FCA’s focus on fair value marks industry ‘step-change’

The FCA’s September report on pricing practices within the home and motor markets represents a “step-change” for the insurance industry, as the principle of providing ‘fair value’ moves from being a “nebulous concept” to a “demonstrable outcome”.

On Friday 6 November, data insight firm Consumer Intelligence hosted a webinar entitled ‘Fair value: What on earth is that?’, which sought to discuss the headline theme running throughout the FCA’s recent General Insurance pricing practices market study report.

Published on 22 September, the report revealed statistics and proposed remedies around the practice of price walking, where new customers of home or motor insurance are offered lower, more competitive premiums than longstanding insurance customers.

Speaking at the online event, Sue Mallender, senior consultant at Sicsic Advisory, said that the FCA’s focus on fair value is “more of a step-change” for the insurance sector, as firms are now required to ask themselves whether “the price being charged [is] commensurate with what’s being provided to the customer”.

For her, the concept of fair value encompasses both products, including core insurance offerings, add-ons and premium finance, as well as distribution, along with associated commissions, fees and charges.

“It’s moved in the regulator’s eyes from being a nebulous concept to very much an expected, demonstrable outcome, so I’d encourage firms to look at this in the context of their overall culture and business model to be successful,” she said.

Constructive, not destructive

Ian Hughes, Consumer Intelligence’s chief executive, added that “fair value doesn’t have to be a negative thing”, despite the additional workload it may create for firms.

He continued: “You could do [a] fair value assessment, even if you aren’t required to do [a] fair value assessment because doing it might make you a better business and might make you more profitable and might make your customers more loyal.

“Don’t avoid it because you think you can get away without doing it. Use this as an opportunity for growth. Use this as something constructive rather than something destructive.”

However, Hughes emphasised that the FCA’s interest in fair value is not new. The timeline of its actions around fair value can be traced back as far as 2013 – this includes 2018’s insurance distribution directive demands and needs, as well as associated product governance, and 2019’s general insurance distribution chain guidance.

Hughes said: “If the industry isn’t able to evolve and do something about this, then I think it should be worried. This has been something that we have seen coming for a long time. It’s not going away. It’s certainly not something the FCA is going to fall asleep and forget about, so the industry has to do something. The cause for concern will be if you don’t have a plan and if you don’t know how to address the issues.”

Action plan

Sicsic Advisory has compiled a framework approach to assist firms in tackling fair value; this is structured around four main cornerstones – product design, distribution, review and validation, which includes benchmarking.

For Hughes, benchmarking is of central importance as insurance businesses have to understand the concept of fair value across the industry rather than just solely focused on their own pool of customers and they also need to consider the customer perspective more fully.

He explained: “I think this is the big area – a lot of people were marking their own homework and a lot of people would go ‘oh it’s absolutely fair’ to be in a certain position or provide a certain service. It’s only when you realise that, actually, the service is not that great through the eyes of the customer and seeing it through the eyes of the customer that you realise, comparatively, you have a bit of an issue. There’s definitely a need to understand where you position.

“It doesn’t say ‘fair price’, it says ‘fair value’. Value means that you can charge a higher price because you’re adding more value and to understand that this isn’t just a march to the lowest possible price, but the creation of a value proposition for a customer. You’ve got to understand that in the context of the market and in the context of other people’s values as well.”

Beyond price

Fellow panellist Mike Miskelly, insight analyst at Consumer Intelligence, said that weighing up different elements of the insurance proposition, however, is not new for consumers and that many are already doing this, albeit potentially unwittingly. This makes it imperative that insurers can offer value “beyond price”, he said.

He further noted the role of price comparison websites (PCWs) moving forward and how these sites can potentially be utilised to distinguish other elements of insurance products aside from just the price – he said PCWs can “help push the envelope” in terms of how they display products and showcase different factors, presenting an opportunity for their business model as well as a benefit for insurers.

Mallender agreed that there will be a shift in how firms compete for business, as service will now become more of a focal point – she added that data and management information (MI) will be intrinsic to evidencing and proving fair value and that firms should ensure to assess fair value during the whole policy cycle.

Key learnings

The webinar’s final panellist James Yerkess, managing director of HAL Consulting, has experience applying fair value to the banking sector. He urged webinar attendees to embed the value exchange into end-to-end product design, assessing this on an ongoing basis rather than just once a year.

Furthermore, businesses may have to review their sales incentive framework and the skills that people within the company have in order to mirror the FCA’s shift from price to service – this could lead to attrition and churn. Yerkess also advised firms to assess fair value across a range of products, rather than looking at individual products one by one.

He added that the “status quo has to change” and that “speed, ease and convenience can be more important than price” from a customer perspective. Having the confidence to see the FCA’s new stance as a “game changer” can also be a positive, he said, and moving quickly in response can lead to commercial benefits in the medium-term.