The UK regulator’s decision to ban ‘price walking’ in general insurance is significant. Yet that significance is wider than simply how retail policies are priced. As I've emphasised in earlier posts, the sector is facing a big accountability challenge, and the regulator’s final report signals a lot about the shape of that challenge. In this week’s post, I explore those signals so that insurers can start preparing now.
The regulator’s ban on price walking was not a big surprise. The sector had already acknowledged that offering discounted premiums at inception and walking the price up at subsequent renewals, was deeply unpopular with consumers. And the regulator had said that a ban was always an option.
Behind all this stood Citizens Advice, whose super-complaint started all this off. They wanted bold measures, and would have been working behind the political scenes to make sure the regulator delivered them. And they did indeed get them. This is what their director of policy had to say after the ban was announced: “This is a big deal… Today’s proposals are bold from the FCA… …the FCA will need to hold their nerve.”
The subsequent consultation process will see a lot of manoeuvring going on, but I believe the regulator’s proposals will enter the rulebook with few changes. Yet big developments like this are often defined just as much by ‘the hares they set running’, as by the change itself. So what hares have been set running?
Consider the shape of the core decision itself. Bans are measures that, by and large, are simple, understandable and monitorable. This points to the regulator wanting to be sure that their decision is adhered to by the sector. A more complicated measure risked too many ‘difficult to answer’ questions around compliance.
Then consider the measures accompanied the core decision. There are three and each is significant. The first seeks to strengthen upstream governance at the product stage. This has the effect of rebalancing accountability more towards ‘before the event’ rather than the more ‘after the event’ that board’s tend to deliver.
The second accompanying measure moves to secure the evidence for compliance with the core decision. These are the ‘data pipelines’ that will feed information to the regulator about a firm’s retail GI pricing. And I expect that monitoring to be around more than just the interplay of new and renewal pricing. Back in February 2019, the FCA confirmed that they were monitoring the GI market for signs of discrimination in pricing. These data pipelines will influence the scope and depth of that monitoring.
And the third accompanying measure was the introduction of an attestation provision requiring regular confirmation from a Senior Manager that the firm’s pricing practices comply with the new rules. This will put the certification of that senior person in question if things aren’t done right.
What these three measures add up to is the encircling of the new pricing landscape in the GI market by a series of mutually reinforcing accountability measures. So while the FCA final report was a bold statement on pricing, these accountability measures are designed to turn it into a bold change in pricing practices.
This is about ensuring the change happens. This is about enabling the FCA to sit before Parliamentary committee two years after the rule change goes live, and to show MPs evidence of the changes in pricing practices that have been delivered.
Something Much Bigger
Let’s move on now and examine a warning to insurers that the regulator hid between the lines of its final report. This is a warning about practices the reputational impact of which dwarf the loyalty penalty.
In a paragraph dealing with price optimisation, the regulator has this to say: “Firms are prevented or restricted by law from using certain protected characteristics as a factor in calculating the price. We will continue to consider optimisation techniques used by firms…”
Now, we know that gender and race are two protected characteristics that cannot under any circumstances be factors in calculating the price. That accounts for the “prevented… by law” part of that comment. And we also know that certain protected characteristics can only be used in certain circumstances. That accounts for the “restricted by law” part of that comment.
Think about that second point. What it is saying is this: your use of ‘certain protected characteristics’ is only allowed under the law when pricing on a ‘risk plus cost’ basis. So an insurer that uses ‘certain protected characteristics’ to walk prices or to optimise pricing, would be exposing itself to challenge from the regulator, and potentially through the courts.
The Problem, Evidenced
Take an interesting finding mentioned earlier in the FCA report. “We also looked at the characteristics of consumers who are of longer tenure and so, on average, pay higher margins as a result of price walking. The main factor correlated with tenure is age.” Now, we know that age is a protected characteristic. It can only be used in insurance pricing under the conditions set out in equalities legislation. And to be brutally honest, I doubt if price walking meets those conditions.
Recall my mention in previous posts of a comment by the FCA’s Chris Woolard in February 2019 to the UK Treasury Committee. In relation to a debate on discrimination in GI pricing, he said that the FCA has “the resources and expertise to pick inside those insurance models.”
What does this add up to then? It is a warning, plain and simple. Make sure your underwriting complies with equalities legislation. The FCA is flashing a red warning signal at the GI sector around age, and more broadly around protected characteristics per se.
Bear in mind as well that the Treasury Committee was clearly impressed by the FCA’s capabilities. It actually recommended that the FCA be put in charge of overseeing equalities legislation in financial markets. The FCA demurred on that option at the time, preferring to keep to the Financial Services and Markets Act for the time being.
Time for Action
So how should insurers respond? Clearly, they’ve had time and teams preparing for the change in pricing rules. I needn’t list the type of steps they will obviously already be taking. Instead, I’m going to highlight three further steps that are crucial.
- Get up to speed on the implications of those data pipelines and the supervisory technologies that lie behind them. They represent significant changes in the scrutiny that firms will be subject to, and this pricing review will see a step change in their use.
- Run a fine toothcomb over all parts of your pricing systems, and, equally important, any other systems that influence prices. What you’re looking for are any signs of a protected characteristic being used, or any form of proxy for them being allowed.
- Look at the management systems you’re using to control the way in which your firm is complying with equalities legislation. And remember just how obligations in that equalities legislation are framed. It’s all about outcomes, so your management systems should reflect that.
I undertook a short survey in 2015, looking at how six insurers framed their equalities commitment in respect of customers. It produced a ‘head in hands’ outcome. I found little to no reference to equality in relation to customers. Has much changed in the subsequent 5 years? Well, some parts of the market have moved forward, while, unbelievably, other parts have moved backwards.
What is clear, is that this pricing report is laying down signals for the sector to really get to grips with protected characteristics. Those signals will then be reinforced in the regulator’s forthcoming data ethics study. This makes the time for action, well, now.
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