Insurance and ‘fair value’: FCA rule changes

Following a period of consultation into ‘General insurance pricing practices’ which resulted in a report published in September 2020 by the Financial Conduct Authority (the “FCA”), a series of rule changes came into force on 1 January 2022. These changes primarily focus on the home and motor insurance markets and automatic renewals but also, delivering ‘fair value’ on all insurance products.

In this article, we take a look at what it means to deliver ‘fair value’.

Background and key rules on ‘fair value’

The rules on fair value came within a host of other rule changes following the FCA’s market report published in September 2020 which found that “some consumers are not getting fair value for their general insurance products” and emphasised the issue of price walking. This is where firms use complex pricing techniques to gradually increase prices at renewal for their most loyal customers.

The key obligation is that, in relation to a non-investment insurance product, firms must ensure that their product approval process identifies whether the product provides fair value to customers in the target market. That obligation also requires firms to consider whether the product will continue to provide fair value for a reasonably foreseeable period, including at renewal.

This obligation to assess is followed up by an obligation to retain a record of the value assessment so that a firm can clearly demonstrate how a product or package provides fair value.

What is ‘fair value’?

The FCA defines ‘value’ as the relationship between the overall price to the customer and the quality of the product and/or services provided. The assessment of value must include consideration of at least:

• the nature of the product including the benefits that will be produced, their quality, and any limitations;
• the type and quality of services provided to customers;
• the expected total price to be paid by the customer when buying or renewing, and the elements that make up the total price, which includes (non-exhaustively):

o the overall cost to the firm of the insurance product; and
o the distribution arrangements, including the remuneration of any third party in the distribution arrangements;

• how the intended distribution arrangements support, and will not adversely affect, the intended value of the product.

Wide ranging in application and consideration

These rule changes are far reaching in terms of their application across the insurance market and in terms of the points firms need to consider.

As ever with FCA rules their formulation can be confusing, so it is important to boil down what is required and factor them into internal processes. Should you require any support with doing this, please contact the Commercial Team.