Are insurers’ pricing practices in the best interests of consumers?
Consumer interests remains the key driver for regulatory intervention in the retail general insurance market and insurers can expect to be reviewing carefully their consumer pricing policies in 2020. Following the CMA’s investigation of so-called loyalty penalties, the FCA is expected to issue its final report into pricing practices in the retail general insurance market in the first quarter of 2020, after the publication of its interim report in October 2019. The FCA has provisionally found that competition is not working well for consumers in the home and motor insurance market and has proposed several wide-ranging remedies including:
- limiting pricing practices that allow firms to charge higher prices to consumers who do not switch;
- stopping practices that could discourage switching – including a potential ban or restriction on the use of auto-renewal of insurance policies and making it easier to decline auto-renewing policies or exit a contract;
- a ban or restriction on raising prices for consumers who renew year on year or requiring firms to automatically move consumers to cheaper equivalent deals;
- requiring more transparency in the way firms communicate with their customers, for example by providing information about alternative deals or moving customers to better priced products with equivalent cover; and
- expanding or strengthening the FCA’s existing product governance requirements.
The FCA is also looking at ways that the financial markets could be positively impacted by technological developments and innovation in the future, such as Open Finance. This is based on the CMA’s Open Banking solution introduced in 2016. It would allow third parties to access consumer data to offer innovative services and could facilitate the process of searching for and switching to better deals. The FCA is keen for the retail general insurance market to be part of these innovations to ensure the market works well for the future. In a speech in November 2019, the FCA’s director of competition highlighted how the FCA has been drawing on the lessons learned from Open Banking to shape its approach to Open Finance, with a particular focus on data sharing and consumer protection and the FCA has just issued a ‘call for input’ on its strategy towards Open Finance which closes on 17 March 2020. Our forthcoming article on InsurTech explores this further and looks at the use of technology to put consumers in control of their data.
A focus on pricing structures used on comparison websites
While price comparison websites have many benefits for consumers, the CMA has been investigating the use of ‘most favoured nation’ (MFN) clauses in contracts between CompareTheMarket and insurers and whether these deny consumers the benefits of price competition. In November 2018, the CMA announced that it had issued a provisional infringement decision to the price comparison website. The CMA has objected to the use of MFN clauses which prohibit home insurers from offering lower pricing on other channels, including rival platforms. The CMA considers that the MFN clauses are preventing rival sites and other channels from competing with the price comparison website by offering lower prices to win business from home insurance providers and, as a result, insurers are likely to be paying higher commission rates which they are passing on to customers. A final decision is expected in Spring 2020.
Understanding when you can and cannot share data
While the FCA may be advocating opening up access to consumers’ data to facilitate switching and price competition, the way in which data and information is shared in the insurance market remains a key enforcement priority for regulators. Insurers need to be mindful of two themes: firstly, whether they hold or have access, or alternatively restrict access, to data that provides an unfair competitive advantage and secondly whether the ways in which competitors deal with each other facilitates the sharing of commercially sensitive information.
An example of the former is the investigation that the European Commission commenced in May 2019 into Insurance Ireland, an association of insurers, on whether the terms and conditions of access to its data pooling system restrict competition in the Irish motor insurance market. The Commission has concerns that the Insurance Link database, which pools information on insurance claims to facilitate the detection of fraudulent claims and verify data provided by potential customers, may place companies without access to the database at a competitive disadvantage.
With regards to sharing data between competitors, the European Commission is also investigating aviation and aerospace insurance brokers over allegedly sharing commercially sensitive information, an investigation initially launched by the FCA with dawn raids in April 2017 and taken over by the Commission in October 2017. The allegations concern the exchange of commercially sensitive information between competitors in relation to aviation and aerospace insurance and reinsurance products, and a decision is expected in 2020. With other enforcement cases in the wider financial services sector also examining the disclosure of information, having in place robust controls to ensure commercially sensitive information is not shared with competitors, should be a compliance priority for insurers in 2020.