Clifford Chance

Interim report shows risks of FCA becoming a pricing regulator

28 November 2019

Changes could mean lower prices for renewing customers but higher pricing for new customers.

The Financial Conduct Authority (FCA) published the interim report of its market study into general insurance pricing practices on October 4. Firms’ pricing practices were found to affect a range of customers, with an estimated six million policyholders paying higher premiums than average for their policies. It did not state how many policyholders pay less than the average. The FCA found:

• There is a general practice of price-walking: firms offering price discounts to new customers and increasing premiums on renewal – with increases targeted at customers less likely to switch;
• Firms engage in a wide range of practices to raise barriers to switching and have complex and opaque pricing techniques; and
• Consequently, one in three customers paying higher premiums showed characteristics of vulnerability.

A key aspect of the FCA’s proposed remedies is some form of intervention on pricing, through restrictions on price increases to renewing customers; restrictions on the use of particular factors when determining price (such as a customer’s likelihood of switching); and/or restrictions on price levels relative to a benchmark. Pricing restrictions are coupled with proposals to increase firms’ transparency of pricing, helping customers to switch to better deals as well as strengthening product governance rules to ensure greater oversight of pricing.

The report is hard hitting and gives a clear indication of the FCA’s focus on good outcomes and value for money for customers. This is unsurprising, given the FCA’s customer-focused regulatory objectives and in itself highlights the risks of the FCA becoming a pricing regulator.

Certain of the pricing practices highlighted by the FCA arguably do not provide fair outcomes from a customer perspective. It is not difficult to see customers would not regard it as fair for them to pay higher premiums for the same risk just because they are seen as unlikely to switch products or for new customers to pay less than existing customers for the same risk. But the report goes further than that.

It is likely restrictions on firms’ pricing of the type identified by the FCA could affect firms’ pricing models and mean not only lower prices needing to be made available to renewing customers but less competitive pricing for new customers. This may have implications for a firm’s ability to compete in the market and the continued viability of its operating model and the distribution chains in which it operates.

While the FCA has sought to consider how price intervention could affect competition by focusing on ensuring good value for money for customers in line with its objective of customer protection, the risk is in regulating the pricing practices of insurers, the FCA disregards the ability of firms to remain profitable and maintain a continued presence in the market. The FCA’s statutory objectives do not take into account the insurer’s economic rationale and this has the potential to lead to market imbalance. If it takes an interventionist approach to pricing regulation, this could result in firms exiting the market.

It will therefore be for the market to engage with the FCA to explain (and defend, where required) its pricing practices, so this can be taken into account in the FCA’s final report in the first quarter of 2020. This will no doubt need to be tempered with looking at areas where practices may be less defensible (eg, price-walking and inertia-based pricing).

This article first appeared in Insurance Day