Protection products must be assessed to ensure they offer fair value to consumers, including those policies originated before October 2018, the Financial Conduct Authority (FCA) has announced.
It warned insurers over products where they know some customers will pay more in premiums than the sum assured or where inflation will reduce the value of the sum assured to eclipse the premiums paid.
The regulator also told insurers to consider the value of products where there was a likelihood of the customer cancelling before reaching an age where they were likely to make a claim or receive a benefit.
And as a result, it warned them to consider if the price outweighed the benefit and therefore if customers would be better served by using alternatives such as making regular savings.
Pricing overhaul for insurance
The rules are being introduced as part of the regulator’s policy statement published today overhauling pricing for general insurance and pure protection contracts following the FCA’s General insurance pricing practices market study.
While policies renewed annually such as motor and home insurance will see the largest impacts on how they are priced, longer-term products such as protection cover are also affected.
As Health & Protection reported, other medical, dental and health insurance products such as cash plans are covered by the rules as well.
The changes deliver “enhancements to our existing product governance rules to ensure firms have processes in place to deliver products that offer fair value to customers,” the FCA said.
“These provisions would apply to all non-investment insurance contracts, including all types of general insurance and pure protection insurance, not only to home and motor insurance.”
The market study was published in September alongside a consultation which included plans to require manufacturers and distributors to consider whether products represented fair value for customers for ‘a reasonably foreseeable period’.
In its final policy statement, the regulator acknowledged this period may vary depending on the type and length of the contract, but said it expected firms “to exercise their judgement to decide on this point”.
“Firms should consider the value that a product or package of products is likely to offer throughout the life of the product – at inception, through the initial insured period and at subsequent anticipated renewals,” it said.
And it added: “For certain pure protection products, the reasonably foreseeable period could be the customer’s lifetime because these are long-term contracts and the benefits are payable only on death or in respect of incapacity due to injury, sickness or infirmity.”
Alternatives providing better value
The regulator noted that it expected many firms will have identified the relevant considerations, including whether they expect customers to renew, how they expect to price renewals, and whether there could be any significant changes to the nature or value of the insured risk or cover provided.
But it highlighted the specific circumstances of long-term pure protection products and warned insurers to be cognisant of potential consumer detriment.
“When the product is sold, firms know that some customers will pay more in premiums than the sum assured, and they are likely to know the precise month when a customer will reach that point,” the FCA said.
“Firms also know that inflation will reduce the value of the sum assured over time.
“We expect firms to consider whether these products are likely to remain of fair value to customers throughout the whole life of the product, given the increased total premium the customer will have paid and the reduced (or potentially negligible) benefit they will receive from it.
“As a result firms would need to consider if the price outweighs the benefits for the product and whether there would be fair value, especially where the customer in that scenario could be better served by an alternative option (such as making regular payments into a savings account).”
And it added: “Cancellation rates, and the reasons for cancellation, during the term of the contract are likely to be an important piece of data for firms to consider when determining if the product is providing fair value.”
Historic policies reviewed
The FCA will also enact its proposal to extend the rules to all polices issued or adapted since 1 October 2018 and compel insurers to have reviewed these policies for fair value within one year of the rules coming into effect.
The regulator noted that a few consultation respondents suggested it would be disproportionate and costly to apply a product approval process for certain pure protection and healthcare products that were developed 10 or more years ago, and for products that are in run-off with a small number of customers.
But it strongly disagreed.
“We do not consider that pure protection products, or products that are in run-off with few customers, should be excluded from the requirement that products are reviewed at least annually on an ongoing basis,” it said.
“Fair value and the other requirements are equally important to consumers with these products.”
Insurers will work with FCA
Charlotte Clark, director of regulation at the Association of British Insurers, said the industry supported the reforms and would continue working closely with the FCA to ensure they were delivered effectively.
“While the FCA recognises their interventions could lead to price increases for consumers who regularly shop around, these remedies should ensure that all customers get fair outcomes from competitive insurance markets,” she said.
“It is vital that the new rules are applied across the whole insurance market, including price comparison websites and insurance brokers, with a uniform level of supervision and monitoring by the FCA, to ensure good customer outcomes.
“As the FCA has said previously, insurers do not make excessive profits and, as they now point out, it is likely that firms will no longer be able to offer unsustainably low-priced deals to some customers.
“It will remain important to maintain incentives for customers to shop around, while ensuring competitive deals for those who stay with their insurer.
“When shopping around people should ensure that they choose the right product for their needs, looking at the overall value of the product, and not just buying price.”