FCA Focus on Retail Insurance

On 22 July, the FCA published a number of updates relevant to retail insurance alongside an overall “Roadmap for retail insurance – empowering consumers and strengthening markets”. 

Coming shortly after the announcement of a package of reforms around the Secondary Competition and Growth Objective, and the focus on lessening regulation, no doubt the FCA wishes, in part, to demonstrate its commitment to protecting consumers.

Evaluation of General Insurance Pricing Practices (GIPP) remedies

Following a study identifying that home and motor markets were not working well for consumers, and that firms were using so-called “price walking” to raise prices for renewing customers year on year and sludge practices to discourage customers from switching providers, the FCA introduced the GIPP remedies. Insurers were required to offer renewing customers a price no higher than that they would offer a new customer. This paper assesses whether the GIPP remedies have addressed the harm identified, within the context of rising insurance prices.

The evaluation has found that price-walking practices have reduced, and that the GIPP remedies are associated with a decrease in prices in the consumer market for motor insurance, and no relationship with prices in the home market. Results in relation to the effect of GIPP remedies on product quality were mixed: some measures suggested an improvement in quality and some a decline. Higher cover limits were observed (an improvement), but also higher compulsory excesses in the motor market (a decline). There was no evidence that GIPP remedies have led to a change in the number of features (such as legal services or personal accident cover) offered by core products.

Motor insurance claims analysis

This analysis was produced as part of the FCA’s work on the Motor Insurance Task Force, to address the issue of motor insurance premiums increasing significantly from 2022 to 2024. The aim of the paper is to determine what is driving motor claims costs.

Some of the conclusions¹ include:

• Claims costs associated with repairs and property damage have increased significantly due to longer lead and repair times, more complex vehicles, and the rising cost and limited availability of skilled labour. This accounts for 65% of the overall increase in total claims costs.
• Additional parties may be involved in the claims process, which is not managed by insurers. This includes where insurers outsource to accident management companies, claims management companies and credit repair and hire organisations, and receive referral fees. The FCA recommends that the ABI work with firms to develop a good practice code on referrals. In addition, the FCA will work with the ABI to determine how claims can be better managed without adversely affecting customer outcomes, which should include robust procedures to challenge unreasonable third party costs.
• The cost of replacement vehicles increased significantly, accounting for 10% of the overall increase in total claims costs. Insurers of the driver not at fault often earn referral fees by referring their customer to credit organisations, even where the customer has courtesy car benefits in the policy. The FCA would like the ABI and firms to consider approaches and processes to manage and control the costs of replacement vehicles.
• The cost of bodily injury claims is increasing, accounting for 8% of the overall increase. There is growing evidence of fraudulent or exaggerated claims. Increasing claims involving uninsured riders (such as those on e-scooters and e-bikes) is also causing a rise.
• Fraud has a large impact on motor claims, and the insurance industry incurs huge costs in preventing and mitigating it. There is also an issue with customers being sold fake insurance policies via ghost brokers online. The FCA recommends that the ABI and firms look further at what they can do to improve fraud detection and prevention.

The FCA is keen to engage with the Government, firms and stakeholders to take the identified matters further.

Review of home and travel claims

The review identified instances of good practice, including using a broad range of MI to monitor the quality of claims handling, multiple oversight mechanisms over third parties, and customer-centric claims polices. Areas for improvement included the following:

• Some insurers had limited control over outsourced claims handling arrangements, more frequently where firms operated as a UK branch of an overseas insurer or provided services into the UK from abroad. This raises concerns about firms’ ability to ensure good consumer outcomes under the Consumer Duty.
• Some firms produced poor quality MI, lacked comprehensive data or failed to use it to identify or assess customer outcomes effectively, including for vulnerable customers.
• There was a lack of clarity, and therefore poor customer understanding, in relation to storm cover. Firms failed to define clearly what constitutes a “storm” and the conditions for storm damage, which together with poor communication is leading to high claim rejection rates.
• In some firms there is poor oversight and monitoring of cash settlements, a failure to consider customer vulnerabilities, and some firms promoted cash settlements without ensuring good customer outcomes.

The FCA expects firms to consider whether policies meet customer needs and whether action is needed to improve understanding of policy wordings. Trade bodies are requested to act in response to the findings by the winter, to help prevent customer harms and ensure compliance with the Consumer Duty. Firms must consider whether their use of cash settlements is controlled and monitored appropriately to meet the Consumer Duty.

Premium finance market study

The FCA has published its first phase of findings in relation to the use of premium finance, which is used to spread the cost of insurance premiums. It notes a growing proportion of consumers are unable to pay premiums in a lump sum or use alternative forms of credit to purchase insurance, and many of these customers have a wide range of characteristics that suggest low levels of financial resilience. For the largest brokers and insurers, premium finance is self- funded and sold alongside the insurance they manufacture, whereas smaller brokers arrange premium finance via specialist premium finance providers (“SPFPs”) who lend the funds to the consumer and the brokers receive a commission.

The study finds that there is a wide variation in the rates charged for paying in instalments. Around 60% of consumers pay headline APRs between 20 – 30%, and almost 20% are paying APRs above 30% (more common where an SPFP is involved). However, 0% finance options are much more common in home than motor insurance. This is because there is a greater prevalence in buying home insurance direct from the insurer rather than via a price comparison website, which enables firms to offset more easily the funding and operational cost of monthly payments within the overall premium; and there is a higher proportion of existing relationships with the customer.

The FCA found that where firms charge for premium finance, revenues appear to exceed costs materially in some cases, with premium finance margins ranging from 14% to 62% across insurers, intermediary lenders, intermediary brokers and SPFPs from 2018 to 2023. The FCA notes that the ICOBS requirement that customers be able to understand the difference in the cost of paying monthly versus annually is being met within existing channels. However, customers who want to explore paying for insurance through credit options other than premium finance encounter barriers when comparing different credit products. 

The FCA also notes concerns by some commentators that there may be “double dipping”: that is, in addition to paying finance charges for premium finance, the decision to pay monthly is also factored into the pricing of the underlying premium. The FCA rules require that firms do not increase the insurance premium for using premium finance without an objective and reasonable basis, but notes that some insurers have said that the choice of payment method is correlated with risk. If the FCA finds evidence that this is not the case, it will consider its supervisory approach on a case by case basis.

The next steps that the FCA will take include: looking at higher-priced products and whether they reflect the value offered; seeking to understand whether the differing approach in home and motor provides fair value to customers; the effect on the market of features such as commission and claw-back arrangements and whether they are creating unnecessary friction; and the extent to which consumers can compare premium finance with other products.

The FCA has currently ruled out a number of steps as remedies, including a single market-wide APR cap, mandating insurance be offered at 0% APR, or a commission ban.

Footnote

1. We flag actions that the FCA will take, or recommends the ABI and firms take. A number of issues require wider government action.