With the final report due within the next month or so, firms would do well to take the opportunity review how well prepared they are for further regulatory intervention in the critical area of pricing practices. We already have a clear steer from previous work done by the FCA and the industry over the past 18 months:
“This market is not working well for all
consumers. While a large number of people shop around, many loyal customers are
not getting a good deal. We believe this affects around 6 million consumers.”
FCA interim market study report October 2019
We have seen considerable effort from firms trying to follow guidance published by ABI and BIBA in May 2018 and the FCA “Dear CEO” letter following its thematic review in October 2018. However, our observation is that actions, though important, have largely been at a tactical level.
We recommend that firms consider three broader questions in relation to pricing practices:
- Business Model – how firms make money?
- Operations – how firms engage with customers?
- Culture and Ethics – how firms behave and how their governance systems ensure proper oversight?
Most firms will already have identified potential differential pricing issues with their practices and models and where any particular cohorts of customers may not have been treated fairly. In these areas it is likely that tactical solutions will have already been implemented, for example, to reduce the gap between new business and renewal pricing or resolving issues in a long-standing back-book.
However, in our experience the real challenge has been defining and implementing a pricing decision framework which is transparent, consistent and robust, and that balances expected returns to the firm with value for money for customers. As part of this firms need to consider how much value is created and paid away through distribution chains and be prepared to respond to regulatory questions on how this is attributed across each main element, such as distributors, brokers and other partners. Firms should consider the extent to which the cost of these elements adds real value to the end customer, looking at the cost of manufacturing and distributing the product compared to the premium paid by the customer. A current and future view needs to be taken regarding target markets, how returns are measured, and how customer value is defined (e.g. short term, lifetime).
Firms should already be undertaking periodic reviews of the way they engage with customers - the “what” (content of communication) and the “how” (processes and methods). Particular consideration needs to be given to the expected further changes that will be required in the area of auto-renewals and additional disclosures.
Our recent work with our partner Consumer Intelligence showed that a lack of transparency in renewal letters encourages up to 4% of customers to shop around more actively rather than stay with their current insurer. Employing a pro-actively transparent approach in renewals communications can therefore increase customer loyalty and retention, more than previously assumed, and be source of untapped comparative additional value to firms.
Culture and Ethics
These are generally the hardest aspects for firms, particularly larger ones, to embed, moving beyond simple high-level statements of good intent and principles. A key area to review, and one which is very much of topical interest and on the regulatory radar is around the use of data, where much more work needs to be done.
Social acceptability around what constitutes legitimate use of personal characteristics for ratings purposes often runs in direct conflict with the use of increasing amounts of data available, which is deeply rooted in the evolution of pricing practices. We may also see some further regulatory restrictions in this area. Getting this wrong can pose one of the most significant reputational risks to firms, alongside the costs and implications of regulatory action.
Firms are advised to give substantial focus to this area and should agree principles at Board level, and ensure they adopt reliable governance systems ensure proper oversight of all aspects of pricing practices.
It can be seen that pricing practices have many dimensions to consider and get to the heart of both conduct and prudential matters, including cultures and ethics. Firms are advised to get prepared now for the imminent final Market Study report to be able to take the necessary actions to operate at competitive advantage.
This blog post summarises Michael Sicsic thoughts during the panel session on the future of General Insurance pricing at the ABI annual conference 2020.