The proposals (84-page / 1.63MB PDF), which the Financial Conduct Authority (FCA) has opened to consultation until 30 April, builds on findings from the regulator's 2014 market study on general insurance (GI) add-ons where it found that too many consumers were purchasing poor value, unnecessary products. The FCA subsequently consulted on three potential methods for calculating the relative value of these products, in order to encourage competition between firms.
The FCA began pilots in began pilots in early 2017 in which it published data reported by insurers in the GI market on claims frequencies, claims acceptance rates and average claims pay-outs in relation to their home, home emergency, personal accident and key cover products. The latest data for 2019, which concern the year up to 31 August 2018, has been published alongside the FCA's consultation paper.
The FCA's new plans require publication of data on claims frequencies, claims acceptance rates and average claims pay-outs, like under the pilot scheme, but an additional metric of claims complaints as a percentage of claims will also apply.
Data concerning a broader range of GI products, including dental, identity theft, motor, pet and travel insurance policies, will also need to be reported.
Insurance law expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law.com, said: “The FCA’s consultation on the submission of value measures has been a long time coming, since its discussion paper in 2015. The FCA has for some time attempted to define a suitable metric for the value of an insurance product and struggled to do so. The original value metric of a 'claims ratio' has been rejected because firms have differing practices; it involves the sharing of commercially sensitive data, and it does not assess the quality of the product and cannot capture non-claim value in a product. The FCA also rejected 'peace of mind', 'customer service' and 'DEFAQTO' ratings."
"The new reporting duties are aimed helping consumers make better decisions and to put pressure on firms to improve value and the quality of products sold both as standalones and add-ons. This has been the FCA’s approach to the value measure since 2015," he said. "The FCA has been keen to tackle this issue in a light touch manner, which can also be seen from its preference to not directly regulate product pricing, for example with caps. However, when you take these new reporting requirements in tandem with firms’ requirements under the PROD sourcebook to ensure that there are processes in place to create and regularly check product appropriateness for the target market, together with any duty of care to customers which may exist, the upshot is that firms are under increased scrutiny and pressure to ensure that their products offer real value to customers."
Cavill said: "We have seen firms take proactive approaches to ensuring that customers are deriving good value from their products which make their way to the market place. This reflects to some degree the regulator’s position that poor value of GI products is a key area of harm for the market. But it also highlights that firms are noticing that customers are becoming increasingly more savvy as to the value of various financial service products."
"GI insurers are alive to the fact that to keep ahead of their competition, they will need to make sure that the message is getting through that the products they provide not only do the job, but also add real value to consumers and are worth having.”
The reporting requirement will apply on an annual basis only, with the reporting period for each year ending at 31 December instead of 31 August as under the pilot scheme. However, the reporting will be "at a more granular level" than has been under the pilot, with insurers required to, among other things, split the data they report "by sales channel", such as those made directly or through price comparison websites.
Thresholds have been proposed to limit which products data will need to be reported for. The reporting requirement will only kick-in if the value of total retail written premiums is above £400,000 in the reporting year and where there are more than 3,000 policies in force during the reporting year, according to the FCA's plans.
The FCA said it will publish the value measures data reported in bands which it would set depending on its "assessment of the claims profile of the different products".
Alongside the new reporting and publication scheme it has proposed, the FCA also said it intends to set "additional product governance rules".
Those new rules would oblige insurers to take value measures data into account in their monitoring of products, and to consider whether their products are likely to offer sufficiently good value to customers in their target market. Where appropriate, the firms will also be required to make changes to their products.
"Our proposals are aimed at addressing poor product value and quality, and reducing the risk of unsuitable GI products being bought or sold," the FCA said.