This month the Financial Conduct Authority (FCA) has released its final rules and guidance arising from its Consultation Paper 15/41 of December 2015 which focused on increasing the levels of transparency and engagement, and therefore availability of competition, for consumers at renewal of personal lines general insurance policies.
The FCA’s aim in making these changes is to encourage consumers to “engage, shop around, and make better-informed decisions” as well as increasing focus on renewal practices and, by this, improving consumer outcomes.
The deadline to bring these rules into effect is 1 April 2017, which has been extended by 3 months to give firms sufficient time to implement the proposals, ensuring that what the FCA describes as an “important pro-competitive initiative” can be introduced as swiftly as possible.
The changes will be implemented by way of amendment to ICOBS (at 6.1.12AR).
They will be reviewed in the event of any changes to the UK regulatory framework including as a result of the UK’s vote to leave the EU.
Previous premiums in renewal notices
FCA found, in randomised controlled trials with consumers in the home and motor insurance lines of business, that showing the previous premium on renewal notices was the best way to increase consumer engagement (FCA, Occasional Paper no. 12, Encouraging Consumers to Act at Renewal).
For all consumer renewals from 1 April 2017, therefore, renewal notices must show the previous premium charged.
To address concerns that disclosure of previous premium would not provide a “like for like” comparison where a consumer’s circumstances had changed during the course of a policy, resulting in a mid-term change in the policy premium, the FCA has confirmed that firms must now show, at the point of renewal, an annualised premium that reflects those mid-term adjustments. Where there have not been any mid-term changes to the premium, firms are required to show last year’s premium at the point of renewal.
The FCA is not directing firms how to calculate the annualised premium figure but has said that any calculation should exclude administrative fees and charges. In addressing concerns that this might lead to increased fees and charges (with the intention of circumventing the effects of the previous premium disclosure), the FCA has pointed to existing disclosure requirements in place for firms to provide information on fees before they are incurred (See ICOBS 4.3.1R and guidance at ICOBS 4.3.2G) and to principle 7 of its Principles for Businesses, requiring them to pay due regard to customers’ information needs and to provide information in a way which is clear, fair and not misleading.
‘Shopping around’ messages
Firms will be required to encourage consumers to consider shopping around for alternative cover. Firms may choose the wording by which they do so for the first three renewals. At or after the fourth renewal, however, firms must use the following prescribed message which should be included clearly, accurately and prominently at renewal and in a place where it can easily be compared with the renewal quote:
“You have been with us for 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’s choice of the fourth renewal as being the best starting point for the prescribed message was determined by aggregated data that had indicated that price increases diminish after five years on average and that when price increases diminish disclosure of previous premium is less effective in prompting action from consumers.
The “shopping around” proposal is to be applicable to all general insurance markets. In response to feedback that “shopping around” disclosures should not apply to policies that may cover pre-existing medical conditions, for example, the FCA acknowledged that consumers with pre-existing medical conditions may find it difficult to find equivalent cover elsewhere. For this reason the FCA altered the “shopping around” requirement so that consumers were encouraged to consider cover as well as price.
Although the FCA appreciated that insurance brokers and intermediaries do shop around on behalf of consumers, it concluded that this will not always be the case; for instance many brokers have limited panels of insurers available and in some cases a consumer could achieve a better outcome for themselves or using alternative intermediaries.
Policy periods in scope
In recognition of a risk that policies could be structured as 11-month or 10-month contracts to avoid these new rules, policies of 10 months or more have been brought within the scope of proposals.
This is a natural next step by the FCA to drive behaviour by insurers and intermediaries which support its focus both on the operation of the general insurance market and, more widely, on the treatment of existing customers to ensure effective competition, a fair deal and greater transparency which it identified as a priority in its Business Plan for 2016/17.
PS16/21: Increasing transparency and engagement at renewal in general insurance markets - Financial Conduct Authority published 10 August 2016
FCA, CP15/41, Increasing transparency and engagement at renewal in general insurance markets
FCA, Occasional Paper no. 12, Encouraging Consumers to Act at Renewal