Graham Wright, UK P&C Pricing Product Claims and Underwriting Lead at Willis Towers Watson, comments: “The UK general insurance industry will no doubt welcome the publication of a proposed outcome to this long investigation, although inevitably the FCA’s paper will raise as many questions as it answers. One of the biggest challenges for insurers and intermediaries alike is managing the implementation transition given current market competitive pressures, and therefore deciding how and at what point price changes should be made.”
As well as outlining the proposed remedy and additional supporting measures, the report appears to effectively provide an endorsement for the use of complex modelling and price optimisation techniques, stating that “most significantly, it can allow firms to compete by offering different prices and products to different consumers. This can benefit consumers if it allows firms to offer a range of choice and better deals. Our judgement is that stopping firms from price optimising completely could lead to less effective competition and worse consumer outcomes overall”. In effect, this recognises that although general insurance pricing practices are extremely complex in the eyes of the average customer, ultimately this complexity is intended to harmoniously balance insurer and intermediary commercial objectives with fair individual customer outcomes.
Whilst at face value the proposed remedies will require insurer and intermediaries to significantly adapt their pricing practices, the scale of the change is not incomparable to that which was required of the industry in 2012 when the ruling against the use of gender in insurance pricing was enacted. To that end, we would expect the insurance industry to rise to the challenge posed by the FCA over the coming months. It is also worth noting that although the main focus is on home and motor insurance, the product governance rules will also apply to wider general insurance and pure protection products.
Stephen Jones, UK P&C Consulting Lead at Willis Towers Watson, comments further that: “As with any regulatory change, there will be winners and losers within the industry, and the winners will be those with the ability to flexibly adapt their pricing strategy. Critical to any effective adaption strategy will be strong portfolio management and governance, the need for greater operational efficiency, the ability to report clearly on the adherence to the remedy and flexible deployment.”
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