Are you delivering “fair value?” It’s a simple but also loaded question for insurers.
If you’re an insurer, you’re likely aware the UK Financial Conduct Authority (FCA) has introduced new regulations to ensure insurance providers deliver fair value on their products. This means more complex product governance standards. But are you ready to manage the change? And how can you do it as smoothly as possible?
Part I of our series on the FCA’s new regulations explores those questions and more.
Why the new rules?
The FCA wants customers to get fair prices for the quality of insurance products they buy. Its own research shows customers are being harmed by ineffective competition within the insurance market.
“Price walking” is one of the main problems. This term refers to situations in which insurance firms offer more competitive and cheaper premiums to new customers, compared to those seeking to renew their cover. The FCA has also found some firms use practices that discourage customers from shopping around.
The FCA outlined the details in a policy statement, General Insurance pricing practices market study released in May 2021.
What are the new rules?
- Enhanced product governance
Under the new rules, insurance firms need to strengthen their product oversight and governance processes to ensure they meet legal and regulatory requirements, as well as provide fair value.The FCA’s requirements for improving product governance are known as PROD, as described in its Product Intervention and Product Governance Sourcebook.PROD states that good product governance should result in products that:- Meet the needs of one or more identifiable target markets
- Are sold to clients in target markets through appropriate distribution channels
- Deliver appropriate outcomes for clients.Insurance firms will have to monitor their products on a continuing basis to ensure they always meet the needs and value expectations of customers. If they discover the product is not offering fair value, the FCA expects firms to take action.
- Changes to how insurers set their prices
To stamp out price walking, under the new rules if a firm sets a renewal price for an insurance product, this must be no higher than it would offer a new customer. - More stringent reporting requirements
Firms will be required to submit regular reports showing pricing information. This also affects add-on policies and premium finance sold alongside these products.
- Easier auto-renewal
Insurance firms need to make it easier for customers to stop policies from auto-renewing. They must allow customers to opt-out of auto-renewal at any point during a contract’s term, and make it easy for them to do this.
Key questions about FCA’s new rules
Who will be affected by the new rules?
The changes will apply to all life assurers and intermediaries selling pure protection business, as well as trade bodies representing these firms, and consumers and consumer organizations.
What are the FCA’s expectations?
If firms do not meet PROD standards, the regulator has warned it will intervene using the full range of regulatory tools, including requiring firms to remove products from a sale where necessary.
What do the changes mean for insurers?
The FCA expects firms to demonstrate strong governance, control and oversight arrangements throughout their business and in mitigating the key risks of harm in several areas, including:
- Weaknesses in pricing and product governance practices
- Weaknesses in control and oversight arrangements and awareness-raising of scams with customers
- Weaknesses in the management of operational risks.
How can insurers achieve this?
Dassault Systèmes and our partners have many years of experience helping customers worldwide to roll out Product Governance and Management solutions. We are working to support firms on their product development frameworks – i.e. to help firms address the weakness in five key areas as laid out by the UK regulator – to adhere to the regulations within product design, product testing, distributors, governance and oversight.
The 3DEXPERIENCE platform is a holistic, automated, connected and streamlined way to manage products. It can do this from development, throughout products’ entire life cycles, through all product variations and changes, right up to retirement. Dassault Systèmes brings product lifecycle management experience and best practices from other industries, such as automotive and life sciences, to financial services. It helps to reduce time-to-market, optimize product performance, create efficient product development process and ensure regulatory compliance.
Look out for Part II of our blog on new regulations to discover how we support firms to manage their product development frameworks and adhere to the PROD 4 regulation.
