The UK regulator issued a report on general insurance pricing in late October that will have set alarm bells ringing in many insurance firms. On the face of it, their findings certainly make serious reading for pricing managers. However, a close and critical reading of their report unearths a lot more. Pricing and data represent only the tip of a much bigger, more serious iceberg that insurers will need to respond to with great care. I explain why in this week’s post.
The FCA doesn’t normally publish the findings of its early stage investigations. However, the issues it found in household insurance pricing were serious enough to override that normal reticence. And what’s more, it also triggered a ‘Dear CEO’ letter from Andrew Bailey himself, to his opposite number at the top of every regulated insurance firm.
Let’s look at the ‘pricing’ tip of that iceberg first. As I read the report and ‘Dear CEO’ letter, the word that initially came to mind was ‘significant’. That pretty much changed to ‘seismic’ when I came to the last sentence in the report’s executive summary:
“We will act as required to ensure [competitive and fair pricing outcomes for consumers], including where appropriate, taking steps that may fundamentally change pricing practices.” (my underline)
So the FCA, even at this early stage, is signalling the possibility that fundamental change may be needed in retail general insurance pricing. Tactically, this is setting the ‘expectations dial’ pretty much at maximum impact. Nothing is being ruled out, not even changing the fundamentals of a core function in a mature market.
Clearly, their investigation of 18 insurance firms, representing 40% of the household market’s GWP, unearthed serious issues around pricing and data. Dual pricing was rife and likely to have resulted in numerous examples of consumer detriment. And data was often being used without any great understanding of its quality or legal implications.
These are things that I’ve been writing about for years, but actually, the real thrust of the FCA’s message was more fundamental. It was this – oversight and accountability for the core function that is pricing was judged to be scarily poor.
In some firms, typical activities associated with oversight, like enquiry, transparency, engagement and challenge, in relation to pricing, were weak. At the same time, in relation to organisational responsibilities, structure, planning and delivery around pricing were weak too.
These types of organisational weaknesses point to a problem with culture. I suspect that habits formed perhaps 10 to 20 years ago have been allowed to continue unchecked into the present. Yet the present is seeing technological change creating significant disruption of pricing practices, at just the same time as new levels of both corporate and individual accountability. People have gotten by in this way for longer than was wise.
The FCA report is meant to be an accountability ‘wake up’ call. Boards, their committees and senior management have to recognise their responsibilities and become much better at delivering on them. Yet this report is still only a starter. It looks at dual pricing and data, but they are actually lesser issues. It’s what is largely left unaddressed in this ‘early investigation’ report that really matters.
The more significant issues lying waiting in the background are price optimisation and analytics. It is in those spaces that the ethical issues really grow in scale. They are also the practices that the market has been investing a lot in of late.
The message to insurers is this. Please sort out how you’ve been managing and overseeing dual pricing and data. If you don’t do this, we’ll put you and/or your firm through a SMCR wringer. If you can’t manage to do this, then the problems you’ll have with price optimisation and analytics will be even greater and so raise regulatory questions around capabilities and certification.
If firms do sort themselves out, then the regulator will then expect them to replicate this with price optimisation and analytics. And in terms of ethical issues like fairness and discrimination, price optimisation and analytics have the potential to be exponentially more serious.
Organisational cultures that have become ingrained into core functions like pricing are not easy to change. Research points to change often only happening if the firm is exposed to a serious threat of some kind. It helps focus minds and gives a sort of ‘survival impetus’ to change actually happening, rather than just being talked about.
And therein lies the reason for the FCA very publicly not ruling out “taking steps that may fundamentally change pricing practices”. They want the market to really focus on the seriousness of the changes they’re expecting many firms to make. They’re looking for some real changes of mindset, in preparation for the more ethically challenging practices of price optimisation and analytics that are just round the corner.
Yet this is a cultural shift that some insurers will probably struggle with. And in such circumstances, they may be tempted to turn to their usual advisers on pricing. Would that be a wise move? Advisers who have guided you into this regulatory frying pan are not normally the ones most suited to guiding you away from the fire.
A successful change of culture in retail GI will only happen if firms actively address the ‘group think’ that has been contributed so much to their present predicament. Boards need to open themselves up to some critical thinking and take on board new perspectives that have been obvious to many on the fringes of the market for quite a while.
There are some obvious starting points for this. A sense of challenge should become the norm – excuses that I’ve heard for some fairly dubious pricing practices, such as ‘everyone else is doing this’, should be questioned. Warren Buffet didn’t call them the five most dangerous words in business for nothing.
Insight rather than just numbers should become the markers of acceptable board reports. Being prepared to ask questions like ‘why?’, and to keep on asking them until you get the insight you now need, should become the new norm. The threads of relationships with suppliers of data and analytics should be scrutinised and redrawn along more transparent and accountable lines.
Two months ago, I advised clients to organise their preparations for this pricing review around five dimensions:
1. Fairness and equality
2. Preferences and perceptions
3. Accountability and explainability
4. Delegation and due diligence
5. Regulatory monitoring
Four of those five dimensions came up in this ‘early stage investigation’ report from the FCA. Preferences and perceptions was the one not covered. Yet it is, as the report says, early stages. Perceptions are certainly a key feature of price optimisation and analytics. Expect more on that later.
I believe that the FCA knows that the market has got itself into (to put it kindly) a pricing bind. And it knows that many in the market know that too. Yet what it wants the market to understand, in no uncertain terms, is that it doesn’t want a repeat in the face of bigger challenges like price optimisation.
2019 could well turn out to be one of the most significant years in UK retail general insurance. And while most people have been focused on how Amazon or Facebook might disrupt the market, it could well be the regulator who will disrupt insurance pricing the most.
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.