The FCA’s General Insurance Pricing Practices: what do firms need to know?

The pricing practice rules

A key feature of the new pricing rules relates to ‘price-walking’ – a method used by firms to identify consumers who are most likely to renew, and then increasing prices for these customers year on year. Also known as ‘loyalty penalties’, the anti-competitive practice rewards new customers with low prices whilst upping payments for existing customers on renewal. Fortunately for consumers, price walking will be prohibited from January 2022. Instead, firms will be required to set renewal prices at no higher than the equivalent new business price (ENBP) – this is the price that would be offered to new customers of the same risk profile purchasing the same product.

For closed books in which legacy products may be offered by way of renewal to existing customers but are not available to new customers, firms will be required to benchmark the closed book legacy product against a comparable new business price, to form a ‘close matched product’. Whilst premiums for all policy holders may increase, the FCA estimate that the prohibition will save consumers over £4.2bn over 10 years.

In addition to the prohibition on price walking, the FCA has introduced new rules in relation to auto-renewals and reporting. Firms must now explain clearly from the outset whether a policy is set to auto-renew whilst providing a range of easy opt-out methods. These methods must be communicated at the point of sale, and in good time before auto-renewal. Further, enhanced reporting requirements mean that firms will be required to submit a list of metrics regarding pricing and claims experience by 31 March each year.

Recent amends

Since May 2021, the FCA has engaged with stakeholders to understand the challenges involved in implementation. A further statement was subsequently issued to refine certain rules. The statement clarifies:

• The price-walking prohibition will apply in the same way to firms that give discounts or other incentives to customers.
• Intermediaries who lower the commission they receive to provide a cheaper price for consumers (commission-rebating), will be offering a discount and so need to reflect this in the ENBP when setting the price for a renewing customer.
• The definition of renewal – where an existing customer actively buys a policy with the same firm through a different channel or distribution arrangement, then firms should treat this as new business rather than renewal business.

More recently, the FCA added an attestation section to the rules. As such, Senior Managers of firms either need to annually report that the firm has complied with ICOBS 6B (where the new rules are contained) or send a nil return to confirm that the rules do not apply to their firm. With surveys being sent out in January 2022, firms will have until 31 March 2022 to provide the attestation.

Why is this important?

The FCA has warned that it will be checking firms’ compliance and will consider acting if it discovers that sufficient steps have not been taken to implement these new rules. As such, it is crucial for firms to stay up to date with the latest changes and ensure that amended renewals and pricing policies are implemented before the new rules come into force on 1 January 2022. Whilst the FCA has allowed for a transitional period until 17 January 2022, firms must backdate the required renewal disclosures to customers who renew their contracts during the transitional period.

If you are an authorised firm and would like more information on how to ensure compliance with the insurance pricing practices, please don’t hesitate to get in touch.