Regulatory concerns on general insurers’ pricing practices have been bubbling under the surface for the last three years. However, following the thematic review on Household pricing practices they seem to have reached boiling point and insurers are now being asked to take action in a number of ways. The market study will focus on three main areas:
• Consumer harm: Establishing the scale of harm created by pricing practices, including how many consumers are affected, who they are (vulnerable?) and the price differential paid by different groups.
• Fairness: FCA will look at pricing models and strategies and whether they are exploitative, whether firms provide clear and accurate information and the impact of contractual terms.
• Competition: FCA will examine if pricing practices lead to distortions on access to quality insurance products, whether firms are making disproportionate profits on certain groups of consumers, the current nature of competition and the experience of new entrants to the market, new business models and whether they deliver good consumer outcomes including a look at the sale of add-on products.
Many insurers, brokers and price comparison websites are dealing with the aftermath of the market study announcement, dealing with the data request and how to best engage with the FCA. Many firms are setting up teams to deal with these issues building appropriate governance into the project team, in many cases with direct involvement from the CEO. Beyond the logistics firms have two main areas to focus on:
1. Tactical response: This involves assessing how the firm’s pricing practices impact on consumer outcomes. Matter to consider include assessing technical pricing models and data used in rating factors (including third party data sets and whether race/gender or religion are directly or indirectly used), governance and responsibilities over pricing decisions, measuring the impact on vulnerable customers and quantifying potential risk of harm for this particular group, and looking at pricing processes and MI including establishing who is responsible for the consumer outcome consequences of pricing decision within the organisation.
2. Strategic response: Pricing sits at the very core of insurers’ business models. The pricing algorithms are one of the most valuable pieces of intellectual property for any insurer and this study aims at reviewing the foundations of the insurers’ business models. CEOs, heads of pricing and strategy should work together to estimate the potential business, profitability and solvency impact of a drastic change in pricing models. Many portfolios are built in such ways that products only become profitable for firms after two or three years of renewal. A change in pricing strategy could render initial acquisition costs almost impossible to recover.
Obviously, this analysis should also include assessment of the add-on and cross selling business which many firms have used over the years to recoup some of the initial investment in acquiring new business. This analysis should be central to the longer term plans for the business. Such plans should acknowledge that there are clear first mover disadvantages in changing pricing models whilst laying out possible glide paths to moving out of pricing models that rely on significant price discrimination.
The message is clear and firms should be taking action. It is not clear how far the FCA will be prepared to go to solve this issue.
The onus partly is on insurers to take responsibility for the consequences of their pricing practices. How to do that? A consistent and fair approach to vulnerability and a framework to allow quantification of potential harm are central pieces of this puzzle. Being able to demonstrate pricing processes include robust mechanisms to protect vulnerable customers from harm and exploitation should help make the regulator think twice before pushing for price intervention.
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