General

insurance pricing
conduct: getting
the price right
Minds made for shaping
financial services

July 2018
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Introduction
The recent publication of Guiding Principles and Action Points for General
Insurance Pricing (GPAPs) by the ABI and BIBA, shortly after the Financial
Ombudsman Service April Newsletter devoted to general insurance (GI) pricing
complaints, has once more placed GI pricing in the spotlight. The Household
Pricing Practices Review by the Financial Conduct Authority (FCA) will provide
further focus on this issue when its report is published later in 2018.
Given the ongoing discussion on pricing of GI products by regulators and trade bodies, it is critical that insurers
and brokers revisit their approach to pricing. In particular, firms should consider how their approach compares with
evolving regulatory expectations and industry best practice.

Increased regulatory interest in pricing

Historically, the FCA has argued that it is not a pricing regulator ►► Pricing policy: The FCA has indicated to a number of insurers
and its level of intervention in the market has been relatively over the last two to three years that they expect board
light. However, given the FCA’s objective of ‘making markets work oversight over pricing policy both from a prudential and
well so that consumers get a fair deal,’ it may mean that the FCA conduct perspective. A number of firms have introduced
needs to start intervening more directly in the market. There are ‘capping’ policies for renewal premiums, although the degree
indications that it has been increasingly doing so over the last to which these have been applied and monitored has varied.
12–18 months:
►► Access to insurance: The FCA’s feedback statement on its
►► Premium disclosures and addressing customer inertia: The ‘Call for Input on Access to Travel Insurance’ had a number of
FCA introduced requirements for insurers to show last year’s findings including, a lack of transparency of price. FCA findings
premium on current renewal notices. In addition, the FCA set will be used to inform their wider work on insurance pricing.
out an expectation that insurers should proactively encourage
►► The FCA has considered the use of big data in recent years,
customers to shop around at the point of their fourth
most notably in relation to general insurance. The 2018/19
annual renewal.
Business Plan sets out the intention to assess whether they
►► Household Pricing Practices Review: The review, currently need to act to ensure that insurance pricing practices support
reaching its conclusions, is wide-ranging and includes an a market which works well for customers. Conclusions from the
assessment of firms’ pricing strategies, philosophies and review of big data, published in September 2016, will form part
approach, and controls including governance and oversight. of FCA considerations.

General insurance pricing conduct: getting the price right 1

 The ABI and BIBA GPAPs
In May 2018, the ABI and BIBA launched a set The GPAPs require that member firms are able to evidence
the steps they have taken to address significant differences
of GPAPs that address how insurer and broker in pricing for new and renewal premiums. The action points
members intend to combat excessive premium associated with the guiding principles are:
differences between new and long-standing 1. Members should ensure customers are clearly informed
customers. The GPAPs apply specifically to that new customer premiums only apply for the relevant
personal lines insurance products but not pet year of coverage and renewal premiums may be higher.
and health insurance. The guiding principles are This communication can be written (including online)
or verbal.
as follows:
2. Members involved in establishing the final premium paid
►► Member firms do not support penalising long-standing
by customers should review and assess their approach to
customers through significant differences between new and
pricing for customers, who have been with them for longer
renewal premiums.
than five years, to ensure it delivers a fair outcome.
►► Better outcomes for long-standing customers is a
3. To ensure outcomes for vulnerable customers are
commitment of members. However, wider market adoption
considered in line with these guiding principles, members
will be required for consistent outcomes.
will review their customers’ tendencies to shop around
►► Members support the requirements to disclose the previous at renewal in line with the existing code for potentially
year’s premium prices and recognise the importance of vulnerable customers.
implementation by all market participants.
4. In no more than two years, the ABI and BIBA will report on
►► Action will be taken by members to ensure customers’ the actions taken by members to combat excessive premium
tendency to shop around at renewal does not unfairly differences between new and long-standing customers.
penalise those customers who remain with their insurer
5. In the event where it is found that excessive differences in
year on year.
premiums unfairly penalise long-standing customers, the
►► Member firms will ensure that the impact of pricing on ABI and BIBA will not seek to defend such cases.
outcomes for long-standing customers is given board and/or
The ABI and BIBA suggest that the FCA take these GPAPs into
senior management priority, and the approach is embedded
account when performing supervisory activities and its current
at renewal pricing procedures.
review of GI pricing.

2 General insurance pricing conduct: getting the price right

 Financial Ombudsman Service
(FOS) setting policy on pricing
The April 2018 edition of ‘Ombudsman News’
contained a number of case studies about
price-related complaints. These provide
a number of principles regarding what
constitutes ‘good practice’ in pricing and some
of the factors to be taken into consideration
when handling price-related complaints.
These principles include:
►► Apparent acceptance, in principle, of firms offering new
business discounts, but an expectation that the discount
to be made up over five years.
►► A recognition that premium calculations are complex,
but an expectation that premium increases should be
calculated on a risk basis only, treating customers fairly
in the process.
►► FOS case assessments that take into account the
individual circumstances of each case and what the
customer would likely have done (i.e., if they had
been informed they could get cheaper equivalent
cover elsewhere).
►► The FCA requirement, from April 2017, for insurers to
take additional steps to encourage customers to shop
around at the fourth annual renewal of their policy, is a
consideration in case assessments.
►► An increased consideration of, and making judgement
calls on, the point at which a customer’s vulnerability
should have become apparent to the insurer
(i.e., for purposes of assessing potential detriment
and calculating redress as required).
►► An expectation that insurers should proactively spot the
signs of customers’ inertia in relation to price and to take
action accordingly (i.e., by contacting the customer when
customers do not shop around or challenge renewal
prices for prolonged periods of time).
►► A potential good practice expectation that insurers will
review premiums, if an ‘at fault’ claim decision which
impacts premiums at renewal (e.g., on a motor policy)
is later overturned.
►► A provision to challenge the fairness of broker
commission charges (i.e., whether the charge was
justified and reasonable).
Redress outcomes for cases upheld by the FOS can include a
refund of premiums, a refund of the difference in premiums,
additional interest — usually payable from the date each
premium was paid until the date of settlement — and
compensation for trouble and upset.

General insurance pricing conduct: getting the price right 3

Actions for insurers and brokers
The ABI and FOS publications provide a useful reference point for ►► Standards for quoting and addressing customer challenges
insurers and brokers, and we would expect the FCA’s Household of premium including the level of discretion given to
Pricing Practices Review report to provide more definitive, and internal staff and third parties to adjust premiums in
ideally detailed, reference points for regulatory expectations on these instances.
pricing going forward.
►► How to assess and manage expressions of dissatisfaction
However, we believe the challenge to ensure fair pricing for relating to pricing including regulated complaints and
long‑standing customers is wider than simply documenting FOS complaints.
strategy and policy standards. Whilst some insurers and brokers
►► Approach to root cause analysis (RCA) in relation to
already have a pricing strategy and a pricing policy, the degree
pricing complaints.
to which such a strategy is implemented and monitored does
appear to vary. Insurers and brokers should ensure that they 5. Training for all relevant departments on the pricing policy and
define, document and monitor their fair pricing policy frameworks. how it impacts their role and aligns with other policies.
A typical framework would have the following characteristics:
6. Oversight of the implementation and operational effectiveness
1. A documented pricing policy setting out key pricing principles of the framework. This should include: monitoring of
and tolerances. implementation and the roll out of training; establishing
operational controls; key performance indicators and triggers
2. Sign-off of that policy by the board together with an annual
throughout the customer life cycle; monitoring of how the firm
review of the policy.
is complying with the policy; and that customers are being
3. Alignment of the pricing policy to other relevant policies treated fairly.
such as vulnerable customer policy, complaints policy,
Diagram 1 provides an overview of the elements which we would
data policy and conduct policy.
expect to be included in a conduct-focused fair pricing framework.
4. Procedures setting out how the pricing policy should be applied
across the business, including:
►► Principles to be applied to pricing.
►► Requirements for the development and publication of
marketing materials and customer communications.

Diagram 1: Pricing framework

Board oversight
Policy framework
EY-000066442
Fair pricing policy

Vulnerable customers
Conduct policy Data policy Complaints policy
policy

Implementation of policy — procedures, controls, training covering:

Complaints
Underwriting Marketing Sales Customer service including RCA and
FOS complaints

Tracking and monitoring

Pricing outside
Complaints RCA FOS Complaints
tolerance levels

4 General insurance pricing conduct: getting the price right

 Contacts
How EY can help Steve Southall
EY can provide an independent Associate Partner
Insurance Regulation
assessment of the appropriateness Ernst & Young LLP
and effectiveness of your firm’s GI ssouthall@uk.ey.com

pricing framework. We can assess the

frameworks against known regulatory
requirements, developing regulatory Hannah Richardson
Senior Manager
expectations and industry practices. Insurance Regulation
This independent assessment can provide Ernst & Young LLP
assurance to senior management and the hrichardson@uk.ey.com

board in the following areas:

►►Board oversight: Assess board
involvement in pricing strategy.
►►Fair pricing policy: Review pricing
policies and links to other conduct
related policies and test if and how
these are applied in practice.
►►Policy implementation: Review the
effectiveness of documented processes
and procedures, associated training
and test if and how they are applied
in practice.
►►Tracking and monitoring: Review
the appropriateness of pricing MI
and assess the effectiveness of the
use of pricing MI and decisions made as
a result.

General insurance pricing conduct: getting the price right 5

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