"The FCA has asked the insurance market to make sure that any money paid and received for selling insurance – throughout the entire lifecycle of that policy – represents fair value."
While lots of focus has been on the price-walking aspect of the regulation, which is vitally important and the market must comply with, in my view not enough attention has been given to the ‘fair value’ aspect. This part is critical to get right and underpins the new policies set out by the FCA and the transition to a value-led model that promotes better customer outcomes.
Over the past 18 months we’ve been collaborating with the FCA and independent compliance experts to make sure our approach is the correct interpretation of the new rules, and so that our distributors are protected from unwanted regulatory scrutiny and ensure customers receive fair value.
The value of advice – what’s fair?
The FCA has asked the insurance market to make sure that any money paid and received for selling insurance – throughout the entire lifecycle of that policy – represents fair value. All parties in the distribution chain are included in this, from the insurer and distributors such as Paymentshield, right through to mortgage advisers. Given that commission directly impacts the price a customer pays, advisers are undoubtedly now asking what this means for them.
Advisers possess considerable expertise to help their clients find the right insurance policy for their needs, so there is no doubt in our minds they should be rewarded for this advice. Therefore, the first thing to say is that our commission rates will remain unchanged.
However, the FCA is asking a clear question of the industry: is there a fair balance between long-term effort and reward? Therefore, the ‘fair value’ aspect of the regulation forces us to focus on both initial and recurring income.
Based on this stipulation from the regulator, as an industry we can no longer turn a blind eye to firms receiving commission indefinitely for GI policies which have ceased to be actively serviced. This is certainly not consistent with the FCA’s guidance which is trying to create better outcomes for the customer.
Can we honestly say we’re acting in the customer’s best interests if we haven’t had meaningful contact for several years, yet still take an income from their policy? Knowing what the FCA has set out to achieve with its guidance and how seriously advisers take their duty of care to customers, we don’t believe anyone will be comfortable with indefinitely taking value from a policy sold over a decade ago, with no subsequent effort made to check it’s still right for their client.
Therefore, we feel it is right to make a change and, where there is minimal customer interaction post sale, limit the amount of time commission is earned for. That’s why, from 1 January 2022, we’ll be pausing renewal commission payments at 20 years for accident, sickness and unemployment policies, and at 10 years for all other products, until a policy review is undertaken.
To reassure advisers, we don’t anticipate that this will result in a significant reduction in income for most firms, given the average duration of a home insurance policy is five years. Less than 1% of the firms Paymentshield works with actually have more than 50 GI policies over 10 years old. And, ahead of January, advisers still have time to proactively review the needs of their clients to avoid any potential impact on income.
Paymentshield has always pushed the importance of regular reviews throughout the lifetime of an insurance policy. It is certainly fair to assume a customer’s circumstances will change over time, and the same policy is unlikely to meet their needs indefinitely. It’s important that advisers check in regularly, with remortgage being an obvious opportunity to do a full review of a customer’s insurance needs.
Ultimately it all boils down to one question: is there a fair balance between effort and reward? We hope advisers agree that our new approach strikes that balance more appropriately.
Pricing practices
Another big change the GI market will see will be as a result of the FCA’s ban on price-walking – the ‘price-walking’ practice of discounting products in the first year but then increasing the price at renewal and subsequent years. The regulator’s definition of discounting includes where cancellation fees are paid to encourage switching, and where vouchers are offered as an incentive for new business. From now on, our renewal prices will never be greater than the equivalent new business price.
This brings welcome and much-needed change to the market. Price-walking has been rife for too long - something the industry became susceptible to in the wake of heavy discounting on comparison sites. It has detracted from the true meaning of ‘value’ to the customer: that is, their policy actually being of worth and suited to their specific needs. It’s put huge pressure on companies such as ours to enable advisers to compete with our new business pricing.
The new rules put an end to all of that, levelling the playing field. Advisers can expect to see new business prices across the entire market increase, while renewal prices, on average, should go down. It presents them with a fantastic opportunity to compete on more policies and offer a fairer proposition to the customer. Paymentshield’s customers will, of course, also benefit from our panel of leading insurers which helps keep our pricing competitive.
Auto renewal and rebroke services
We’ve also made changes to our auto-renewal and auto-rebroke services, in line with the FCA’s criteria. The FCA has asked that it is made clear to the customer if their policy is set to auto-renew, and give them the option to opt out if they wish. We are ahead of the game here and the functionality is live, with advisers being asked to start doing this from 13 December.
Advisers will now be presented with text in our Adviser Hub platform that they simply need to read to the customer, providing a clear choice to opt in or out of auto-renewal. To make sure those who do opt-out aren’t left with a period of no cover, we’ll be sending out reminders in plenty of time.
For those who do choose to auto-renew, we’ve also made improvements to our auto-rebroke service. Since 29 November, we’ve been taking a more proactive approach to get customers the best deal. We’re now checking prices from our full panel of insurers every year to see if we can find customers a cheaper price, not just if we notice their renewal price increase.
We hope the industry joins us in welcoming the changes introduced by the FCA to make things work better for consumers. If advisers have any questions about the changes we’re making and how they’re going to be affected, please do get in touch with us.
