Whilst it may be understandable for the industry to be pausing for breath ahead of the publication of the Financial Conduct Authority's (FCA’s) finalised market study into General insurance pricing practices, there is much to do right now, and insurers should aim to be on the front foot taking the issue seriously.

The publication of the interim market study in October 2019 signalled the potential for some far reaching remedies given the extent of the potential consumer harm that was identified. The root causes of the potential harm, such as the complexity of pricing practices employed by insurers, the extensive use of data and techniques such as margin optimisation have to be considered alongside the fact that, overall, the market is not making excessive profits. Therefore it is appropriate that the FCA considers next steps carefully given the risk of unintended consequences from intervention.

In the meantime firms should be acting as a priority on those areas identified by the FCA as a cause for concern in the responses they received to the original Dear CEO letter in relation to Pricing Practices:

Ensuring that a clear, Board approved, pricing strategy is in place. Particular areas of focus should include:

• Demonstrating the link between the overall strategy of the firm and their pricing strategy.
• Establishing clear principles for how the firm balances commercial and customer outcomes, including the measures that are in place to ensure that an appropriate balance is struck. Where measures are defined, e.g. to assess “Value for Money”, a risks appetite should be set to establish tolerance for deviation from the target level.
• Recognising the potential sources of harm to consumers and the constraints that should be in place to mitigate those harms, for example – differentials between price by customer duration; differentials between the technical (“risk”) cost and the market (“customer”) price; caps on commission levels where appropriate.
• Defining scope carefully, for example – distribution channels; product range (including ancillary products) and customer segments.
• Clearly linking the pricing strategy to other key elements of the firm’s governance such as policies in relation to data usage (including third party data) and vulnerable customer policies.

Ensuring that the firm’s approach to governance, control and oversight ensure that risks to customer outcomes from pricing are appropriately mitigated in practice. This should include:

• Articulating the roles and responsibilities in pricing decision making, including attendance at key pricing committees.
• Defining the decision making framework, how pricing decisions are recommended and with what supporting Management Information (MI).
• Ensuring there is appropriate challenge to decision making processes, e.g. from the 2nd Line of Defence.
• Reviewing the MI used to monitor customer outcomes from pricing, linking to the overall pricing strategy and ensuring there is appropriate oversight through pricing committees, executive committees and into the Boardroom.
• Reviewing controls and pricing processes to ensure that changes are reflected in the way that pricing teams operate “day to day”.
• Ensuring that the above approach addresses the oversight of particular areas of focus from the FCA including the tolerance to differential pricing, the impact of pricing on vulnerable customers, and the use of data in pricing.

Ensuring that the approach to pricing is embedded across the firm.

It is not enough to implement a new strategy, it has to be embedded in the day to day operation of the pricing team. This is as much about driving cultural change as it is changing MI and technical pricing processes. Firms should consider their approach to performance management and objective setting, role profiles, recruitment, communication and investment prioritisation processes.

2020 will be a pivotal year for Pricing Practices in the General Insurance sector. There is much to do and firms should not wait. Get in touch to see how we can help you to get ahead.