A super complaint was delivered last week to the UK competition authority. It means pricing practices in the retail general insurance market will now come under intense scrutiny. In this post, I’ll assess its origins and its implications, and show how insurance firms can respond.
Super complaints are rare. Only a very few consumer groups can issue them and this is only Citizens Advice’s fourth since they were introduced in 2002. Their most famous one exposed the payments protection insurance scandal back in 2005.
What this adds to up is this: when a super complaint is issued, you can be sure that they’ve been well researched and planned.
The Competitions and Markets Authority must now conduct a thorough investigation into pricing practices in household insurance, one of the five markets specifically referred to in the super complaint. In truth, the Financial Conduct Authority will take the lead on that. It had already begun a review on pricing in that very market.
No doubt they saw it coming. After all, even I saw it on the horizon back in 2017 and wrote a blog post specifically about the likelihood of a pricing super-complaint in January 2018 (read it here).
The FCA haven’t wasted any time. Their existing diagnostic review was upgraded to a market study on pricing practices across retail general insurance. Again, hardly a surprise. Readers of this blog will remember this post from April 2018, in which I highlighted the extent to which the FCA had been researching the problems since at least 2015. Here is the graph (sourced here) that attracted much comment…
What has been made very clear to me since that post went out was that the graph’s line is an average. Some insurer pricing showed only small differences between new and existing after 5 years, while other insurers showed differences in the region of 200%. So there is a spread of pricing practices across the market, which is not a surprise. At the same time, it should be a worry for those insurers who find themselves isolated at the wrong end of that spread.
So the regulator has a lot of data and analysis with which to back up its eventual response. One point that is still unclear is the extent to which the FCA’s response will be bounded by the CMA’s overall response across all five markets. It is clear though that the CMA’s response will be closely coordinated with the FCA. The person who lead the project analysing household insurance pricing at the FCA is now Chief Data Scientist at the CMA. That brings a lot of connected thinking with it.
That connected thinking will work both ways. One of the remedy options undoubtedly on the cards will be some form of pricing principles, modelled on the CMA’s CARE principles recently introduced for price comparison websites. They’re an oven ready remedy, having already been researched and implemented by the CMA. Combine them with all the data and analysis that the FCA has on household pricing and their role in some form as part of the response to the super complaint is a strong possibility. There’s more on this in this post.
I say some form of pricing principles is a ‘strong’ possibility for a particular reason. Super complaints need to be dealt with relative promptness – they rise to the top of regulatory priorities. That puts time pressures on both regulators. At the same time, they’ll want to make sure that any possible remedies are tested before being introduced.
Testing in a variety of forms is one of the main changes to the FCA’s approach in recent years. Why? Because a review of regulatory interventions across several sectors, published this week, has concluded that regulators should “be bold in identifying possible remedy options. Think broadly about a range of options and do not rule out radical solutions too quickly.”
Bold interventions need careful planning and testing, in case they have unintended consequences or just simply miss the mark. The 2014 review of the short term credit market was founded upon huge amounts of data, analysis and testing, and introduced bold interventions in pricing and product design.
The regulators therefore need the time to design, test and consult on a robust intervention to pricing practices in household insurance. At the same time, they’ll be under pressure to produce results. At a FCA / CMA conference this week, a graph was presented of research into the use of the term “sharp practices’ in UK media. Up until about four years ago, use of the term was negligible. And then it picks up, before sky rocketing last year.
The reason? Much more attention to sharp practices from the popular press, most noticeable the Sun and Daily Mail. What this does is create a perfect storm. While the regulators need time to get their robust response to market, they may not get it. That sky rocketing media attention will put them under pressure to solve the problem sooner rather than later. And the political establishment will pick up on this and watch to see how it plays out.
Key in this situation will be Citizens Advice itself. It’s well connected politically. Will it tug at those political connections to move their case along, or wait and see how things develop? Remember that they’ve already been waiting. In each of the markets identified in the super complaint, they’ve already been banging a loud drum for a while. I doubt if their patience will stretch to any great lengths.
The ABI and BIBA will quite naturally at this stage send out reassuring signals about their members being ‘on message’. They’ll point to the recent ‘Guiding Principles’ as evidence of this. In my opinion, signing up to the principles is fine. Relying on them for the strength of either a market response or an individual firm response to the super complaint would however not be a good idea. They’re too vague – just imagine how well they’d stand up under questioning from a Parliamentary Committee.
Might keeping a low profile be better? Not at all. When I’ve talked with CA people in the past, it’s been clear that household insurance was very much on their radar. And it will have been on their radar because of the feedback they will have been getting from their network of advice centres. So household insurance is not being treated as ‘just another thing to add in for completeness’. It was a central part of the super complaint.
So what might insurers do in response at this point in time? Here are five steps that spring immediately to mind:
They need to understand the scope and depth of the problems that regulators, NGOs and the media are finding with insurance pricing practices. This is largely about mapping out the ethical landscape associated with pricing. This blog post from October 2017 about some of the ethical risks associated with insurance pricing will help.
Insurance firms then need to assess the significance of those problems for their business. This free guide to ethical risk assessments will help with this, especially the sections on prioritisation.
They then need to run a variety of checks. One would be to establish just where their pricing strategies for different products leaves them on the graph highlighted earlier. Another should be around their processes for ensuring that their pricing levers work in line with their regulatory and legal obligations. Are those processes complete, robust and sufficiently challenging? They'll need to evidence this.
Some form of impact assessment should come next. How might the remedies coming out of this super complaint affect the firm’s income? And on their investment in all that data and analytics? Bear in mind that while price caps are unlikely, the limited or banning of certain pricing practices is likely.
The next step is perhaps the most challenging and the most important one. The underwriting models generating these prices need to be opened up and their levers and pistons identified. It doesn’t matter if the pricing components of that model are digital or analogue, hand written or machine learnt. The regulator will expect each director of underwriting to be fully aware of what influences the prices their firm offers. The firm then needs to weigh up the ethical implications of each of them. From what I’ve seen in recent years, some of them can be eye-opening.
In my work with clients, I guide them through five key dimensions that should shape the scope and depth of their response to this situation. What this does is introduce an independent and informed eye to their response to the pricing situation that the super complaint has now crystalised. If you’d like me to do something similar with your pricing team, get in touch.
Duncan is the founder of the Ethics and Insurance blog and the author of its many posts. He's a Chartered Insurance Practitioner, having worked 18 years in the UK market. As an adviser to many firms on ethics issues, as well as a regular conference speaker, he is one of the leading voices on ethics and insurance.