Annual Insurance Review 2021: Regulatory

In this chapter of our Annual Insurance Review 2021, we look at the main developments in 2020 and expected issues in 2021 for regulatory.

Key developments in 2020

While COVID-19 dominated the headlines in 2020 and the financial services regulators were forced to postpone some activities that were on the agenda, the Financial Conduct Authority (FCA) continued to focus on fair value. 

Building on its interim report published in October 2019, the FCA published its 'General insurance pricing practices' final report in September 2020, setting out its final findings on how the home and motor insurance markets were working and its proposed remedies to address the harms it identified. 

In essence, the FCA's view was that general insurance markets do not deliver good outcomes for all customers. In particular, it found:

• evidence of firms gradually increasing the price to customers who renew with them year on year (known as price walking); 
• that when setting a price, most firms take into account the likelihood that a customer will switch supplier at their next renewal or in the future; and 
• that some firms used practices to raise barriers to switching. 

The proposed remedies are more prescriptive than its typical 'outcome' focused guidelines and arguably signal a more interventionist approach.  Perhaps the most striking aspect was its proposed pricing remedy, that would require firms to offer renewal prices for retail home and motor products that are no higher than the equivalent new business prices available through the same sales channel.  Although designed to improve consumer outcomes, this and the other measures proposed will likely have significant implications for the market, not least as insurers and distributors consider and implement required operational changes before new rules come into effect as early as the summer of next year.

The FCA also published its 'General Insurance value measures reporting and publication' policy statement in September 2020. This amends the FCA's:

• Supervision manual, requiring insurers and insurance intermediaries to report data on value measures to the FCA; and
• Product Intervention and Product Governance sourcebook, requiring firms to ensure that their products offer sufficiently good value to customers. 

Firms will need to provide value measures data, including claims frequencies, claims acceptance rates, average claims pay-out and claims complaints to the FCA and, on the product governance side, they will (among other things) be required to consider value measures data when monitoring products and consider whether their products are likely to offer sufficiently good value to customers in their target market. These changes may also be operationally significant in terms of collating, analysing and formatting such data for provision to the FCA. 

What to look out for in 2021

Expect continued focus on fair value, particularly given the economic uncertainties that have been exacerbated by COVID-19. The FCA noted in its 2021 Business Plan that, given the digitisation of firms owing to COVID-19, it expects digital markets to deliver fair value and firms to use "data and algorithms ethically to price and have adequate controls to prevent undue bias or discrimination."

Somewhat linked to this, the FCA will be further focusing on operational resilience. Following the 'Building operational resilience' consultation papers published in December 2019, the FCA's proposals expects firms to 'take ownership' of their operational resilience and 'prioritise plans and investments based on their public interest impact'.

Firms will be working to identify their important business services by analysing how disruption to such services could cause harm to their customers or market integrity. Whilst this will likely have been brought into focus even more by coronavirus, firms should ensure that they are setting tolerances for disruption and plans to ensure that they can continue to deliver important business services during severe but plausible scenarios. 
Authored by Lauren Murphy.

Download our full Annual Insurance Review 2021 for more insights.