The Financial Conduct Authority (FCA) wants consumers to “engage, shop around, and make better-informed decisions” when they come to renew their insurance policies. It wants to address concerns about low consumer engagement and poor treatment by insurers at renewal, and the lack of competition that results from this.
The FCA’s new rules and guidance require firms to make a number of changes to their renewal communications by 1 April 2017. This newsletter considers these new provisions, which apply across all personal lines general insurance markets.
Overview of the key changes
- The new rules apply to both insurers and intermediaries who deal with the consumer at the point of renewal in relation to general insurance products which are provided to retail consumers in the UK. However, the FCA guidance also encourages firms to consider whether any of the issues raised in respect of retail consumers would also apply to commercial customers and whether there is benefit to making wider changes.
- The concept of renewals extends beyond the continuation of a relationship with a single insurer. It also captures a change of insurer where 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”.
- From 1 April 2017, firms will be required to:
- disclose the previous year’s premium at each renewal (either the premium at the start of the current policy or, where relevant, a figure that reflects mid-term adjustments);
- include text to encourage consumers to check their cover and shop around for the best deal; and
- identify consumers who will be renewing with them for the fourth (or more) consecutive time, and provide to them an additional prescribed message encouraging them to shop around.
- The FCA addresses industry concerns about 10- and 11- month policies and expects that the issue of consumer inertia at renewal would also apply to contracts of this length. In order to address the risk that policies could be structured as 10-month or 11-month contracts to avoid the new requirements, the rules capture all policies with a duration of 10 months or more.
- Firms are again reminded of their obligations to treat customers fairly when developing their overall approach to renewal pricing and in their treatment of long-standing customers.
The changes will be implemented by way of an amendment to ICOBS (at 6.1.12AR) which comes into force on 1 April 2017. The rules and guidance have been developed under the existing UK and EU and regulatory framework but will be reviewed in the event of any changes to the UK regulatory framework, including as a result of Brexit.
The FCA has also provided guidance to help firms understand its expectations in relation to the renewal of general insurance contracts, 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.
New ICOBS rules
From 1 April 2017, firms must “in good time before the renewal” provide the consumer with the following information, in such a way so as to draw the consumer’s attention to it (ICOBS 6.1.12AR):
1. The renewal premium and the previous year’s premium
The FCA has carried out a large-scale trial with consumers from home insurance and motor insurance providers, which found that showing the previous premium on renewal notices was the best way to increase consumer engagement.
The FCA has not prescribed how this information should be presented, but it must be clear and accurate and in a prominent place in the renewal notice in order to enable the consumer to easily compare the renewal premium with the previous year’s premium.
2. Annualised premium
Where a consumer’s circumstances have changed during the course of the policy such that there has been a mid-term change in the policy premium (a “mid-term adjustment”), firms must now at the point of renewal show the consumer an annualised premium reflecting mid-term adjustments. The FCA provides an example of where a motor policyholder changes the vehicle which is insured during the policy term. As such, there is likely to be a mid-term adjustment to the price of the policy to reflect the change of risk. In these circumstances, the motor insurer would need to show an annualised premium figure at renewal which accounts for the change in vehicle and risk.
The premium must be shown in a way that makes it easy for the consumer to compare the last year’s premium with the renewal premium.
Where there have not been any mid-term changes in premium, firms will still be required to show last year’s premium.
The FCA has not been prescriptive as to how firms should calculate the annualised premium figure but has said that any calculation should exclude administrative fees and charges. The FCA expects that in calculating and presenting this figure to consumers, firms will consider the FCA’s overall expectation under principle 7 of the Principles for Businesses by paying due regard to customers’ information needs and giving them information in a way which is clear, fair and not misleading.
3. Shopping around
Firms are now required to encourage consumers to consider shopping around for alternative cover. Firms have discretion over the exact wording they choose to use for the first three renewals but the statement made should indicate that:
- the consumer should check that the level of cover offered by the renewal is appropriate for their needs; and
- they are able, if they wish, to compare the prices and levels of cover offered by alternative providers.
Firms are able to formulate the prompt as a question (provided this does not serve to discourage the consumer). The FCA gives the following as an example prompt: “Have you checked that your insurance cover still meets your needs? Have you considered shopping around to find the best deal for the cover you want?”
In its trials, the FCA found when price increases diminish, the disclosure of previous premium disclosure is less effective at prompting action from consumers. The data the FCA reviewed suggested that price increases diminish after five years on average and therefore the fourth renewal is the right point to introduce an additional shopping around message.
The following additional shopping around disclosure must be provided when a consumer is about to enter into a fourth (or more) consecutive renewal of a policy through the same channel: “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”.
It applies to renewals across all channels (including intermediaries). Although, if a renewal does not occur in one year then this breaks the chain of consecutive renewals.
The shopping around message should be included clearly, accurately and prominently at renewal and in a place where it can easily be compared with the renewal quote.
New ICOBS guidance
The FCA has also published new guidance (ICOBS 6.1.12B G) which requires a firm to have regard to its record-keeping obligations (in ICOBS 2.4.1G) and to ensure that it has appropriate systems and controls in place in relation to:
- 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.