal feature:
(1)
at the time the customer purchases the policy and at any time during
the duration of the policy; and
(2)
free of charge.
6A.6
Retail premium finance: disclosure and remuneration
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Other requirements in the Handbook
6A.6.1
G
This section does not affect the application of other requirements in the
FCA Handbook applying to firms in relation to a regulated credit
agreement.
Pre-contract information
6A.6.2
R
In good time before the conclusion of a policy including on any renewal, a
firm offering retail premium finance in relation to that policy must give to
the customer:
(1)
price information about:
(a)
the total cost of the policy if purchased without retail premium
finance;
(b)
the total cost of the policy with retail premium finance
including costs of or associated with the retail premium finance;
and
(c)
any difference in the costs in (a) and (b),
alongside each other;
(2)
a description that the use of retail premium finance arrangements will
be more expensive for the customer compared to paying for the policy
upfront, unless there is no difference;
(3)
any difference between the duration of the policy and that of the retail
premium finance;
(4)
where the information given to the customer includes the price
presented on any basis other than annually, an explanation alongside
that basis of any difference between the total price to be paid by the
customer when buying with or without retail premium finance.
6A.6.3
R
The information in ICOBS 6A.6.2R must be communicated:
(1)
in a way that is accessible and which draws the consumer’s attention
to it as key information; and
(2)
in accordance with ICOBS 4.1A.
Active election
6A.6.4
G
For the purposes of ICOBS 6A.2.2R providing the customer with the choice
between paying monthly or annually will not be sufficient to show the
customer has made an active election to obtain the retail premium finance.
Premium finance related remuneration
Page 12 of 79
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6A.6.5
R
A firm must not propose or arrange the use of any particular retail premium
finance where that would be inconsistent with the firm’s obligations in the
FCA Handbook, including the customer’s best interest rule, SYSC 19F.2 or
CONC.
6A.6.6
G
(1)
Firms are reminded of their obligations elsewhere in the FCA
Handbook including:
(a)
Principles 1 and 6 to act with integrity and treat customers
fairly;
(b)
Principle 8 to manage conflicts of interest fairly, both between
itself and its customers and between a customer and another
client. This principle extends to the remuneration a firm
receives including soliciting or accepting inducements where
this would conflict with a firm’s duties to its customers;
(c)
conflicts of interest requirements in SYSC 3.3 (for insurers) or
SYSC 10 (for insurance intermediaries);
(d)
the customer’s best interests rule, and SYSC 19F.2 to ensure
remuneration arrangements do not conflict with their duty to
comply with the customer’s best interests rule.
(2)
An inducement is a benefit offered to a firm, or any person acting on
its behalf, with a view to that firm, or that person, adopting a
particular course of action. This can include, but is not limited to,
cash, cash equivalents, commission, goods, hospitality or training
programmes.
6A.6.7
G
(1)
Firms should consider, at inception and then on a regular basis, their
arrangements with providers or distributors of retail premium finance
and whether they could give an incentive to act in a way that is
inconsistent with the customer’s best interests rule or otherwise could
risk breaching any of the provisions referred to in ICOBS 6A.6.6G
above. For example, a firm’s remuneration arrangements should not
provide an incentive to offer retail premium finance having greater
costs to the customer (including a higher APR) where another retail
premium finance arrangement, better aligned with the customer’s
interests, is available to the firm in the market .
(2)
Where the remuneration firms receive in relation to retail premium
finance conflicts with the duty to comply with the customer’s best
interests rule they will need to take appropriate actions to address the
situation including, where necessary, changing retail premium finance
providers.
Insert the following new chapter ICOBS 6B (Home insurance and motor insurance pricing),
after ICOBS 6A (Product Specific Rules). The text is not underlined.
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6B
Home insurance and motor insurance pricing
6B.1
Application and purpose
Application
What?
6B.1.1
R
This chapter applies where a firm carries out any of the following activities in
relation to a home insurance or motor insurance policy or any related
additional product sold to a consumer:
(1)
setting the renewal price; or
(2)
setting the price for any additional product offered to the customer at
renewal; or
(3)
determining the level of remuneration earned by the firm when
distributing a product at renewal.
Exclusions
6B.1.2
R
This chapter does not apply to group policies where these include, or are sold
alongside, home insurance or motor insurance products.
Purpose
6B.1.3
G
The rules in this chapter:
(1)
promote competition through ensuring consumers have a realistic
picture of the long-term cost of their chosen product when purchasing it
and incentivising firms to compete for consumer business on this basis;
and
(2)
protect consumers through ensuring that they are placed in a position
where they can understand the long-term cost of their product.
6B.1.4
G
The rules in this chapter are not intended to affect how risk is priced for
home insurance and motor insurance.
6B.2
Setting renewal prices
6B.2.1
R
A firm must not set a renewal price that is higher than the equivalent new
business price.
6B.2.2
R
In the case of a combined home insurance and motor insurance package, the
renewal price for each of the following must be no higher than the equivalent
new business price:
(1)
the home insurance element,
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(2)
the motor insurance element; and
(3)
the bundled price for the package.
6B.2.3
G
ICOBS 6B.2.1R does not distinguish between firms which price on a net
rated price basis or firms which price on a gross price basis. Firms which
price on a net rated price basis should apply the rules in this section to arrive
at a net rated price which is the equivalent new business price on a net rated
price basis that they would quote for a customer.
6B.2.4
R
(1)
In determining the equivalent new business price, a firm must apply the
following assumptions:
(a)
that the renewal customer has approached the firm through the
same channel as they used when they first purchased their
policy; and
(b)
the customer has selected the same payment method (annually
or monthly) as they currently use to pay for their policy.
(2)
Where the firm no longer accepts new business through the channel
that the customer originally used to purchase the policy, the firm must
assume that the customer approached the firm through the channel
most commonly used by customers of the firm.
6B.2.5
G
For the purposes of the assumptions in ICOBS 6B.2.4R, a firm should treat
each intermediary chain, price comparison website or affinity/partnership
scheme through which it sells policies as a separate channel.
6B.2.6
G
In determining a customer’s equivalent new business price, a firm may take
account of any additional risk information it has acquired during the term of
the customer’s current policy where this information is:
(1)
information that the customer would be asked to disclose if they were a
new business customer; or
(2)
information that would be available to the firm about new business
customers from other external sources of information.
Closed books
6B.2.7
R
Where a customer’s policy is in a closed book, the firm must determine the
customer’s equivalent new business price according to the following rules.
6B.2.8
R
The firm must identify from the home insurance and motor insurance
products that it currently actively markets or distributes, whether it has a
home insurance or motor insurance product that is a close matched product.
6B.2.9
R
Where the firm no longer actively markets or distributes any home insurance
or motor insurance product which is a close matched product but it is part of
a group which does actively market or distribute home insurance or motor
Page 15 of 79
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insurance products, it must identify a close matched product from those
products actively marketed or distributed by the firm’s group.
6B.2.10
R
Where there is more than one product which is a close matched product, the
firm must select:
(1)
the close matched product which is the most similar to the customer’s
existing policy; or
(2)
where it is not possible to identify the most similar close matched
product, the close matched product which will lead to the most
favourable pricing outcome for customers who hold a policy in the
closed book.
6B.2.11
R
Where a close matched product is identified or selected, the equivalent new
business price for a customer in the relevant book is the price set out in (1),
taking account of the permitted adjustments set out in (2).
(1)
The equivalent new business price for the close matched product.
(2)
The permitted adjustments are those which fairly and proportionately
reflect the difference in costs for the firm arising from differences
between the cover or benefits (including any compulsory excess)
provided by the policies in the closed book and the close matched
product.
6B.2.12
G
Where a firm is unable to identify a close matched product for a product in a
closed book, a firm should set the renewal price for policies in the closed
book in compliance with ICOBS 6B.2.19R.
6B.2.13
R
Where a firm is unable to generate an equivalent new business price or
identify a product which is a close matched product because a policy is not
part of the firm’s or its group’s standard policy offering or falls outside the
firm’s or its group’s underwriting policies for new business, the firm must set
the renewal price in accordance with ICOBS 6B.2.19R.
Intermediaries’ remuneration and involvement in setting price
6B.2.14
R
An insurance intermediary that is involved in the setting of any portion of the
renewal price of the policy must ensure that the portion they set or their
contribution to that portion is set at a level that is no higher than it would be
set for a new business customer.
Responsibility of firms where more than one firm is involved in setting the
renewal price
6B.2.15
R
Where more than one firm, including insurance intermediaries, is jointly
responsible for setting the renewal price, each firm must take reasonable
steps to assure itself that the renewal price is set in compliance with the rules
in this chapter.
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6B.2.16
G
The following points are relevant to determining whether a firm has taken the
reasonable steps required by ICOBS 6B.2.15R:
(1)
Obtaining verification that a firm has set the portion of the renewal
price they are responsible for in compliance with the rules in this
chapter will generally be considered reasonable steps.
(2)
However a firm should not rely on any verification obtained if the firm
has other information that indicates that the renewal price has not been
set in compliance with the rules in this chapter.
(3)
In considering how frequently verification should be requested, firms
should consider the duration of the product (eg annual or longer) and
any processes already in place under PROD 4.3 for providing
information to distributors.
Additional products
6B.2.17
R
Any firm that has responsibility for setting the price of an additional product
that is available to a customer in connection with a home insurance or motor
insurance policy must ensure that the price of the additional product at
renewal is no higher than the price at which the additional product would be
offered to the customer if they were a new business customer.
6B.2.18
R
Where a firm no longer offers to new business customers an additional
product which is available to a customer in connection with the renewal of a
home insurance or motor insurance policy, the price for that additional
product must be set as follows:
(1)
where the additional product is a policy, the firm must:
(a)
apply the rules for closed books in ICOBS 6B.2.7R to 6B.2.11R;
or
(b)
if the additional product has no close matched product apply
ICOBS 6B.2.19R.
(2)
where the additional product is not a policy, the firm must apply
ICOBS 6B.2.19R.
Firms’ assurance over customer outcomes
6B.2.19
R
A firm must ensure that it does not systematically discriminate against
customers based on their tenure, when determining:
(1)
an equivalent new business price;
(2)
the renewal price for customers in closed books where a firm is unable
to identify a close matched product; and
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(3)
the price for any additional products offered to the customer at renewal
of a policy.
6B.2.20
E
(1)
A firm’s equivalent new business price for customers of longer tenure
should not systematically exceed the new business price for new
business customers.
(2)
A firm should not systematically earn a higher margin the longer a
customer’s tenure is.
(3)
A pricing model used by the firm to determine the equivalent new
business price, or renewal prices for customers in closed books where a
firm is unable to identify a close matched product, should not generate
prices which are systematically higher the longer a customer’s tenure
is.
(4)
A firm’s renewal price for customers of longer tenure, or the price for
any additional products offered to customers of longer tenure at
renewal of a policy, should offer fair value to the customer taking
account of the prices offered to customers of shorter tenure. The
following outcomes tend to indicate that there is a failure to offer fair
value:
(a)
the price of any of the following materially exceed the new
business price which a customer of longer tenure would pay to
obtain the cover and/or benefits offered by the product if the
customer were to shop around as a new business customer
approaching another firm or firms:
(i)
the firm’s renewal price for customers in a closed book
where no close matched product is identified;
(ii)
the firm’s price for any additional product offered at
renewal where that additional product is a policy and no
close matched product is identified;
(iii)
the firm’s price for any additional products offered at
renewal where the additional product is not a policy and
is no longer available to new business customers;
(b)
the quality of service or cover enjoyed by customers of longer
tenure is lower than that enjoyed by customers of shorter tenure
for the same product; and
(c)
relevant and appropriate value measures, or the gross incurred
claims ratio, for policies held by customers of longer tenure
indicate that the value provided by these policies is lower than
that for policies held by customers of shorter tenure.
(5)
Contravention of any of (1) to (4) may be relied on as tending to
establish contravention of ICOBS 6B.2.19R.
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6B.2.21
G
Under Principle 11, firms should notify us of any change in their pricing
model where there is a material risk of harm for customers.
Sales practices
6B.2.22
R
When communicating a renewal price to customers, or when contacted by
customers to discuss a renewal price, a firm must not systematically
discriminate against customers based on tenure.
6B.2.23
R
When communicating a price for any additional product at renewal of the
policy, or when contacted by customers to discuss the prices of additional
products at renewal of their policy, a firm must not systematically
discriminate against customers based on tenure.
6B.2.24
E
(1)
A firm should not communicate with a customer of longer tenure in a
manner which is objectively likely to discourage a customer of longer
tenure from shopping around for an alternative policy offered by
another firm.
(2)
A firm should not communicate with customers of longer tenure with
the intent, or in a way that might reasonably be expected to have the
effect, that these customers are less likely than other customers to
contact the firm to negotiate the renewal price of the policy.
(3)
A firm should not interact with customers of longer tenure with the
intent or the effect that these customers are more likely than other
customers to accept the renewal price of the policy.
(4)
Contravention of any of (1) to (3) may be relied on as tending to
establish contravention of ICOBS 6B.2.22R or ICOBS 6B.2.23R.
6B.2.25
G
Where a firm has communicated a renewal price to a customer in compliance
with the rules in this chapter, a firm may subsequently agree a discount to a
renewal price in individual negotiations with the customer.
Governance, records and attestation requirements
6B.2.26
R
A firm must make and retain written records of how it continues to satisfy
itself that it does not systematically discriminate against customers based on
tenure in contravention of ICOBS 6B.2.19R, including details of:
(1)
the assessment undertaken by the firm to evaluate whether the
equivalent new business price for, or the margin earned from,
customers of longer tenure systematically exceeds that for new
business customers;
(2)
the controls put in place by the firm to ensure that any pricing model it
uses to generate its equivalent new business prices, or the renewal
prices for customers in closed books where a firm is unable to identify
a close matched product, does not generate prices which are
systematically higher the longer a customer’s tenure is;
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(3)
the evidence gathered and the assessment undertaken by the firm to
evaluate whether its renewal prices or prices for additional products at
renewal offer fair value to customers of longer tenure; and
(4)
appropriate independent oversight of the assessments and controls in
(1), (2) and (3).
6B.2.27
R
A firm must also make and retain written records of its consideration of the
extent to which material decisions which it takes in relation to its compliance
with the rules in this chapter are consistent with:
(1)
the objectives of these rules as set out in ICOBS 6B.1.3G; and
(2)
the requirement not to discrimination against customers based on
tenure in ICOBS 6B.2.19R, ICOBS 6B.2.22R and ICOBS 6B.2.23R.
6B.2.28
R
The records in ICOBS 6B.2.27R must set out clearly:
(1)
the basis on which the firm is complying with the rules in this chapter;
(2)
how the firm has resolved any areas of discretion, ambiguity or
potential uncertainty in its determination that the pricing of its home
insurance and motor insurance renewal business, including additional
products available to customers in connection with this business, is in
compliance with the rules in this chapter; and
(3)
appropriate expert input and advice on which the firm relies in
satisfying itself as to its compliance with the rules in this chapter.
6B.2.29
G
The material decisions referred to in ICOBS 6B.2.27R, include but are not
limited to:
(1)
launching, discontinuing or materially varying any aspect of a product
which is, or could be, relevant to setting an equivalent new business
price;
(2)
taking action which would result in a book becoming closed for the
purposes of the rules in this chapter;
(3)
identifying or selecting a close matched product or determining that it
is not possible to identify a close matched product;
(4)
making changes to the firm’s business structure or to the business
structure of a firm’s group to the extent that this may affect the basis on
which an equivalent new business price is set; and
(5)
determining the firm’s approach to ensuring that it does not
systematically discriminate against customers based on their tenure in
accordance with ICOBS 6B.2.19R, ICOBS 6B.2.22R and ICOBS
6B.2.23R.
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6B.2.30
R
The records compiled by the firm in accordance with ICOBS 6B.2.26R and
ICOBS 6B.2.27R must be provided as soon as reasonably practicable after
the record is prepared or updated to the senior manager responsible for the
attestation in ICOBS 6B.2.31R, and to the FCA on request.
6B.2.31
R
An appropriate senior manager of a firm must provide the attestation set out
at (1) for the reporting period set out in (2) at the time set out in (3).
(1)
The attestation is that the firm:
(a)
is and has been complying with the rules in this chapter
throughout the reporting period; and
(b)
is satisfied that the pricing of its home insurance and motor
insurance renewal business and related sales practices are
consistent with the objectives of the rules as set out in ICOBS
6B.1.3G and does not discriminate against customers of longer
tenure as set out in ICOBS 6B.2.19R, ICOBS 6B.2.22R and
ICOBS 6B.2.23R.
(2)
The reporting period is the 12-month period beginning 1 January and
ending 31 December.
(3)
The attestation must be provided annually, on or before 31 March
following the end of the reporting period.
6B.2.32
G
A firm should have in place policies and procedures to ensure its ongoing
compliance with the rules in this chapter following any material changes to
the firm’s pricing practices, pricing models or products which could affect a
firm’s compliance with rules in this chapter or fair outcomes for customers of
longer tenure.
Format and method of submission
6B.2.33
R
The attestation must be submitted online through the appropriate systems
accessible from the FCA’s website.
6B.2.34
R
The attestation will not be considered as submitted to the FCA unless it has
been accepted by the relevant FCA system.
6B.2.35
G
If the FCA’s information technology systems fail and online submission is
unavailable for 24 hours or more, the FCA will endeavour to publish a notice
on its website confirming that online submission is unavailable and will
confirm what methods of submission should be used instead.
Amend the following as shown. New text is underlined.
…
TP 2 Other Transitional Provisions
Page 21 of 79
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(1)
(2)
Material to
which the
transitional
provision
applies
(3)
(4) Transitional provision
(5) Transitional
provision: dates
in force
(6) Handbook
provision: coming
into force
…
5
ICOBS
6A.5
A firm need not comply with
ICOBS 6A.5 for contracts
entered into before [coming into
force date of instrument].
From [in force
date of
instrument]
[in force date of
instrument]
6
ICOBS
6B.2.30R
(1)
This transitional applies to
a firm which is required to
provide an attestation under
ICOBS 6B.2.30R.
(2)
The first attestation must be
submitted within 3 months
following ICOBS 6B
coming into force.
From [date] to
[date]
[in force date of
instrument]
For example, if ICOBS 6B
comes into force on 1 June
2021, the first attestation
will be due on or before 1
September 2021.
(3)
The first attestation relates
only to a firm’s compliance
on the date when ICOBS
6B comes into force (and
not to a reporting period).
For example, if ICOBS 6B
comes into force on 1 June
2021, the first attestation
will relate to a firm’s
compliance as at 1 June
2021.
Page 22 of 79
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(4)
The second attestation must
be submitted on or before
31 March in the year
following that in which
ICOBS 6B comes into
force.
(5)
For example, if ICOBS 6B
comes into force on 1 June
2021, the second attestation
will be due on or before 31
March 2022.
The reporting period for the
second attestation is from
the date on which ICOBS
6B comes unto force until
31 December of that year.
For example, if ICOBS 6B
comes into force on 1 June
2021, the reporting period
for the second attestation
will 1 June 2021 to 31
December 2021.
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Annex D
Amendments to the Product Intervention and Product Governance sourcebook (PROD)
In this Annex, underlining indicates new text and striking through indicates deleted text,
unless otherwise stated.
1
Product Intervention and Product Governance Sourcebook (PROD)
…
1.4
Application of PROD 4
1.4.1
R
PROD 4 applies to:
(1)
an insurance intermediary; and
(2)
an insurer,
with respect to:
(3)
manufacturing insurance products; and
(3A)
(see PROD 4.6) product governance and distribution arrangements for
RPPD non-investment insurance products; and
(4)
distributing insurance products.
[Note: articles 1(2) and 25 of the IDD]
1.4.-1A
R
A TP firm and a Gibraltar-based firm must comply with PROD 1.4, PROD 4
and (where applicable) PROD TP 1 in relation to non-investment insurance
products (including RPPD non-investment insurance products) that are, or will
be, marketed or distributed, or there are policies under the product that remain
in force, in the United Kingdom.
…
1.4.3
R
PROD 4 does not apply in relation to the manufacturing or distributing of an
insurance product that is:
(1)
a contract of large risks, or
(2)
a reinsurance contract.
[Note: article 25(4) of the IDD]
When an intermediary may be considered to be manufacturing
…
Page 24 of 79
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1.4.5
G
The effect of PROD 1.4.4UK and PROD 1.4.6R is that an insurance
intermediary needs to consider if it is manufacturing an insurance product or if
it would be a manufacturer for an RPPD non-investment insurance product for
PROD 4.6, and, if so, should comply with PROD 4.2 (Manufacture of
insurance products).
Scope of ‘manufacturing’
1.4.5A
G
(1)
PROD 4.2 applies to firms that manufacture insurance products. The
terms ‘firm’ and ‘manufacturer’ are used in that section
interchangeably to refer to such persons.
(2)
The Glossary term ‘manufacture’ includes ‘designing, developing,
creating and/or underwriting’ which cover activities prior to the
insurance product being approved for marketing and distributed, and
on a continuing basis after such approval.
Effect of provisions marked “UK”
1.4.6
R
(1)
Subject to (2) and PROD 1.4.3R, provisions in this section and in
PROD 4 marked “UK” apply to firms:
(a)
manufacturing or distributing insurance products, but to whom
the IDD POG Regulation does not apply;
(b)
in relation to product governance and distribution arrangements
for RPPD non-investment insurance products,
as if they were rules.
…
(4)
In relation to an RPPD non-investment insurance product, the
reproduced provisions of an article of the IDD POG Regulation must
be read to be consistent with the application of product governance and
distribution requirements in PROD 4.2 and 4.3 to an RPPD non-
investment insurance product.
Where?
1.4.7
R
PROD 4 applies to a firm with respect to activities carried on from an
establishment maintained by it, or its appointed representative,:
(1)
(for all insurance products) in the United Kingdom; and
(2)
(in addition, for non-investment insurance products) elsewhere, in
relation to an insurance product that is, or will be, marketed or
distributed, or there are policies under the product that remain in force,
in the United Kingdom.
[Note: in respect of (1) article 7(2) of the IDD]
Page 25 of 79
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…
4
Product governance: IDD and pathway investments
…
4.2
Manufacture of insurance products
Product governance arrangements
4.2.1
R
A firm which manufactures any insurance product must maintain, operate and
review a process for the approval of:
(1)
each insurance product; and
(2)
significant adaptations of an existing insurance product,
in each case before it is marketed or distributed to customers.
[Note: first subparagraph of article 25(1) of the IDD]
4.2.1A
G
(1)
For the purposes of PROD 4.2 whether a proposed change to the
product would be a ‘significant adaptation’ should include consideration
of the potential impact the adaptation may have on an existing or
potential customer (when compared to the unadapted version of the
product).
(2)
For the purposes of PROD 4.2, a ‘significant adaptation’ in relation to a
non-investment insurance product may include, but is not restricted to, a
proposed change to the insurance coverage, costs, exclusions, excesses,
limits or conditions and any other significant change to the terms and
conditions.
…
4.2.3A
G
In addition to, and/or by way of elaboration of, the factors set out in PROD
4.2.3G, for a non-investment insurance product a firm should take into
account:
(1)
the potential risk, and possible levels, of harm to customers if the
product design is flawed, in particular, due to the potential scale of harm
if the product is intended for a wide target market;
(2)
the nature of the cover that the product is intended to provide;
(3)
whether the distribution arrangements could mean customers are at a
greater risk of not receiving fair value from the insurance product, for
example where:
(a)
the insurance product will be distributed with additional
products;
Page 26 of 79
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(b)
where the insurance product will be distributed on an ancillary
basis to another product; or
(c)
there is complexity in the distribution arrangements including the
use of multiple parties in the distribution chain or reliance on
persons not regulated under FSMA when selling the insurance
product;
(4)
the nature and complexity of the firm’s existing or intended customer
base, for example whether it includes or is likely to include;
(a)
different types of customers with varying characteristics including
in relation to their understanding of financial matters;
(b)
a significant number of vulnerable customers;
(c)
a significant number of customers of long tenure;
(5)
any particularly notable features of, or relating to, existing products
(including how it has been distributed).
4.2.4
G
…
4.2.4A
G
(1)
In relation to a non-investment insurance product, PROD 4.2.2R does
not mean that firms can assume a simple product approval process will
be appropriate for a product intended for a mass retail market even if
the product and/or distribution arrangements are straightforward and
not complex. For example, the potential risks and levels of harm which
could result even from a straightforward and non-complex product,
with simple distribution arrangements, intended for the mass market
could mean that more exacting measures are required.
(2)
An example of a straightforward and non-complex product could be
cover for a single item (such as mobile phone insurance), or in relation
to a single risk (such as ticket cancellation insurance), with
straightforward distribution arrangements. However, there could be
potential risks of such a product not providing fair value and therefore
potentially leading to significant levels of harm. Firms should ensure
the product approval process has the necessary measures to identify
and mitigate any potential risks and harms.
B
Product approval process
…
4.2.5A
R
For a non-investment insurance product, a firm must ensure a product
approval process has all necessary measures and procedures for identifying
whether the product is, or remains, appropriate to be marketed or distributed to
customers in light of the requirements in PROD 4.2.14A to PROD 4.2.14OR
(Identifying fair value for non-investment insurance products: additional
provisions).
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…
Identifying fair value for non-investment insurance products: individual insurance
product
4.2.14
A
R
For a non-investment insurance product, a firm must ensure that the product
approval process identifies whether the product provides fair value to
customers in the target market including whether it will continue to do so for a
reasonably foreseeable period (including following renewal).
Identifying fair value for non-investment insurance products: where the insurance
product is intended to be part of a package
4.2.14
B
R
(1)
Where a non-investment insurance product is intended to be distributed
with one or more additional products, a firm must identify whether:
(a)
each component product; and
(b)
the package as a whole,
will provide fair value to the customer including that it will continue to
do so for a reasonably foreseeable period (including following renewal).
(2)
The assessment referred to in (1) must include (but is not limited to)
consideration of:
(a)
the value of the core insurance product;
(b)
the value of any additional products; and
(c)
the overall price of the package to the customer, taking into
account the proposed distribution arrangements.
Identifying fair value for non-investment insurance products: record keeping and
steps following value assessment
4.2.14
C
R
(1)
A firm must:
(a)
be able to clearly demonstrate how any non-investment
insurance product, additional product or package provides
(and will provide for a reasonably foreseeable period) fair
value; and
(b)
make and retain a record of the value assessment required by
PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.
(2)
Where a firm is unable to both:
(a)
identify; and
(b)
clearly demonstrate,
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that the insurance product or the package will provide fair value, the
firm must not market the product or permit the product to be distributed
(whether directly or through another person), or must have ensured
appropriate changes have been made so that fair value will be provided.
Identifying fair value for non-investment insurance products: relevance through the
product approval process
4.2.14
R
A firm must consider the value considerations in PROD 4.2.14A and PROD
D
4.2.14BR throughout every stage of the product approval process in PROD 4
including, in particular, when:
(1)
identifying the target market and the interests, needs, objectives and
characteristics of such customers (PROD 4.2.15R to PROD 4.2.21AG);
(2)
undertaking product testing (PROD 4.2.22UK to PROD 4.2.26G); and
(3)
selecting any distribution channel (PROD 4.2.27UK to PROD
4.2.32DR).
Identifying fair value for non-investment insurance products: meaning of value
4.2.14E
R
In PROD 4 ‘value’ means the relationship between the overall price to the
customer and the quality of the product(s) and/or services provided. The
assessment of value must include consideration of at least the following:
(1)
the nature of the product including the benefits that will be provided,
their quality, and any limitations (for example in the scope of cover,
exclusions, excesses or other features);
(2)
the type and quality of services provided to customers;
(3)
the expected total price to be paid by the customer when buying or
renewing the insurance product, and the elements that make up the total
price. This will need to include consideration of at least the following:
(a)
the pricing model used to calculate the risk premium:
(i)
for the initial policy term; and
(ii)
any future renewal;
(b)
the overall cost to the firm of the insurance product (including the
underwriting and operating of the product) and, where relevant,
any other components of a package;
(c)
the individual elements of the expected total price to be paid by
the customer including, but not limited to the price paid for:
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(i)
the insurance product including any additional features
which are part of the same non-investment insurance
contract for example add-ons or optional cover;
(ii)
any additional products, including retail premium finance,
offered alongside the insurance product;
(iii)
the distribution arrangements, including the remuneration
of any relevant person in the distribution arrangements, and
including where the final decision on setting the price is
taken by another person);
(4)
how the intended distribution arrangements support, and will not
adversely affect, the intended value of the product.
4.2.14F
G
(1)
Firms will need to consider the matters in PROD 4.2.14ER and PROD
4.2.14JE to identify if there is fair value both for the initial term of a
non-investment insurance product and renewals for a reasonably
foreseeable period.
(2)
Where the manufacturer will provide, or arrange for another firm to
provide, the option for retail customers to buy a non-investment
insurance product using retail premium finance, it will need to consider
if the additional costs of or relating to the retail premium finance have a
material detrimental effect on the value of the insurance product when
the two products are taken together.
(3)
When considering the costs of, or associated with, any distribution
arrangements, firms should consider the justification in value terms of
any difference between the risk price and the total price paid by the
customer including where the difference is mainly due to the costs
(including remuneration) of any person in the distribution arrangements
or where this is due to the combined costs (including remuneration) of
multiple parties involved in the distribution arrangements.
(4)
Where a firm identifies that an insurance product, package or individual
component has poor value or there is an unreasonable relationship
between either the cost to the firm and the price paid by the customer, or
the price paid by the customer and product quality or service provided,
the product or package will not be providing fair value. However, a firm
should not assume there is fair value simply due to the absence of an
unreasonable relationship in the costs or where they identify an absence
of poor value. Firms will need to consider all relevant aspects of value
in the particular context and consider whether overall there is fair value
provided.
(5)
Where a non-investment insurance product has negligible, or no
obvious, benefit for the customer this will not be providing fair value
regardless of the price of the product. For example, the product will not
provide fair value where the cover under the non-investment insurance
contract is significantly limited, whether by exclusions or limits on the
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amount that would be paid in settlement, meaning that the customer is
unlikely to be able to make a successful claim or where the customer
could conclude it is not in their interests to make a claim due to the
disproportionate time or effort which would be required, compared to
the claim settlement which could be expected.
4.2.14
R
When considering the value of a non-investment insurance product under
G
PROD 4.2.14A and, where relevant, PROD 4.2.14BR, a firm must not rely on
individual customers to consider whether they are making fair value purchases
in place of any part of the firm’s own assessment, in particular where an
insurance product is manufactured to be distributed either with other
additional products or on an ancillary basis to another good or service.
Identifying fair value for non-investment insurance products: information to be used
for the assessment
4.2.14
R
When assessing value, a firm must use the full range of data and information
H
available to it including but not limited to:
(1)
information available to the firm internally including:
(a)
customer research;
(b)
claims information such as handling times, frequency, severity of
claims costs (including total costs and average per claim), claims
ratios, rates of and reasons for claim acceptance/declinature, both
expected for the product and/or any actual information from a
comparable product; and
(c)
complaints data (including root cause analysis and handling
times), both expected for the product itself and/or any actual
information from a comparable product;
(2)
public information or information obtainable by the firm from external
sources including analysis of similar insurance products available from
other firms and, where relevant, data published as part of the FCA’s
work on value measures in the general insurance market;
(3)
information available to the firm specifically from persons in the
distribution arrangements, including:
(a)
remuneration and its impact on the value of the product, package
or component part;
(b)
levels or quality of service provided by any person in the
distribution arrangements;
(c)
any results of monitoring and oversight of the processes of any
persons in the distribution arrangement (for example, call
monitoring or file checks) including in relation to other products
that person distributes.
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Identifying fair value for non-investment insurance products: arrangements not
providing fair value
4.2.14I
G
The following evidential provision provides examples of arrangements the
FCA considers will breach PROD 4.2.14AR and, where relevant, PROD
4.2.14BR.
4.2.14J
E
(1)
A non-investment insurance product will not be providing fair value
where:
(a)
the difference between the risk price to the firm and the total price
paid by the customer bears no reasonable relationship to:
(i)
the actual costs incurred by the firm or any another person
involved in the distribution arrangements;
(ii)
the quality of any benefits (including of the insurance
product or any additional products); or
(iii)
the costs or quality of any services provided in connection
with the insurance product or additional products, by the
manufacturer or any another person involved in the
distribution arrangements;
(b)
the firm increases the price of the insurance product based on:
(i)
policies being subject to auto-renewal compared to policies
that are not subject to auto-renewal;
(ii)
the customer’s vulnerability or any protected
characteristic(s) (unless the firm is clearly permitted to rely
on them under the Equalities Act 2010);
(iii)
where customers purchase the policy using retail premium
finance,
unless the firm has an objective and reasonable basis for making
the change;
(c)
the firm assesses value using an estimated final price to the
customer which does not represent the expected total price to the
customer including where the firm expects additional products to
be purchased by the customer. For example, where the firm is
responsible for providing or making available retail premium
finance (the costs of which will be part of the total price paid by
the customer).
(2)
Contravention of any of (1)(a) to (c) may be relied on as tending to
establish contravention of PROD 4.2.14A and, where relevant, PROD
4.2.14BR.
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Identifying fair value for non-investment insurance products: distribution channels
and information disclosure to distributors
4.2.14
K
R
A firm must, as far as reasonably possible, ensure the distribution
arrangements for a non-investment insurance product avoid or minimise the
risk of negatively impacting the fair value of the insurance product or package.
This includes, but is not limited to:
(1)
(2)
avoiding or reducing the risks arising from:
(a)
any remuneration of a party or parties involved in the distribution
arrangements increasing, directly or indirectly, the total price paid
by the customer without adequate monitoring or oversight of the
nature, level and fairness justification for their inclusion; or
(b)
providing discretion to another person to set the final price, for
example through a net pricing arrangement, without adequate
monitoring or oversight of the final price paid by the customer;
ensuring that appropriate arrangements will be in place to identify if the
actions of another person involved in the distribution arrangements
would adversely affect the value of the insurance product or package;
and
(3)
reducing the scope for the overall effect of any distribution
arrangements to detrimentally affect the value of the products or
package including where the cumulative effects of the remuneration of
multiple parties unreasonably add to the overall price paid by the
customer.
4.2.14L
G
(1)
Where the firm is considering the effects of the distribution
arrangements on value it should consider whether the additional costs of
any individual party in the arrangements that add to the total price paid
by the customer deliver any, or a proportional, additional benefit. If not,
firms should consider how they can be satisfied that the arrangements
are consistent with their obligations to be able to clearly demonstrate
fair value to the customer.
4.2.14
M
R
(2)
A benefit that could be consistent with fair value might include where
the party’s inclusion in the distribution arrangements increases access to
the product for customers in the target market in a way that is
proportionate to the additional cost involved.
A firm must obtain from any person in the distribution arrangements all
necessary and relevant information to enable it to assess the remuneration
associated with the distribution arrangements to allow it to assess the ongoing
value of the product, including at least:
(1)
the total costs of the distribution arrangement whether as part of the
premium or not, including in relation to additional products;
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(2)
a sufficiently detailed breakdown of the costs in (1) identifying the type
and level of remuneration of each person in the distribution
arrangements together with an explanation of the services provided by
that person; and
(3)
confirmation from any firm in the distribution arrangements that any
remuneration is consistent with their regulatory obligations including
SYSC 19F.2.
Identifying fair value for non-investment insurance products: additional provisions
4.2.14
R
A firm manufacturing a non-investment insurance product must ensure the
N
manufacture of an insurance product is driven by features that benefit the
customer and not by a business model which relies on poor customer
outcomes to be profitable.
4.2.14
R
In relation to a non-investment insurance product to be sold in a package with
O
additional products, a firm must not set or increase the price of those
additional products to the customer in a way that detrimentally impacts the
package delivering fair value, including where this is done to minimise the
financial effects on the firm of reducing the price of, or making other changes
to, an insurance product as a result of the fair value assessment.
Target market
4.2.15
R
…
4.2.15
G
The effect of PROD 4.2.14AR and, where relevant, PROD 4.2.14BR, when
A
taken together with PROD 4.2.15R, is that a firm will need to be able to show
that a non-investment insurance product offers fair value to the specified target
market, taking into account in particular their needs, objectives, interests,
characteristics.
…
4.2.17
R
(1)
For a non-investment insurance product, when identifying the target
A
market a firm must identify if there are groups of customers for whom
the product or package would not provide the intended level of value
identified for PROD 4.2.14AR and, where relevant, PROD 4.2.14BR.
(2)
A firm must take reasonable steps in its use of the distribution
arrangements to ensure the product is not distributed to any such groups
of customers identified in (1). The information required in PROD
4.2.29R to be provided to distributors must include a clear description
of these customers.
…
4.2.21
G
In relation to a non-investment insurance product, a firm should consider
A
whether the target market needs to be identified in more detail, even for a
Page 34 of 79
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simpler, more common product, where there is a material risk of customer
harm associated with it.
…
4.2.26
G
(1)
PROD 4.2.25R does not affect the manufacturer’s freedom to set
premiums.
(2)
In relation to a non-investment insurance contract a firm should
consider whether, as a result of the charging structure it has put in place,
the overall cost for the customer is consistent with its obligations under
PROD 4.2.14AR (and, where relevant, PROD 4.2.14BR), the Principles
and ICOBS.
(3)
…
Distribution channels and information disclosure to distributors
…
4.2.29
G
For a non-investment insurance product, the information required by PROD
A
4.2.29R should include:
(1)
all appropriate information to enable the distributor to understand the
intended value of the insurance product established by the firm;
(2)
any effect the distributor may have on the intended value that has not
been fully taken into account by the firm when assessing value, and
therefore which the distributor should take into account; and
(3)
any type of customer for whom the insurance product is unlikely to
provide fair value.
4.2.32
R
…
Distribution channels: selecting channels for non-investment insurance products
4.2.32
R
In relation to a non-investment insurance product, where a firm is unable to
A
demonstrate clearly that a distribution channel results in fair value to the
customer it must not use that channel.
4.2.32
B
R
In relation to a non-investment insurance product, whenever making a change
to the distribution arrangements a firm must:
(1)
obtain all necessary information from the distributor or any other person
who will be involved with the distribution arrangement, including that
set out in PROD 4.2.14MR; and
(2)
identify whether the proposed change to the distribution arrangements is
consistent with the fair value requirement in PROD 4.2.14AR and
PROD 4.2.14BR.
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4.2.32
G
For PROD 4.2.32BR a change to the distribution arrangements includes
C
adding a further distribution channel.
4.3.32
G
For a non-investment insurance product sold on an ancillary basis to another
D
product or service, for example a motor vehicle, electrical good or a holiday, a
firm should consider whether the proposed distribution channel would be
appropriate in light of the risk that the customer’s focus is on the core product
rather than the insurance product.
Monitoring and review of insurance products
…
4.2.34
R
A firm must regularly review the insurance products it offers or markets taking
into account any event that could materially affect the potential risk to the
identified target market. In doing so, the firm must assess at least the
following:
(1)
whether the insurance product remains consistent with the needs of the
identified target market; and
(2)
(in relation to a non-investment insurance product) whether the
insurance product remains consistent with the fair value assessment
required under PROD 4.2.14AR and, where relevant, PROD 4.2.14BR;
and
(3)
whether the intended distribution strategy remains appropriate.
[Note: fourth subparagraph of article 25(1) of the IDD]
4.2.34
G
‘Offers’ and ‘markets’ in the requirements in PROD 4.2.33R and PROD
A
4.2.34R should be read to include ‘renews’ in relation to the renewal of
existing non-investment insurance products.
4.2.34
R
For a non-investment insurance product, a firm must undertake the regular
B
review required by PROD 4.2.34R:
(1)
every twelve months; or
(2)
more frequently where the potential risk associated with the product
makes it appropriate to do so.
4.2.34
G
For the purposes of PROD 4.2.34B the factors that should be taken into
C
account when considering if more frequent reviews would be appropriate
include, but are not limited to:
(1)
the nature and complexity of the product;
(2)
the nature of the customer base, including whether there are significant
numbers of customers of long tenure and/or vulnerable customers;
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…
4.2.35
A
R
(3)
(4)
(5)
(1)
(2)
(3)
any specific indicators seen in the firm’s assessment of the product’s
value to the customer;
any indicators of customer harm potentially emerging from the
performance of the product (for example through claims and complaints
data); and
the nature and type of distribution arrangements being used.
When reviewing a non-investment insurance product, a firm must
consider:
(a)
whether the insurance product is providing the intended fair value
to customers;
(b)
any impact which the distribution arrangements are having on the
value including whether the distribution channels remain
appropriate;
(c)
whether the use of any retail premium finance arrangement
remains appropriate.
A firm in (1) must:
(a)
ensure that it has sufficient, good quality management
information; and
(b)
use the full range of data and information available to it (whether
it holds this information already, the information is publicly
available or it is able to obtain it from another person),
to enable it to consider and asses value including that actually being
provided by the insurance product.
The information in (2) includes but is not limited to:
(a)
information available to the firm internally including:
(i)
customer research;
(ii)
claims information (such as handling times, frequency,
rates of and reasons for claim acceptance and declinature,
severity of claims costs (including total costs and average
per claim) and claims ratios); and
(iii)
complaints data (including root cause analysis and handling
times);
(b)
public information or information obtainable by the firm from
external sources including analysis of similar insurance products
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available from other firms and, where relevant, data published as
part of the FCA’s work on value measures in the general insurance
market;
(c)
information available to the firm (including what it would be
reasonably able to obtain) in relation to any distribution
arrangements through which the product is distributed, including:
(i)
remuneration information;
(ii)
levels and quality of service provided by the distributor;
(iii)
ongoing monitoring and oversight reports relating to the
distributor’s processes, for example call monitoring or file
reviews.
4.2.35
B
R
In addition to the information specified in PROD 4.2.35AR, a firm must obtain
all necessary and relevant information in order to enable them to properly
understand and monitor a non-investment insurance product including
verification of the information in PROD 4.2.14MR.
4.2.35
C
G
For PROD 4.2.35AR(1), a firm should identify whether there is a risk to its
continuing to provide fair value where there is a material change in the
relationship between the price to the customer and the actual costs to the firm
or another party involved in the ongoing service/distribution of the product.
…
4.2.36
A
4.2.36
B
G
R
In relation to a non-investment insurance product, when identifying the
appropriate intervals for regular review firms will need to consider the
requirement in PROD 4.2.34BR and also whether any event has happened or
issue arisen requiring the insurance product to be reviewed outside of the
minimum review period.
For the purposes of showing the requirements in PROD 4.2.1R and PROD
4.2.5UK are met, where a firm makes a change to a non-investment insurance
product it must make and retain a record of:
(1)
the assessment of whether that change would amount to a significant
adaptation of the insurance product; and
(2)
where the assessment in (1) is that the change would not be a significant
adaptation, the reasons for that decision.
…
4.2.37
A
R
For a non-investment insurance product, the review process must:
(1)
have the necessary measures to be able to identify if the insurance
product is not providing fair value; and
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(2)
in that case, provide that appropriate actions be taken:
(a)
for the mitigation and any potential remediation of the harm to
existing customers; and
(b)
to prevent harm to new customers.
4.2.37
B
G
In relation to a non-investment insurance product, the actions firms may need
to take for the purposes of PROD 4.2.37A include (and may involve a
combination of), but are not limited to:
(1)
making changes to the product (such as amending policy terms or
applying them more favourably to customers in the event of a claim);
(2)
offering existing customers the option to cancel the non-investment
insurance contract without additional cost (for example by waiving
cancellation fees or charges);
(3)
providing customers with a refund of the difference between the
premium paid for the non-investment insurance contract and the
premium for a fair value version of that product;
(4)
proposing alternative insurance products, whether offered by the firm or
another provider, to existing customers or distributors which provide
fair value and which would be compliant with other FCA requirements,
for example, ICOBS 5.2 (Demands and needs);
(5)
withdrawing the insurance product from continued marketing or
distribution.
4.2.37
C
G
Where in the review required by PROD 4.2.34R and PROD 4.2.35UK a firm
identifies a breach of any rules in place at the time, it should consider what
may be necessary to provide appropriate mitigation and/or remediation of the
harm including whether redress should be made. The firm should contact any
affected customers where this is necessary to inform them of the issues and of
the measures being taken.
…
4.2.39
A
R
In relation to a non-investment insurance contract, where a firm identifies that
the distribution is detrimentally affecting the intended value of the insurance
product it must take appropriate remedial measures including but not limited
to:
(1)
amending the distribution arrangements, including ceasing to use certain
distributors or distribution channels;
(2)
amending remuneration structures;
(3)
withdrawing the insurance product from continued marketing or
distribution.
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4.3
FCA 2021/XX
Distribution of insurance products
…
4.3.2A
R
In relation to a non-investment insurance product, the arrangements in PROD
4.3.2R must enable the distributor to understand:
(1)
the outcome of the value assessment required by PROD 4.2.14AR and,
where relevant, PROD 4.2.14BR; and
(2)
any identified group of customers for whom the insurance product is not
expected to provide fair value.
…
4.3.6A
R
(1)
In relation to a non-investment insurance product, the product
distribution arrangements in PROD 4.3.2R must enable the distributor
to identify:
(a)
the value that the insurance product is intended to provide to the
customer; and
(2)
(3)
(b)
the impact that the distribution arrangements (including any
remuneration it, or another person in the distribution chain to
which it belongs, receives) has on the overall value of the
insurance product to the customer.
Any distribution strategy set up or applied by the distributor must be
consistent with the aim of providing fair value to the customer.
For the purposes of (1) and (2) a firm must consider at least the
following:
(a)
the benefits the product is intended to provide to the customer;
(b)
the characteristics, objectives, interests and needs of the target
market;
(c)
(d)
the interaction between the price paid by the customer and the
extent and quality of any services the distributor (or any person
connected to it) provides;
whether any remuneration it receives in relation to the insurance
product would result in the product ceasing to provide fair value
to the customer;
(e)
any potential detrimental effect on the intended value where the
insurance product is to be distributed as part of a package with, or
as part of the same agreement which provides, another product or
service; and
Page 40 of 79
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(f)
where the distribution strategy involves offering, or arranging for
the customer to be offered, retail premium finance, the firm must
ensure that, taking into account the costs (including any
charges/interest) of the retail premium finance, the customer does
not pay a price that means, if seen as a package, the customer will
not receive fair value.
4.3.6B
G
The following evidential provision provides examples of what the FCA
considers indicate that the customer is not being provided fair value which, if
relied on by a firm, the FCA considers will breach PROD 4.3.6AR.
4.3.6C
E
(1)
Any person at any stage of the distribution chain receiving a level of
remuneration which does not bear a reasonable relationship to the
person’s actual costs, or their contribution, level of involvement or the
benefit added by them, to the arrangements for the distribution of the
product, including where the person provides little or no benefit beyond
that which the customer would receive if they obtained the insurance
product through another distribution channel.
(2)
A firm, or other person in the distribution arrangement, having
remuneration arrangements which give an incentive to propose or
recommend an insurance product which either does not meet the
customer’s needs (or not as well as another product would) or is not in
accordance with the customer’s best interests rule.
(3)
Where the insurance product is distributed as part of a package, the
overall price of the package does not bear a reasonable relationship to
the overall benefits provided by the package.
(4)
Where the level of any remuneration (for which any person in the
distribution arrangement is responsible for setting) is not reasonably
reflective of the costs actually incurred.
(5)
Contravention of any of PROD 4.3.6CE (1) to (4) may be relied upon as
tending to establish contravention of PROD 4.3.6AR.
…
4.3.10
A
R
A firm must review its product distribution arrangements in relation to a non-
investment insurance product at least every twelve months.
4.3.10
B
R
For the purposes of PROD 4.3.10UK, a distributor must provide on request to
a manufacturer of a non-investment insurance product:
(1)
information on the distributor’s remuneration in connection with the
distribution of the insurance product;
(2)
information on any ancillary product or service that the distributor
provides to the customer (including insurance add-ons, non-insurance
optional additional product and retail premium finance), which may
affect the manufacturer’s intended value of the insurance product; and
Page 41 of 79
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…
4.3.11
A
4.3.11
B
R
G
(3)
confirmation that the distribution arrangements are consistent with the
obligations of the firm under the FCA Handbook including in particular
in SYSC 10 and SYSC 19F.2.
(1)
For a non-investment insurance product, a distributor must take
appropriate remedial and mitigating action, including to amend its
product distribution arrangements, where it identifies:
(a)
the insurance product (or, where relevant, the package) is not
providing fair value for customers; or
(b)
any aspects of a product or package that may mean it does not
offer fair value; or
(c)
the distribution arrangements including remuneration structures
may mean the customer is not being provided with fair value.
(2)
The actions which the distributor takes for (1) must:
(a)
aim to mitigate the situation and prevent further occurrences of
any possible harm to customers, including, where appropriate,
amending the distribution strategy for that product (and, where
relevant, the package); and
(b)
include informing any relevant manufacturers promptly about any
concerns they have and any action the distributor is taking.
For the purposes of PROD 4.3.11AR the steps a distributor may need to take
include (but are not limited to):
(1)
amending its remuneration structures;
(2)
amending the distribution arrangements;
(3)
improving the quality of, or ceasing, any service or benefits it provides;
(4)
where the failure to provide fair value is due to the costs or quality of
additional products, renegotiating the terms of the current arrangements
relating to the additional products, or selecting alternative providers or
distributors of them, in order to provide for a fair outcome;
(5)
ceasing to distribute certain insurance products (or where relevant,
packages), or ceasing to use certain distribution channels;
(6)
contacting existing customers to inform them of the issues and of the
measures being taken to rectify them; and
(7)
providing redress to customers.
Page 42 of 79
4.6
FCA 2021/XX
…
Insert the following new section PROD 4.6 (Application of PROD 4.2 and 4.3 for RPPD non-
investment insurance products) after PROD 4.5 (Additional expectations for manufacturers
and distributors in relation to value measures data). The text is not underlined.
Application of PROD 4.2 and 4.3 for RPPD non-investment insurance products
Application
4.6.1
R
(1)
PROD 4.6 applies to the following firms in relation to an RPPD non-
investment insurance product:
(a)
the manufacturer of the RPPD non-investment insurance
product, which includes:
(i)
an intermediary which has a decision-making role (in
whole or in part) in relation to the manufacture of the
RPPD non-investment insurance product;
(ii)
an insurer that is responsible for the manufacture of the
product including whoever currently underwrites the
RPPD non-investment insurance product; and
(b)
a firm that distributes (including the renewal of an existing
policy) the RPPD non-investment insurance product.
4.6.2
R
For a product falling within limb (2)(b) of an RPPD non-investment
insurance product any reference to distribution or renewal is to be treated as
including the ongoing collection of premiums in relation to a policy that
remains in force.
Purpose
4.6.3
G
The purpose of this section is to set out the product governance distribution
arrangements for, and how PROD 4 applies to, RPPD non-investment
insurance products.
Manufacturers of RPPD non-investment insurance products
4.6.4
R
A manufacturer of an RPPD non-investment insurance product must apply
the product approval process in PROD 4.2 to that insurance product
including:
(1)
general (PROD 4.2.5UK to PROD 4.2.14R);
(2)
fair value assessment (PROD 4.2.14AR to PROD 4.2.14OR);
(3)
target market requirements (PROD 4.2.15R to PROD 4.2.21G);
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(4)
product testing (PROD 4.2.22UK to PROD 4.2.26G);
(5)
distribution channels and information disclosure to distributors
requirements (PROD 4.2.27UK to PROD 4.2.32.R); and
(6)
monitoring and review of insurance products (PROD 4.2.33R to PROD
4.2.39UK).
4.6.5
G
(1)
Firms should take into account all relevant factors, including those in
PROD 4.2.3G and PROD 4.2.3AG, when identifying the necessary
product approval process and arrangements including, in particular:
(a)
previous product governance arrangements including reviews
which the firm (or another person) has undertaken and the extent
to which these would or would not have complied with PROD
requirements; and
(b)
the potential level of harm which could result from the product
in question.
(2)
Firms should ensure the product approval process has the necessary
measures to identify whether the insurance product is, or remains,
appropriate to be marketed or distributed to customers.
4.6.6
R
(1)
A firm must determine whether the RPPD non-investment insurance
product should continue to be marketed and distributed (including
renewals for existing customers).
(2)
Where a firm does not approve the continued marketing and
distribution of the product, including where the firm has been unable to
identify that the product or package provides fair value for the
purposes of PROD 4.2.14AR or 4.2.14BR, it must immediately:
(a)
cease marketing or distributing the product or package (whether
directly or indirectly), including any renewal for an existing
customer; and/or
(b)
make such changes as are necessary for the product or package
to provide fair value.
Distributors of RPPD non-investment insurance products
4.6.7
R
A firm which distributes, or will distribute, an RPPD non-investment
insurance product must meet the requirements in PROD 4.3 in relation to that
insurance product.
4.6.8
R
A firm that distributes an RPPD non-investment insurance product must put
in place the necessary product distribution arrangements, including for:
(1)
obtaining any necessary information from the manufacturer;
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(2)
providing any necessary or relevant information to the manufacturer;
(3)
understanding the product, identified target market and value
assessment;
(4)
ensuring adequate oversight, including the ability to obtain necessary
or relevant information, of any other persons involved in the
distribution with whom the distributor has a direct relationship; and
(5)
the regular review of the product distribution arrangements including
to take appropriate action in order to avert the risk of consumer
detriment.
Amend the following as shown. New text is underlined.
TP 1
Transitional Provisions
(1)
(2) Material to
which the
transitional
provision applies
(3)
(4) Transitional provision
(5)
Transitional
provision:
dates in force
(6)
Handbook
provision:
coming
into force
1.1
…
1.2
Rules in PROD 4.2
that will be made
or amended by the
Non-Investment
Insurance: Product
Governance,
Premium Finance,
General Insurance
Auto-renewal and
Home and Motor
Insurance Pricing
Instrument 2021]
R
Where an existing non-
investment insurance
product:
(1)
has, before [in force
date of the instrument
in column (2)], been
approved for
marketing and
distribution in
compliance with
PROD 4.2; and
(2)
remains available for
distribution (including
renewals) or, if not
still being marketed or
distributed, there are
policies under the
product that remain in
force,
From [in
force date of
the
instrument in
column (2)]
up to and
including [12
months after
this date]
[in force
date of
instrument]
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the manufacturer must,
within 12 months of [the in
force date of the instrument
in column (2)], review the
product and ensure it meets
the fair value requirements
in PROD 4.2.
1.3
G
The effect of PROD TP 1.2
and the requirements in
PROD 4.2.14AR to PROD
4.2.14OR is that where the
firm is unable to identify
that the product or package
provides fair value it will
need to immediately:
(1)
cease any distribution
of the product,
whether directly or
through another
person, immediately;
and/or
(2)
take any necessary
steps to ensure the
product will provide
fair value in future.
1.4
Rules in PROD 4.3
that will be made
or amended by the
Non-Investment
Insurance: Product
Governance,
Premium Finance,
General Insurance
Auto-renewal and
Home and Motor
Insurance Pricing
Instrument 2021
R
Where a firm, to which
PROD 4.3, distributes an
existing non-investment
insurance product which
was approved for marketing
or distribution [before in
force date of the instrument
in column (2)] under PROD
4.2, it must, within 12
months of [the in force date
of the instrument in column
(2)], update its distribution
arrangements to comply
with the requirements in
column (2).
From [in
force date of
the
instrument in
column (2)]
up to and
including [12
months after
that date]
[in force
date of
instrument]
1.5
PROD 4.6.6R
R
A firm has 12 months from
[the in force date of the
instrument in column (2)] to
make the determination
From [in
force date of
the
instrument in
column (2)]
[in force
date of
instrument]
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required by the rule in
column (2).
up to and
including [12
months after
that date end
date]
1.6
PROD 4.6.7R and
PROD 4.6.8R
R
A firm must put in the place
the necessary product
distribution arrangements
required by the rules in
column (2) within 12
months of [the in force date
of the instrument in column
(2)].
From [in
force date of
the
instrument in
column (2)]
up to and
including [12
months after
that date end
date]
[in force
date of the
instrument]
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Annex E
Amendments to the Supervision Manual (SUP)
In this Annex, underlining indicates new text and striking through indicates deleted text,
unless otherwise stated.
16
Reporting requirements
16.1
Application
…
16.1.3
R
Application of different sections of SUP 16 (excluding SUP 16.13, SUP
16.15, SUP 16.16, SUP 16.17, SUP 16.22 and SUP 16.26)
(1) Sections (s)
(2) Categories of firm to
which section applies
(3) Applicable rules
and guidance
…
SUP 16.27
…
SUP 16.28
A firm which, in respect
of general insurance
contracts, is:
Entire section
…
(1)
an insurer;
(2)
a managing agent;
(3)
an insurance
intermediary;
(4)
a TP firm; or
(5)
a Gibraltar-based
firm that is not a
TP firm.
to the extent that the firm
and its business falls
within the scope of SUP
16.28.8R.
…
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16.2
Purpose
16.2.1
G
…
(4)
The purpose of SUP 16.28 is to provide the FCA with relevant data
that it can use to assess firms’ compliance with the home insurance
and motor insurance pricing rules in ICOBS 6B.
…
16.3
General provisions on reporting
…
Structure of the chapter
16.3.2
G
This chapter has been split into the following sections, covering:
(1)
…
…
(21)
Directory persons information reporting (SUP 16.26); and
(22)
value measures data reporting (SUP 16.27).; and
(23)
Home insurance and motor insurance pricing reporting (SUP 16.28).
…
Insert the following new section SUP 16.28 (Home insurance and motor insurance pricing
reporting) after SUP 16.27 (General insurance value measures reporting). The text is not
underlined.
16.28
Home insurance and motor insurance pricing reporting
Application
Who?
16.28.1
R
The effect of SUP 16.1.1R is that this section applies to every firm of a type
listed in column 1 of the table in SUP 16.28.8R.
What?
16.28.2
R
This section applies to a firm which has carried on the business described in
column 2 of the table in SUP 16.28.8R in relation to any of the following
types of general insurance contracts:
(1)
home insurance, or
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(2)
motor insurance.
16.28.3
R
This section does not apply in relation to the following types of products:
(1)
policies entered into by a commercial customer, or
(2)
group policies.
Purpose
16.28.4
G
The purpose of this section is to require firms to submit information on their
home insurance and motor insurance contracts and any additional products
in a standard format to the FCA. This information will assist the FCA in
monitoring firms’ compliance with ICOBS 6B.
Definitions
16.28.5
R
In this section and SUP 16 Annex 49AR and SUP 16 Annex 49BG:
“buildings only” means
Home insurance cover for the
structure of (but not the contents of)
domestic properties, including any
core related liability cover.
“contents only” means
Home insurance cover for the
contents of (but not the structure of)
domestic properties, including any
core related liability cover.
“buildings and contents” means
Home insurance cover for both the
structure and contents of domestic
properties, including any core related
liability cover.
“expected claims cost” means
The expected risk cost when
calculating the policy’s premium.
“expected claims ratio” means
The expected claims cost as a
percentage of the gross written price.
“core product” means
The home insurance or motor
insurance policy, excluding any
additional products.
“high premium” means
A premium that is a factor of 1.5x to
2x higher than the average premium
paid by a customer for the product in
the reporting category.
“price-setting intermediary” means
An insurance intermediary whose
role includes setting the gross price
Page 50 of 79
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paid by the customer for the core
product or setting the gross price of
any element of that premium, or
setting the price of any additional
products.
“reporting period” means
the 12-month period beginning on 1
January and ending on 31 December.
“very high premium” means
A premium that is more than 2x
higher than the average premium
paid by a customer for the product in
the reporting category.
Requirement to submit a pricing information report
16.28.6
R
Where a firm of a type set out in column 1 of the table in SUP 16.28.8R has
carried on the business in column 2 of the same row in relation to home
insurance or motor insurance products, it must:
(1)
submit to the FCA a report containing the specified information in
relation to their home insurance and motor insurance products and
related additional products; and
(2)
submit the report in accordance with SUP 16.28.9R to SUP
16.28.16R.
16.28.7
R
A TP firm or a Gibraltar-based firm which is of a type set out in column 1 of
the table in SUP 16.28.8R (or which is treated as if it is) and has carried on
the business in column 2 of the same row in relation to home insurance or
motor insurance products in the UK must:
(1)
submit to the FCA a report containing the specified information in
relation to their UK home insurance and motor insurance products
and related additional products; and
(2)
submit the report in accordance with SUP 16.28.9R to SUP
16.28.16R.
16.28.8
R
This is the table referred to in SUP 16.28.6R and 16.28.7R
(1) Type of firm
(2) Nature of business
An insurer
Contracts of insurance effected by
the insurer.
A non-price setting insurance
intermediary
Contracts of insurance in relation to
which:
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FCA 2021/XX
(a)
the insurance intermediary
carried on or was responsible
for insurance distribution
activities; but
(b)
the firm was not acting as a
price-setting intermediary.
A price-setting insurance
intermediary
Contracts of insurance in relation to
which:
(a)
the price-setting intermediary
carried on or was responsible
for insurance distribution
activities; and
(b)
the firm was acting as a price-
setting intermediary.
A managing agent
Contracts of insurance written at
Lloyd’s which were effected by the
managing agent.
16.28.9
R
Firms must comply with the following in relation to the table in SUP
16.28.8R.
(1)
Where different insurers underwrite different elements of the cover
that forms part of the same policy, then the insurer underwriting the
largest proportion of the cover (and in the event of any doubt, the first
part of the cover recorded in the policy) must report the pricing
information for all elements of the cover (including any additional
products associated with the policy).
(2)
References to manufacturing are to manufacturing in whole or in part.
Where there is more than one firm referred to in column 1 that
manufactures a contract of insurance, then only one must report the
pricing information and each firm must agree in writing with the
others which firm is responsible.
Content of the report and pricing information
16.28.10
R
A pricing information report must contain pricing information set out in SUP
16.28.11R and SUP 16.28.12R as follows:
(1)
the information must be completed in respect of each firm’s home
insurance and motor insurance business;
Page 52 of 79
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(2)
the information must be provided on an aggregated basis for each of
the following product types in a firm’s motor insurance business,
excluding the books to be separately disclosed in (6) below;
(a)
car, including motorhomes; and
(b)
motorcyles, including tricycles;
(3)
the information must be provided on an aggregated basis for each of
the following product types in a firm’s home insurance business,
excluding the books to be separately disclosed in (6) below:
(a)
buildings only;
(b)
contents only; and
(c)
buildings and contents;
(4)
the aggregated information for each of the categories set out in (2)
and (3) must be split out into products sold via the following types of
channel:
(a)
direct (aggregated across all methods of direct sales);
(b)
price comparison websites;
(c)
intermediated; and
(d)
affinity/partnership schemes;
(5)
the pricing information for each type of channel must be split into
categories representing the tenure of the customers (broken down by
the year of tenure) in that type of channel;
(6)
price-setting intermediaries must further split the required information
for each channel and tenure combination into gross price and net
rated price.
(7)
pricing information must be provided separately, split into the type of
home insurance product or motor insurance product (where relevant)
and into categories representing the tenure of customers (broken
down by year of tenure) but not by type of channel, for each book of
business that is:
(a)
a large book of business; or
(b)
a closed book (where not already included in (7)(a) above);
(8)
pricing information for additional products must be provided on an
aggregated basis for each of the following:
(a)
retail premium finance; and
Page 53 of 79
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(b)
additional products which are general insurance products;
(9)
pricing information for fees and charges that are not part of the
premium for the core product must be provided on an aggregated
basis for each of the following:
(a)
pre-contractual fees and changes; and
(b)
post-contractual fees and charges;
(10)
the pricing information in (8) and (9) must be split into categories
representing the tenure of the customers (broken down by the year of
tenure).
16.28.11
R
The pricing information for the core product (for each aggregated category or
separately reported book) is:
(1)
total gross written premium;
(2)
total net written premium;
(3)
total earned premium;
(4)
average gross written premium;
(5)
average net written premium;
(6)
average earned premium;
(7)
average net rated price (intermediated sales only);
(8)
average gross price (intermediated sales only);
(9)
number of policies in force at the reporting date;
(10)
total number of policies sold or renewed;
(11)
expected claims ratio;
(12)
expected claims cost;
(13)
gross incurred claims ratio;
(14)
developed gross incurred claims ratio for the current reporting
period;
(15)
developed gross incurred claims ratio for the reporting period 1 year
prior to the current reporting period;
(16)
developed gross incurred claims ratio for the reporting period 2 years
prior to the current reporting period;
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(17)
total prior year’s reserve release;
(18)
total prior year’s reserve strengthening;
(19)
proportion of customers where the expected claims ratio is 10
percentage points lower than the average expected claims ratio;
(20)
proportion of customers where the expected claims ratio is 30
percentage points lower than average expected claims ratio;
(21)
proportion of customers paying high premiums; and
(22)
proportion of customers paying very high premiums.
16.28.12
R
The pricing information for additional products (including retail premium
finance) and pre- and post-contractual fees and charges that are not part of
the premium for the core product is:
(1)
total charged for retail premium finance;
(2)
number of customers with retail premium finance;
(3)
APR range;
(4)
total gross written premiums for additional products which are
general insurance products sold in connection with, or alongside, the
core product;
(5)
number of additional products sold which are general insurance
products;
(6)
total pre-contractual fees/charges paid by all customers;
(7)
average pre-contractual fees/charges per customer;
(8)
total post-contractual fees/charges paid by all customers; and
(9)
average post-contractual fees/charges per customer.
Annual submission date and reporting period
16.28.13
R
The pricing information report must be submitted annually on or before 31
March and contain information in relation to the reporting period which
begins on 1 January and ends on 31 December of the immediately preceding
calendar year.
Format and method of submission and format
16.28.14
R
A pricing information report must be completed using the form and format
set out in SUP 16 Annex 49AR, using the notes for completion in SUP 16
Annex 49BG.
Page 55 of 79
16
FCA 2021/XX
16.28.15
R
The report must be submitted online through the appropriate systems
accessible from the FCA’s website.
16.28.16
R
A pricing information report will not be considered as submitted to the FCA
unless all the mandatory reporting fields set out in SUP 16 Annex 49AR have
been completed correctly and the report has been accepted by the relevant
FCA reporting system.
16.28.17
G
If the FCA’s information technology systems fail and online submission is
unavailable for 24 hours or more, the FCA will endeavour to publish a notice
on its website confirming that online submission is unavailable and that the
alternative methods of submission set out in SUP 16.3.9R (Method of
submission of reports (see SUP 16.3.8R)) should be used.
Insert the following new annexes SUP 16 Annex 49AR (Pricing information report form) and
16 Annex 49BG (Notes on completing the pricing information report form) after SUP 16
Annex 48BG (Notes on completing the value measures report form). The text is not
underlined.
Pricing information report form [(REP XXXX)]
Annex
49AR
…
Page 56 of 79
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Pricing information report form REPXXX
FCA Handbook reference: SUP 16 Annex 49AR
Notes for completing the form are available in: SUP 16 Annex 49BG
Financial Conduct Authority
12 Endeavour Square
Stratford London E20 1JN
United Kingdom
Telephone +44 (0) 845 606 9966
E-mail fi[email protected]
Website http://www.fca.org.uk
Name of firm
(As entered in 1.05)
All firms should complete Sections 1 and 6. In addition:
• insurers should complete Sections 2, 3 and 4
• price-setting intermediaries should complete Section 5
Page 57 of 79
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Contact details Section 1
All firms should complete this section
1.01
Title
1.02
First name
1.03
Last name
1.04
Job title
1.05
Firm name
1.06
Firm Reference Number (FRN)
1.07
Business address
1.08
Postcode
1.09
Office phone number
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1.10
Email address
Page 59 of 79
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Pricing information – core product by channel Section 2
Only complete this Section if your firm is an insurer
2.01
Product
Dropdown list:
• Motor - cars including motor homes
• Motor - motorcycles including tricycles
• Home - buildings and contents
• Home - buildings only
• Home - contents only
Tenure
Direct channel
T0
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10+
2.02
Total gross written premium (£)
2.03
Average gross written premium (£)
2.04
Total number of policies sold/renewed
2.05
Total number of policies in force at reporting date
2.06
Expected claims cost (£)
2.07
Expected claims ratio (%)
2.08
Proportion of customers where the expected claims ratio is 10
percentage points lower than the average expected claims ratio (%)
2.09
Proportion of customers where the expected claims ratio is 30
percentage points lower than the average expected claims ratio (%)
2.10
Proportion of customers paying a high premium (%)
2.11
Proportion of customers paying a very high premium (%)
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Tenure
Intermediated channel (net rated)
T0
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10+
2.12
Total gross written premium (£)
2.13
Total net rated written premium (£)
2.14
Average gross price (£)
2.15
Average net rated price (£)
2.16
Total number of policies sold/renewed
2.17
Total number of policies in force at reporting date
2.18
Expected claims cost (£)
2.19
Expected claims ratio (%)
2.20
Proportion of customers where the expected claims ratio is 10
percentage points lower than the average expected claims ratio (%)
2.21
Proportion of customers where the expected claims ratio is 30
percentage points lower than the average expected claims ratio (%)
2.22
Proportion of customers paying a high premium (%)
2.23
Proportion of customers paying a very high premium (%)
Intermediated channel (gross rated)
2.24
Total gross written premium (£)
2.25
Average gross price (£)
2.26
Total number of policies sold/renewed
2.27
Total number of policies in force at reporting date
2.28
Expected claims cost (£)
2.29
Expected claims ratio (%)
2.30
Proportion of customers where the expected claims ratio is 10
percentage points lower than the average expected claims ratio (%)
2.31
Proportion of customers where the expected claims ratio is 30
percentage points lower than the average expected claims ratio (%)
2.32
Proportion of customers paying a high premium (%)
2.33
Proportion of customers paying a very high premium (%)
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Tenure
Price comparison website channel
T0
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10+
2.34
Total gross written premium (£)
2.35
Average gross written premium (£)
2.36
Total number of policies sold/renewed
2.37
Total number of policies in force at reporting date
2.38
Expected claims cost (£)
2.39
Expected claims ratio (%)
2.40
Proportion of customers where the expected claims ratio is 10
percentage points lower than the average expected claims ratio (%)
2.41
Proportion of customers where the expected claims ratio is 30
percentage points lower than the average expected claims ratio (%)
2.42
Proportion of customers paying a high premium (%)
2.43
Proportion of customers paying a very high premium (%)
Affinity/ Partnerships channel (net rated)
2.44
Total gross written premium (£)
2.45
Total net rated written premium (£)
2.46
Average gross price (£)
2.47
Average net rated price (£)
2.48
Total number of policies sold/renewed
2.49
Total number of policies in force at reporting date
2.50
Expected claims cost (£)
2.51
Expected claims ratio (%)
2.52
Proportion of customers where the expected claims ratio is 10
percentage points lower than the average expected claims ratio (%)
2.53
Proportion of customers where the expected claims ratio is 30
percentage points lower than the average expected claims ratio (%)
2.54
Proportion of customers paying a high premium (%)
2.55
Proportion of customers paying a very high premium (%)
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FCA 2021/XX
Tenure
Affinity/ Partnerships channel (gross rated)
T0
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10+
2.56
Total gross written premium (£)
2.57
Average gross written premium (£)
2.58
Total number of policies sold/renewed
2.59
Total number of policies in force at reporting date
2.60
Expected claims cost (£)
2.61
Expected claims ratio (%)
2.62
Proportion of customers where the expected claims ratio is 10
percentage points lower than the average expected claims ratio (%)
2.63
Proportion of customers where the expected claims ratio is 30
percentage points lower than the average expected claims ratio (%)
2.64
Proportion of customers paying a high premium (%)
2.65
Proportion of customers paying a very high premium (%)
Total (aggregated for all channels)
2.66
Total gross written premium (£)
2.67
Average gross written premium (£)
2.68
Total earned premium (£)
2.69
Average earned premium (£)
2.70
Total number of policies sold/renewed
2.71
Total number of policies in force at reporting date
2.72
Expected claims cost (£)
2.73
Expected claims ratio (%)
2.74
Gross incurred claims ratio for the current reporting period (with
IBNR/IBNER) (%)
2.75
Developed gross incurred claims ratio for the previous reporting
period (%)
2.76
Developed gross incurred claims ratio for the reporting period 2
years ago (%)
2.77
Developed gross incurred claims ratio for the reporting period 3
years ago (%)
2.78
Total prior year’s reserve releases (£)
2.79
Total prior year’s reserve strengthening (£)
2.80
Proportion of customers where the expected claims ratio is 10
percentage points lower than the average expected claims ratio (%)
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FCA 2021/XX
2.81
Proportion of customers where the expected claims ratio is 30
percentage points lower than the average expected claims ratio (%)
2.82
Proportion of customers paying a high premium (%)
2.83
Proportion of customers paying a very high premium (%)
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Pricing information for large books of business with 100,000 or more policies Section 3
Sub-set of total in Section 2
Only complete this Section if your firm is an insurer
3.01
Description of book
Tenure
Book A – complete this Section for each large book
T0
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10+
3.02
Total gross written premium (£)
3.03
Total number of policies sold/renewed
3.04
Total number of policies in force at reporting date
3.05
Expected claims cost (£)
3.06
Expected claims ratio (%)
3.07
Proportion of customers where the expected claims ratio is 10
percentage points lower than the average expected claims ratio (%)
3.08
Proportion of customers where the expected claims ratio is 30
percentage points lower than the average expected claims ratio (%)
3.09
Proportion of customers paying a high premium (%)
3.10
Proportion of customers paying a very high premium (%)
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Pricing information for closed books of business Section 4
Sub-set of total in Section 2
Only complete this Section if your firm is an insurer
4.01
Description of book
Tenure
Book A – complete this Section for each closed book
T0
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10+
4.02
Total gross written premium (£)
4.03
Total number of policies sold/renewed
4.04
Total number of policies in force at reporting date
4.05
Expected claims cost (£)
4.06
Expected claims ratio (%)
4.07
Proportion of customers where the expected claims ratio is 10
percentage points lower than the average expected claims ratio (%)
4.08
Proportion of customers where the expected claims ratio is 30
percentage points lower than the average expected claims ratio (%)
4.09
Proportion of customers paying a high premium (%)
4.10
Proportion of customers paying a very high premium (%)
Page 66 of 79
FCA 2021/XX
Pricing information – core product by channel Section 5
Only complete this Section if your firm is a price-setting intermediary
5.01
Product
Dropdown list:
• Motor - cars including motor homes
• Motor - motorcycles including tricycles
• Home - buildings and contents
• Home - buildings only
• Home - contents only
Tenure
Direct channel (net rated)
T0
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10+
5.02
Total gross written premium (£)
5.03
Total net rated written premium (£)
5.04
Average gross price (£)
5.05
Average net rated price (£)
5.06
Total number of policies sold/renewed
5.07
Total number of policies in force at reporting date
5.08
Proportion of customers paying a high premium (%)
5.09
Proportion of customers paying a very high premium (%)
Direct channel (gross rated)
5.10
Total gross written premium (£)
5.11
Average gross price (£)
5.12
Total number of policies sold/renewed
5.13
Total number of policies in force at reporting date
5.14
Proportion of customers paying a high premium (%)
5.15
Proportion of customers paying a very high premium (%)
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Tenure
Intermediated channel (net rated)
T0
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10+
5.16
Total gross written premium (£)
5.17
Total net rated written premium (£)
5.18
Average gross price (£)
5.19
Average net rated price (£)
5.20
Total number of policies sold/renewed
5.21
Total number of policies in force at reporting date
5.22
Proportion of customers paying a high premium (%)
5.23
Proportion of customers paying a very high premium (%)
Intermediated channel (gross rated)
5.24
Total gross written premium (£)
5.25
Average gross price (£)
5.26
Total number of policies sold/renewed
5.27
Total number of policies in force at reporting date
5.28
Proportion of customers paying a high premium (%)
5.29
Proportion of customers paying a very high premium (%)
Price comparison website channel (net rated)
5.30
Total gross written premium (£)
5.31
Total net rated written premium (£)
5.32
Average gross price (£)
5.33
Average net rated price (£)
5.34
Total number of policies sold/renewed
5.35
Total number of policies in force at reporting date
5.36
Proportion of customers paying a high premium (%)
5.37
Proportion of customers paying a very high premium (%)
Price comparison website channel (gross rated)
5.38
Total gross written premium (£)
5.39
Average gross price (£)
5.40
Total number of policies sold/renewed
5.41
Total number of policies in force at reporting date
5.42
Proportion of customers paying a high premium (%)
5.43
Proportion of customers paying a very high premium (%)
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Tenure
Affinity/ Partnerships channel (net rated)
T0
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10+
5.44
Total gross written premium (£)
5.45
Total net rated price written premium (£)
5.46
Average gross price (£)
5.47
Average net rated price (£)
5.48
Total number of policies sold/renewed
5.49
Total number of policies in force at reporting date
5.50
Proportion of customers paying a high premium (%)
5.51
Proportion of customers paying a very high premium (%)
Affinity/ Partnerships channel (gross rated)
5.52
Total gross written premium (£)
5.53
Average gross price (£)
5.54
Total number of policies sold/renewed
5.55
Total number of policies in force at reporting date
5.56
Proportion of customers paying a high premium (%)
5.57
Proportion of customers paying a very high premium (%)
Total (net rated) (aggregated for all channels)
5.58
Total gross written premium (£)
5.59
Total net rated written premium (£)
5.60
Average gross price (£)
5.61
Average net rated price (£)
5.62
Total number of policies sold/renewed
5.63
Total number of policies in force at reporting date
5.64
Proportion of customers paying a high premium (%)
5.65
Proportion of customers paying a very high premium (%)
Total (gross rated) (aggregated for all channels)
5.66
Total gross written premium (£)
5.67
Average gross price (£)
5.68
Total number of policies sold/renewed
5.69
Total number of policies in force at reporting date
5.70
Proportion of customers paying a high premium (%)
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5.71
Proportion of customers paying a very high premium (%)
Page 70 of 79
FCA 2021/XX
Premium finance, add-ons and fees and charges Section 6
All firms should complete this section
Tenure
Premium finance
T0
T1
T2
T3
T4
T5
T6
T7
T8
T9
T10+
6.01
Total charged (£) for retail premium finance in the current reporting
period
6.02
Number of policies with retail premium finance in the current
reporting period
6.03
Number of policies in the current reporting period with an APR
between:
0% to 9.9%
10% to 19.9%
20% to 29.9%
30% to 39.9%
40% to 49.9%
50% or more
Add-ons
6.04
Total gross written premiums (£) for optional and mandatory
additional products in the current reporting period
6.05
Number of optional and mandatory additional products sold in the
current reporting period
Fees and charges in addition to the premium
6.06
Total pre-contractual fees/charges (£) paid by all customers in the
current reporting period
6.07
Average pre-contractual fees/charges (£) per customer in the current
reporting period
6.08
Total post-contractual fees/charges (£) paid by all customers in the
current reporting period
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6.09
FCA 2021/XX
Average post-contractual fees/charges (£) per customer in the
current reporting period
Page 72 of 79
16
FCA 2021/XX
Annex
49BG
Notes on completing the pricing information report form [(REP XXXX)]
This annex contains guidance on completing the pricing information report form
[(REP XXXX)]
General notes
(1)
All firms should complete Sections 1 and 6. In addition, insurers and
managing agents should complete Sections 2, 3 and 4, and price setting
intermediaries should complete Section 5.
(2)
All monetary figures should be rounded to the nearest pound.
(3)
Unless otherwise stated, monetary figures should be calculated and reported
excluding insurance premium tax.
(4)
Firms should report information separately for large books of business and
for closed books. All remaining information should be aggregated as set out
in notes (6) and (7) below.
(5)
Firms should name large books of business and closed books and provide
information for them split by:
(a)
product group e.g. motor insurance, home insurance: buildings only,
contents only, buildings and contents; and
(b)
customer tenure. For example, for each of new business customers,
customers with a 1-year relationship with the firm, customers with a
2-year relationship etc.
(6)
Firms should provide their remaining aggregated information on the core
product split by:
(a)
product group e.g. motor insurance, home insurance: buildings only,
contents only, buildings and contents;
(b)
type of channel e.g. all products sold direct, via price comparison
websites, via intermediaries or via affinity/partnership schemes; and
(c)
customer tenure. For example, for each of new business customers,
customers with a 1-year relationship with the firm, customers with a
2-year relationship etc.
(7)
Firms should provide their remaining aggregated information on additional
products and fees and charges split by customer tenure. For example, for
Page 73 of 79
FCA 2021/XX
each of new business customers, customers with a 1-year relationship with
the firm, customers with a 2-year relationship etc.
Data
Notes
Tenure
The number of years a customer has held the policy.
For example:
T0 = new business customer;
T1 = customers who held their policy for 1 year;
T10+ = customers who have held their policy for 10 years or
more.
Firms should round down to the last full year the customer has
held a policy with them in cases where customers have contracts
that renew on shorter than annual basis. For example, a firm
should classify a customer on a six-monthly contract who has
renewed the policy once as T0 (new business customer) and a
customer who has renewed this policy 3 times as T1 (customers
who have held their policy for 1 year).
Firms should report data for each tenure individually from T0 to
T9 inclusive. Data for any tenure that is T10 or greater should be
aggregated and reported as T10+.
Large books of business
Firms should report information separately for their large books
of business. A large book of business is a book with 100,000 or
more live policies in a reporting period.
A book of business can be interpreted in several ways by firms
depending on their business model but is usually composed of a
group of policies with a common defining characteristic.
For example, a book of business may be defined by affinity
partner, brand, target market (e.g. high net worth, high
performance vehicle, core market), niche MGA derived, etc.
Closed books
Firms should name each closed book and report information
separately for each closed book.
Total earned premium
The total premium earned in the reporting period.
Average earned
premium
The total premium earned in the reporting period divided by the
number of policies in force in the reporting period.
Total gross written
premium
The total amount of gross written premium, (excluding insurance
premium tax) in relation to policies sold during the reporting
period.
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Data
Notes
Average gross written
premium
The total amount of gross written premium, (excluding insurance
premium tax) in relation to policies sold during the reporting
period divided by the number of policies per relevant reporting
period.
Total net rated written
premium
For intermediated sales only, firms should report the total net
rated price set by the insurer in relation to policies sold during
the reporting period.
Average net rated price
For intermediated sales only, firms should report the total net
rated price set by the insurer in relation to policies sold during
the reporting period divided by the number of policies per
relevant reporting period.
Average gross price
For intermediated sales only, firms should report the gross price
in relation to policies sold during the reporting period divided by
the number of policies per relevant reporting period.
Total number of
policies sold/renewed
The total number of policies sold for new business (tenure 0) and
the total number of policies renewed (all other tenures).
Total number of
policies in force
The total number of policies in force during the relevant
reporting period.
Proportion of customers
where the expected
claims ratio is 10
percentage points lower
than the average
expected claims ratio
Expressed as a percentage, the proportion of customers with
expected claims ratio 10 percentage points below average.
For example, if expected claims ratio in tenure T1 is 50%:
A.
calculate the number of customers with expected claims
ratio below 40% and;
B.
divide (A) by the total number of customers in tenure T1.
Proportion of customers
where the expected
claims ratio is 30
percentage points lower
Expressed as a percentage, the proportion of customers with
expected claims ratio 30 percentage points below average.
For example, if expected claims ratio in tenure T1 is 50%:
than the average
expected claims ratio
A.
calculate the number of customers with expected claims
ratio below 20% and;
B.
divide (A) by the total number of customers in tenure T1.
Gross incurred claims
ratio (with
IBNR/IBNER)
Actual claims incurred ratio. This data is only to be reported for
total aggregated figures.
IBNR is claims incurred but not reported.
IBNER is claims incurred but not enough reported.
Page 75 of 79
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Data
Notes
Developed incurred
claims ratio (with
IBNR/IBNER)
Actual adjusted (ultimate) claims ratio for:
• the previous reporting period
• the reporting period 2 years ago
• the reporting period 3 years ago
Total prior years’
reserve release
Firms should report any reserve releases in the reporting period
that relate to surplus reserves for prior years.
Total prior years’
reserve strengthening
Firms should report any reserve strengthening in the reporting
period that relate to shortfalls in reserves for prior years.
Proportion of customers
paying high premium
Expressed as a percentage, the proportion of customers with
premiums more than 1.5 times – 2 times the average premium.
For example, if the average premium in tenure T1 is £50:
A.
calculate all customers in tenure T1 who have premiums
between above £75 and £100 respectively (A) and;
B.
divide (A) by the total number of customers in tenure T1.
Proportion of customers
paying very high
premium
Expressed as a percentage, the proportion of customers with
premiums more than 2 times the average premium.
For example, if the average premium in tenure T1 is £50:
A.
calculate all customers in tenure T1 who have premiums
more than £100 (rounded) and;
B.
divide (A) by the total number of customers in tenure T1.
Retail premium finance
– total charged
Total charged to customers for retail premium finance.
Retail premium finance
– number of policies
with retail premium
finance
Total number of policies with retail premium finance.
APR range
The number of policies where the related retail premium finance
sold falls within each the following specific APR ranges:
• 0% - 9.9%
• 10% - 19.9%
• 20% - 29.9%
• 30% - 39.9%
• 40% - 49.9%
• 50% or more
Page 76 of 79
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Data
Notes
Where APR falls within a range boundary, e.g. 9.95%, firms
should round down. For example, an APR of 9.95% should be
reported in the 0% - 9.9% APR range.
Premiums from
additional products
which are general
insurance products -
gross written premiums
(sold in connection or
alongside the core
product)
Total gross price from additional products which are general
insurance products.
Number of additional
products which are
general insurance
products sold
Total number of additional products sold which are general
insurance products.
Pre-contractual fees and
charges
Total and average (mean) pre-contractual fees/charges charged
on the core policy (net of value added tax).
Post-contractual fees
and charges
Total and average (mean) of any post-contractual fees/charges on
the core policy (net of value added tax).
Amend the following as shown. New text is underlined.
…
TP1 Transitional provisions
TP1.1 Transitional provisions applying to the Supervision manual only
…
TP 1.2
(1)
(2)
Material to
which the
transitional
provision
applies
(3)
(4) Transitional
provision
(5) Transitional
provision: dates in
force
(6) Handbook
provision: coming into
force
…
Page 77 of 79
FCA 2021/XX
19
…
20
SUP
16.28.6R
and SUP
16.28.7R
R
(1) This transitional
provision applies to a
firm that is required
under SUP 16.28.6R
or SUP 16.28.7R to
submit a pricing
information report to
the FCA.
(2) For the first 12
months that ICOBS 6B
is in force, a firm must
submit a pricing
information report
every 3 months, with
the first report
submitted 3 months
after the
commencement of
ICOBS 6B.
(3) The first report
submitted under
paragraph (2) must
include developed
incurred claims ratio
data for the previous
three calendar years.
For example, if a
firm’s report is due on
September 2021, the
firm would report the
developed incurred
claim ratio data for the
calendar years ending
31 December 2020,
2019 and 2018.
(4) A pricing
information report
submitted under
paragraph (2) must be
submitted through the
secure FCA mailbox
specified by the FCA
for this purpose.
From [date] to
[date]
[in force date of
instrument]
Page 78 of 79
FCA 2021/XX
(5) The first annual
pricing information
report must be
submitted on or before
the 31 March
following ICOBS 6B
having been in force
for 12 months.
For example, if ICOBS
6B comes into force
on 1 June 2021, the
first annual pricing
information report will
be due by 31 March
2023.
Page 79 of 79
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Website: www.fca.org.uk
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