"Rather than taking the difficult decision, many firms look over their shoulder and choose to do nothing on the basis that others in the market are doing the same."
- James Daley, Managing Director at Fairer Finance
For over two years now, the insurance industry has been obliged to prove that they offer fair value to customers. It’s a challenge that has led to a diverse spread of solutions which, when taken seriously, ask some difficult questions of established models.
“It’s no longer acceptable, for example, to simply bank as much commission as you can get away with charging.”
Brokers need to be able to frame the remuneration they are making in the context of the costs and service they’re providing. Insurers should set their prices with the same considerations in mind.
It drives a stake through the idea that price is fair simply because the customer is willing to pay it. Fair value (and the Consumer Duty more broadly) asks all companies in the distribution chain to think about the value they’re offering.
Taken as intended, the fair value challenge should lead firms to cut high commission and prices. But in many sectors, it’s hard to detect any real movement. The Financial Conduct Authority (FCA) is already giving firms an idea of how it intends to use its new Duty. In the Gap Insurance market, the FCA started by writing a 'Dear CEO' letter saying it didn’t think fair value was being achieved if the industry was only paying out claims equivalent to 6% of premiums.
“When the industry failed to take the hint that it was time for a complete rethink of its pricing, commission, and distribution – the regulator swooped in and shut down the entire sector.”
In protection, there are several areas where firms could and should already be acting. Commission in the direct market is too high, loaded premiums are impossible to justify - to name just two. But firms find it hard to be first movers on these issues, for fear of losing their competitive advantage.
There was a useful parallel in the motor market a decade or so ago. Insurers were selling claimant details to claims management companies, pushing up the cost of claims for everyone. Firms knew it was a bad idea but over time, they got hooked on the income and couldn’t tear themselves away from it. It took intervention from the Government to ban the practice before firms finally stepped away.
In the protection market, there are many distributors who know that loaded premiums are impossible to justify in the face of fair value. Similarly, comparison sites know that they cannot justify taking a £1k commission for a Life Insurance sale with no advice.
“Yet being the first mover to scrap these will put them at a competitive disadvantage from an investor perspective.”
Executives will all be incentivised to grow profits, and backing away from loaded premiums or high commission might be a move that guarantees they don’t hit targets. It may also hit their relationship with insurers.
So, rather than taking the difficult decision, many firms look over their shoulder and choose to do nothing on the basis that others in the market are doing the same. In many cases, there’s usually some kind of spurious justification concocted – eventually, even the people making these arguments start to believe them.
“Protection is some months ahead of the Gap Insurance market.”
The 'Dear CEO' letters have not yet landed – and no formal indication has been given that this is something the regulator is looking at. But it almost certainly is – and it’s a matter of when not if some action is taken.
I’d like to see trade bodies showing some leadership in these tricky areas – working with members to stop practices which everyone privately admits are unjustifiable. Through collective action, the pain of transition can be reduced.
“Those outside the body who choose not to follow suit will soon find they're isolated and run the risk of a harder penalty for not taking cue from their peers.”
St James’ Place’s share price fell 25% last summer when it was revealed that the FCA had not been impressed by their initial attempts at offering fair value. Nine months later, the share price is down another 50% as the firm put aside provisions to compensate investors - having faced the full implications of Consumer Duty.
Their story should act as a warning to those who try and deal with Consumer Duty with their heads in the sand.
