On 10 August 2016, the FCA published its Policy Statement arising from its Consultation Paper – “Increasing transparency and engagement at renewal in general insurance markets” 15/41 - and has confirmed its final rules and non Handbook guidance on the issues, having taken feedback from a variety of sources, including consumer groups, trade bodies, price comparison websites, insurers and brokers.
The new rules apply to insurers and intermediaries, depending on who is dealing with the customer at renewal, in relation to all general insurance contracts which are not group policies and which have a duration of 10 months or more. Renewals include where the insurer changes but the intermediary remains the same and the features and exclusions of the policy are so similar to the previous one that from the consumer’s perspective they have renewed their policy. The rules take effect from 1 April 2017.
The rules are to address the FCA’s concerns in relation to renewal pricing by making renewal prices more transparent and prompting customers to shop around at renewal. One of the FCA’s main concerns has been the issue of longstanding customers paying more for the same insurance product than new customers.
Firms must, therefore, from 1 April 2017, “in good time before the renewal” provide the customer with the following, in writing or other durable medium, in such a way that draws the consumer’s attention to it (ICOBS 6.1.12A R):
- the renewal premium and the previous year’s premium. The FCA has not prescribed how the information should be provided, but states that it must be clear and accurate and in a prominent place in the renewal notice so that the customer can easily compare the renewal premium with the previous year’s premium;
- where mid-term changes have been made to the policy, the premium can be calculated by annualising (or otherwise adjusting as appropriate), excluding all fees or charges, to take into account pricing for the mid-term changes. The FCA has not been prescriptive as to how this information is to be given but has stated that the premium must be shown in a way that makes it easy for the customer to compare the last year’s premium with the renewal premium;
- whilst firms have discretion as to the exact words used, a statement indicating that the consumer:
- should check that the level of cover offered by the renewal is appropriate for their needs; and
- that they are able, if they wish, to compare the prices and levels of cover offered by alternative providers;
- where the renewal is the fourth or subsequent renewal, the firm must include the following statement: “You have been with us a number of years. You may be able to get the insurance cover you want at a better price if you shop around”.
The FCA also published new guidance (ICOBS 6.1.12B G) which requires a firm to have regard to the record-keeping obligations (in ICOBS 2.4.1G) and to ensure that it has appropriate systems and controls in place in relation to both:
- the adequacy of its records so it may fulfil its regulatory and statutory obligations; and
- the sufficiency of its records to enable the FCA to monitor the firm’s compliance with the requirements under the regulatory system.
In addition to the new ICOBS rules and guidance, the FCA has published guidance on “Improving General Insurance Renewal Practices” (FG16/8), to help firms understand the FCA’s expectations both in terms of what needs to be covered in the initial contract, and what steps need to be taken if the firm intends to offer the consumer a subsequent contract.
The FCA recognises that firms might in the short term increase prices in advance of the new rules, so that the difference between the renewal premium and previous premium seems smaller, and has warned that any attempts to undermine the remedy by artificially increasing prices prior to the implementation would not be in the spirit of the rules, and it will take action as necessary.
The FCA has carried out a cost benefit analysis of the new rules and expects that the changes will provide benefit to consumers of £64-103 million per year. It acknowledges, however, that firms will incur increased call handling costs and reduction in revenue and a one-off implementation cost of £133 million.
The FCA is live to the issue that whilst better disclosure and improvements in practice do increase customer engagement, the rules are unlikely to address fully consumer inertia on renewals. However the FCA has stated that they do not at this stage intend to go further by intervening in renewal pricing, as some customer groups may have wished, but it will monitor the effect of the new rules and will consider if any further intervention is necessary in the future. The FCA has also stated that it is, in any event, encouraging industry initiatives that seek to help vulnerable customers at renewal.
Although commercial customers are not in scope, the FCA also stated that it would encourage firms to consider whether there is benefit in changes in relation to commercial customers.
Whether the new rules will result in the increased level of customer engagement and the cost savings for customers as envisaged by the FCA remains to be seen. However, what is clear is that the FCA will, if necessary, consider further intervention in the future.