The Financial Conduct Authority (FCA) has published its consultation paper ‘Increasing transparency and engagement at renewal in general insurance markets’ (CP15/41). The paper sets out proposals to introduce new rules and guidance for firms on steps they should take when reviewing general insurance policies.
The paper draws on evidence from the FCA’s 2014 research project as set out in its Occasional Paper No.12: ‘Encouraging consumers to act at renewal’, also published this month. The findings set out in this paper suggest that consumers often underestimate the benefits of shopping around, overestimate the time it takes to switch provider and so do not shop around, switch or negotiate when it would be in their interests to do so. CP15/41 sets out proposals which the FCA hopes will prompt consumers to engage in the renewal decision, thereby increasing transparency and improving competition.
This consultation reflects an interesting regulatory development in which the FCA is essentially using behavioural economics to shape authorised firms’ processes around weaknesses in consumer behaviour.
The proposals put forward in CP15/41 include a new requirement for firms to disclose the previous year’s premium on renewal notices for retail general insurance policies as this was found to be the most effective way to prompt consumers to shop around. This information must be clearly shown and allow comparison with the quoted renewal premium to encourage consumers to check that their cover still meets their needs. Firms can provide other relevant information, but this must be in addition to the required disclosure and must not obscure it.
The FCA has also proposed additional disclosure for consumers who have already renewed a product four times (i.e. been with the same provider for five consecutive years). These consumers are less likely to shop around if there has only been a slight price increase on the previous year, but can end up paying significantly more than new customers. The FCA has found that a large proportion of long-standing customers are older and, as age can be an indicator of vulnerability, expects firms to think about the needs of vulnerable customers in meeting their Treat Customers Fairly obligations.
Firms are expected to demonstrate compliance with these disclosure requirements by maintaining appropriate records as required under the Systems and Controls Sourcebook (SYSC), which would include maintaining a record of premiums. The FCA has proposed guidance to make this clear to firms.
The FCA plans to publish a summary of feedback and final rules and guidance in a Policy Statement in mid-2016. These proposals have a proposed implementation date of 1 January 2017.
The deadline for comments on CP15/41 is 4 March 2016.