The Financial Conduct Authority (FCA) has published a policy statement, General insurance pricing practices – amendments (PS21/11). The policy statement provides amendments and clarifications to the earlier policy statement on general insurance pricing practices, published in May (PS21/5). The FCA explains that it is publishing amendments following discussions with stakeholders on the challenges involved in implementing the policy set out in PS21/5. Alongside the new policy statement, the FCA has also published a set of ‘Q&As’ to address some of the questions it has received since publishing PS21/5.
Amendments made to rules by PS21/11
The clarifications and amendments include the following:
- The FCA pricing rules require that where a firm sets a renewal price, it must be no higher than the equivalent new business price (ENBP). The ENBP must reflect both cash and cash‑equivalent incentives that are offered to new customers. Some stakeholders have asked how this rule applies to intermediaries that offer cash-equivalent incentives on a gross price set by the insurer at renewal and to intermediaries that offer cash and cash-equivalent incentives for new business but do not set prices at renewal. The FCA is amending its rules to clarify that in both cases the intermediary would be caught by the pricing rules and required to replicate the new business discount or cash‑equivalent incentive in the ENBP.
- In PS5/21 the FCA set out different reporting requirements for net‑rated business and gross‑rated business. Stakeholders had asked the FCA to clarify the treatment of business where insurers set a gross price, but intermediaries discount their commission (commission‑rebating) to lower the price that consumers pay. The FCA has decided to amend its rules to clarify that, for reporting purposes, commission‑rebated business counts as gross‑rated business, where only the insurer is required to report data. The FCA is also introducing a requirement for intermediaries to notify the regulator where over 25% of either their home or motor sales include commission‑rebating.
- The FCA introduced a broader definition of a renewal in its rule proposals in PS5/21. This was designed to capture any situation where customers took out a policy of a similar type from the same firm as their existing contract. However, the FCA reports that some firms have told it that this broad definition could be problematic as the proposed definition would capture situations where the customer chooses to lapse their current policy and take out another policy with same insurer via a different intermediary. Not all insurers would capture these scenarios as renewals. As a result, the FCA will change the definition with the effect that where an existing customer actively buys a policy with the same firm through a different channel or distribution arrangement, then firms should treat this as new business rather than renewal business. Where firms move a customer to another channel, distribution arrangement or to a different policy (of a similar type) at the lapsing or expiry of an existing policy then the arrangement should be treated as renewal.
- The FCA has clarified the application of rules relating to a transition period for the rules on auto-renewal due to come into effect on 1 January 2022 (but subject to a transition period until 17 January 2022).
- Additional changes relate to mainly administrative matters including removing a reference in the rules to reporting margin earned, prior year premium reporting and references to product types and cross-references.
General insurance firms that are affected by the changes proposed in PS21/5 should review the updates to see how they will impact implementations plans.
When will the new rules coming into effect?
- The rules relating to systems and controls and product governance (in addition to premium finance) will come into effect on 1 October 2021.
- The rules on pricing, auto‑renewal and reporting will come into effect on 1 January 2022, with a transitional provision (of until 17 January) for the rules on pricing and auto‑renewal disclosure.
View: General insurance pricing practices – amendments (PS21/11)
View: Q and A sheet on general insurance pricing practices (published on 18 August 2021)