September 18, 2024

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by: kiran

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Tags: "Regulation"

General Insurance Value Measures 2023: Key Findings and Considerations for Firms

The FCA committed to publish the GI value measures data in Policy Statement PS20/9. This is the second full year of general insurance value measures data covering January to December 2023.

The data provides firms, market commentators and organisations such as consumer groups with common indicators of value across a range of GI products. Its aim is to incentivise firms to compete on broader elements of product value rather than price alone, and to improve the value of the products and services they offer consumers.

The FCA are concerned that a number of firms appear to be reporting data that could suggest a large difference between the risk price and the total price paid by the customer. This may present similar risks of harm as those identified in the GAP insurance market. While there have been some improvements in the percentage of premiums paid out in claims, add-ons continue to lag and therefore are likely to remain a focus going forward.

Key Findings

A summary of what the data shows

  • Claims costs as a proportion of premium range from 10% for GAP insurance (Add-on) to 72% for healthcare cash plan (All). Therefore, GAP insurance has shown the most significant change in percentage of premiums paid out in claims and add-ons continue to lag behind stand-alone products in terms of the percentage of premiums paid out in claims.
  • There has been modest improvement among some of the products with the lowest proportion of claims costs to premiums written. However, they remain low relative to other insurance products.
  • Claims costs as a proportion of premium were 56% for motor insurance and 45% for home insurance (buildings and contents combined). This is a drop compared to 2022 (when they were 64% and 50% respectively).
  • Motor insurance consistently made an underwriting loss throughout 2023 despite significant increases in premiums. So, this may be a feature of the FCA data picking up the significant premium increases when the policies were sold during 2023 – but not yet reflecting the claims that will be made on those policies (those claims may be settled during 2024 – or in later years). The FCA continue to monitor this situation as consumers navigate cost-of-living pressures.

Assessing Value

In assessing fair value, the FCA have seen a range of practices including:

  • An example where a firm identified that the risk price was the key benefit to customers and reflected this by making sure the risk price was always the largest proportion of the price paid by the consumer, not the cost to distribute the insurance. In this case, the firm was considering all the elements that made up the total price to ensure the customer was receiving fair value.
  • Examples where the risk price reflects only a small proportion of the total price, with distribution costs being the largest proportion without showing why this was consistent with fair value. The Fair Value Assessments (FVA’s) the FCA saw failed to identify any unique or particular benefits customers would receive from paying such high distribution costs.

During the FCA’s General insurance and pure protection product governance thematic review they saw very little evidence of firms considering the nature and complexity of the products’ existing or intended customer base when considering fair value.

The FCA recognise that distribution and administration costs may form a higher proportion of the total price in some cases, but high distribution costs do not necessarily equate to greater benefits for customers. Firms should be careful not to pass on higher costs which provide no proportionate benefits.

Alternatively, if a product has higher average premiums, distribution and administration costs may appear low as a proportion of the total price, but firms must still demonstrate that these costs are consistent with providing fair value.

What firms need to consider?

Firms must be fully compliant with PROD 4 rules, which include the following:

  • A firm must make sure that the product approval process identifies whether the product provides fair value to customers in the target market (PROD 4.2.14A R).
  • A firm must be able to clearly demonstrate how any product provides, and will provide for a reasonably foreseeable period, fair value (PROD 4.2.14C R (1)).
  • Where the firm is unable to identify and clearly demonstrate that a product provides fair value, the firm must not market the product or permit the product to be distributed, or must have made sure appropriate changes have been made so that fair value will be provided (PROD 4.2.14C R (2)).
  • The risk price and the total price paid by the customer should bear a reasonable relationship to the actual costs incurred by the firm or any other person involved in the distribution arrangement, the quality of any benefits, and the costs or quality of any services provided (PROD 4.2.14M E).
  • A firm must, as far as reasonably possible, ensure the distribution arrangements for a non-investment insurance product avoid or minimise the risk of negatively impacting the fair value of the insurance product or package (PROD 4.2.14N R).

This data should be read in conjunction with the FCA’s recent thematic review looking at firms’ implementation of PROD 4.

How we can help

If you would like to discuss this data in more detail or determine where your MI sits within the FCA’s published data, please get in contact.

As highlighted, in the FCA’s findings from their thematic review on product governance, firms should be looking closely at their overall frameworks and if you would like to discuss the FCA’s findings or would like a review of your current arrangements, contact us here.