When the Financial Conduct Authority (FCA) released its interim report on general insurance pricing practices, it discussed the introduction of new rules to increase transparency and engagement at insurance renewal. Discussing the question of transparency within the insurance sector, Sameer Keshani, general insurance board chair of the Institute & Faculty of Actuaries, outlined the need for consumers to be placed at the heart of the insurance proposition.
The FCA has concluded that there is more work for insurers to do not only with the amount of information provided but also in the way that it is communicated, Keshani said. This is particularly complex with regards to some products that are individually priced for a particular person or risk, he said, and it can be extremely difficult to explain all the factors that go into setting the premium.
“Clearly it is important to provide key details which drive price but setting out all calculations may potentially confuse people rather than enlighten people,” he said, “and make it much more difficult for consumers to make decisions. And this could have an adverse impact on the most vulnerable in society.”
He believes that, while more should and will be done, the insurance industry is now working hard to improve the transparency of information within the sector. It has been challenging for the industry to strike the right balance between providing too much information and too little, he said.
An especially taxing area for insurers, Keshani said, has been the practice of cross-subsidy as this is generally not well understood by consumers even though it is fundamental to insurance pricing. Judgements relating to what is deemed ‘fair’ are not straightforward, he stated, and depending on what those are, can give a perception of price discrimination.
“It is also important to consider the trade-off between cross-subsidy and personalisation,” he said. “At one extreme, setting the same price for everyone may seem inappropriate or unjust. At the other extreme, total personalisation of pricing may lead to unaffordable prices for some customers, including those who are most vulnerable.”
Insurers, he said, will always be worried about the brand implications of disclosing cross-subsidy details but he believes that a more detailed industry-wide narrative, set out within the key facts document which accompanies products, might be the way forward.
The need to establish transparency within the insurance sector is about placing the consumer at the heart of pricing practices and Keshani believes that the fundamental concept of insurance is a social good. Despite the role of insurance in protecting people from loss, he said, insurance, and particularly personal insurance, can sometimes be perceived as something of a grudge purchase.
“The industry has worked hard to change this attitude by offering more and improved additional benefits along with the core cover so that consumers do feel that value,” he said.
This emphasis on the consumer has benefited insurers in turn, he said, with increased brand awareness and better customer loyalty.
The role of brokers in the personal lines insurance market has been slightly diminished since the rise of insurers selling insurance products directly to consumers, Keshani noted. Brokers do remain a key distribution channel for many insurance companies, he said, and he believes that, in order to stay that way, there needs to be a two-way communication on consumer needs and insurance offerings.
“It is of fundamental importance that the insurance markets work well and deliver good outcomes for consumers,” he said, “particularly for those who are vulnerable. Robust product governance is essential, and all insurers should be clear about how their staff and models determine prices.”
Keshani noted, however a concern that the FCA’s report may have an undue focus on the final price consumers have to pay, to the exclusion of almost all other concerns. A big picture view of the insurance product is needed, he said, including an assessment of the overall quality of the product and any associated product add-ons.
“The prescription of pricing factors may not be the most suitable solution,” he said. “In particular, there could be a ‘waterbed effect’ for the rest of the market where, if the premium for a substantial section of the market reduced significantly, then premiums for the rest of the market might then need to increase which itself may have unintended consequences.”
Regarding concerns around pricing factors, Keshani said that, given the relatively recent implementation of the Insurance Distribution Directive, there may be merit in taking stock on what this directive is achieving and understanding where gaps may lie, before adding further interventions such as prescription of pricing factors.