FCA pricing fairness – What should we be looking for?
February 9, 2022 Paul De'Ath
Following on from our note last week “FCA Pricing Fairness – One month in, what have we learned?”, this week we are discussing what to look out for over the rest of 2022. How will we know if it has been a success? When will we see the impact of the rules on insurer results? Read on for our thoughts on the key points of interest for all things GIPP.
What should we be looking for?
Having established that pricing is likely to be volatile in 2022, a number of our clients have asked us what they should be looking for to understand how the new rules are being implemented and what impact they are having on the market. In our view there are a number of aspects to watch to understand if the regulations have been a success, the potential reactions of competitors and whether the FCA might expand the scope of the regulations (for example to other lines of business).
Over the next 6-7 months there will be three main opportunities to assess how the changes are being felt by the largest insurers in the market as they release results covering FY21 (March), 1Q22 (May) and 1H22 (August).
While there are likely to be some high-level comments in earlier announcements, the most important results period will be when companies release their first half 2022 results in August. This will provide an update on the GWP impact of the rule changes and also an indication of the profitability of the business written across the home and motor books.
The FCA will want to ensure that customers overall are getting better value for money. Under the new reporting requirements, insurers and intermediaries have to provide interim data to the FCA for the six months up to 30 June 2022 by the end of September. While there may be some initial press releases and views from the FCA ahead of this, we would expect a more qualitative report from the FCA on the impact of the changes around the end of 2022.
As we noted last week, it appears that the level of interest in insurance products from consumers has declined over the first month of the year. It will be interesting to see if this continues throughout the rest of the year or a January blip. We will be monitoring this over the coming months – subscribe to our Market Intelligence list to make sure you do not miss anything. Longer-term we would expect a slow burn of change in customer attitudes to switching over the coming years as the desire to spend time searching wanes over time.
The fastest sources of data on what is happening market-wide will come from the annonomised data provided by the likes of Consumer Intelligence, Pearson Ham and eBenchmarkers. Most of our clients subscribe to at least one of these services and will be watching the data closely to guage the reaction of both peers and customers alike. We have already seen price indices creeping up at the end of 2021 and into the early part of 2022. There are likely to be more fluctuations in prices over the coming months as insurers find the right balance for their portfolios.
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Where might the FCA go next?
The initial focus of the GIPP on the home and motor markets made perfect sense as they impact the largest customer base and include many of the most vulnerable within society. But, assuming the changes are a success, where might be next on the list?
Within personal lines the next two most common coverages are travel and pet insurance. While there are potential issues with both products from a customer point of view, neither lends itself well to the specifics of the GIPP rules, in our view.
Pet insurance costs tend to trend upwards over time but this is in keeping with the risk profile of the ‘customers’. Older pets are more likely to need treatment and therefore the premiums are higher to reflect this. In travel insurance there is less of a culture of renewal than in other lines of business. Many people (a straw poll of the office placed it around 50%) will only buy travel insurance on a per-trip basis and therefore cannot fall into a price-walking scenario. Even those on annual policies are likely to let coverage lapse at times as there is little benefit in renewing a policy until such time as you are going away again.
Private medical insurance (PMI) and protection are also likely to come under some pressure from a customer value point of view but it is less likely that the precise regulations within the GIPP will be applied. In PMI, there is a similar argument as for pet insurance – existing conditions limit the ability to switch and customers are generally willing to pay increasing prices over time as their risk of claiming increases. In protection, the policies tend to be long-term in nature and pricing is set at the time of purchase so annual renewal increases are not an issue.
Outside of personal lines, the most likely next step for the FCA would be to look at SME, particularly the micro SME space. There is an argument (and the FCA has already commented as such in its paper on consumer duty) that individual small business owners are just as naïve about insurance as personal lines customers. We would expect that if GIPP is deemed a success for customers, there will be some pressure to expand the remit to small business owners in due course.
The Oxbow Partners View
This is a challenging time for many in the home and motor space. Knowing more about how others in the market are reacting to the changes will be very important. One must also remember that the GIPP rules are only one aspect of fair value and consumer duty. We expect that similar rules could be rolled out to other adjacent markets. We expect the whole industry to be paying close attention to the motor and home markets over the next 12 months. They say prevention is better than cure and we would expect many players in adjacent markets to start preparing now for future regulatory changes.
If you would like to discuss how Oxbow Partners can help understand and navigate the new world then please get in touch with a member of the team.
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