On 31 October 2018, the Financial Conduct Authority (FCA) launched a package of measures to address concerns about pricing practices in the general insurance (GI) market. The measures follow the publication of the results of a thematic review (Pricing practices in the retail general insurance sector: Household insurance (TR18/4)). The FCA has also published a discussion paper on fair pricing in financial services markets (DP19/9).
Alongside the publication of TR18/4, the FCA published a ‘Dear CEO’ letter from Chief Executive, Andrew Bailey, to the heads of GI firms in respect of pricing activities and has launched a market study to review pricing in home and motor insurance (General insurance pricing practices market study (MS18/1)).
The FCA has raised concerns about insurance pricing since 2015 (including transparency about pricing at renewal). In 2017/18 the FCA committed to undertake diagnostic work on pricing practices in the GI market. In its 2018/19 Business Plan the regulator committed to concluding its work on insurance pricing practices. The FCA hopes that the measures introduced with ensure fairer prices for consumers.
Results of thematic review
In its thematic review the FCA found the following issues relating to firms’ pricing practices in respect of household insurance:
- Failure to have in place effective strategies, governance, control and oversight of pricing practices and activities with the result that firms are unable to evidence that they are in fact treating customers fairly.
- Differential pricing that leads to identifiable groups of customers paying significantly higher prices than other customers with a similar risk profile.
- Risk of discrimination against consumers through rating factors based (either directly or indirectly) on data relating to or derived from protected characteristics under the Equality Act 2010.
TR18/4 states that concerns around price differentiation have grown as firms have access to increased data about their customers, including data on behavioural characteristics. Concerns about exclusion and discrimination have recently been raised by Citizens Advice in a super-complaint as well as concerns about price differentiation raised in previous communications from the FCA.
Dear CEO letter
The letter from Andrew Bailey to the chief executives of GI firms states that the regulator views pricing as a key business activity where there is significant risk of consumer harm where firms have not put into place appropriate strategies to determine and monitor pricing activities and any impact on consumers. The letter requires firms to address any issues identified in the findings of TR18/4. All firms are expected to assess whether their pricing practices result in customer being unfairly treated.
Firms are reminded of the new requirements introduced under the Insurance Distribution Directive including that firms at all times act honestly, fairly and professionally in accordance with the best interests of their customers. The FCA will require firms to have clear lines of accountability and responsibility as required under the soon to be in place Senior Managers and Certification Regime.
The FCA has published the terms of reference for its market study on General Insurance Pricing Practices. MS18/1 will examine:
- whether pricing practices for home and motor insurance lead to consumer harm;
- who is affected; and
- what action should be taken to improve the market.
Although the study is limited to home and motor insurance only, the FCA expects to apply lessons learned where relevant to other markets.
The FCA aims to publish an interim report in summer 2019. A final report is due by the end of 2019.
Discussion paper on fair pricing in financial markets
DP18/9 opens a discussion about the fairness of certain pricing practices in financial services. The FCA is seeking stakeholder views on the regulatory approach to ensure that any actions taken are in the public interest. DP18/9 focuses on:
- Firms charging different prices to different consumer based solely on differences in price sensitivity; and
- Firms charging existing customers higher prices than new customers.
Comments on DP18/9 should be sent to the FCA by 31 January 2019.