We’re starting to see the regulator’s response to the pricing super complaint take shape. And it’s pretty much in line with what I predicted back in September 2018. Yet their pricing review is far from over. Some heated debate seems inevitable.
Last week, the Financial Conduct Authority issued a feedback statement following its earlier discussion paper on a duty of care. One of the two options for change put forward by the regulator was for “new/revised Principles to strengthen and clarify firms’ duties to consumers…”. The capitalising of Principles refers to the overarching Principles for Businesses that sit at the heart of its Rulebook.
All this will come as no surprise to subscribers of this blog. Back in January 2018, I wrote that a pricing super complaint should be expected. Then in March 2018, I advised clients that the regulator’s response to it would most likely be framed around some form of pricing principles. This was followed up in September 2018 with a guide for subscribers: “20 questions about pricing principles in insurance” (you can download it for free here). Then in the October came the super complaint itself. My point is that the signs were pretty much in plain sight.
Simple Levers of Supply and Demand
Let’s go back a few decades, to times when retail GI pricing was based upon some simple risk data, adjusted for likely expenses and returns. The market was pretty competitive, and some good underwriting was likely to yield a decent profit over time. Then a regulator came along and started to cast a watchful eye over what was going on. Their focus tended to be orientated around simple levers of supply and demand, and on the whole, they were fairly content with how they saw the market working.
Next on the scene were software houses, aggregators and data brokers, offering all sorts of clever opportunities to play around with price and distribution. The table around which these participants sat was getting ever bigger. And it would continue to grow, until it now accommodates a startling array of parties.
It’s worth bringing in this quote from a 2015 paper by the economic sociologist José Ossandón Writing about insurance, he saw ‘price’ as… “not simply a matter of supply and demand, but rather the product of a wider range of actors, including regulators, lawyers, policymakers, members of parliament, consumer associations and representatives of the industry.”
Regulatory Struggles
Each of these, and more, now sit at the table that is considering retail GI pricing. And when you speak to each of them, the picture that emerges is just as Ossandón postulates later on in his paper, that in established and competitive markets, “profitability is found mostly in regulatory struggles. In insurance, business means politics”.
This array of actors (to use the academic term) is shaping the pricing landscape upon which, later this year, the regulator will announce its response to the super complaint. The ‘complicatedness’ of it all is enormous. If, as Citizens Advice intimated last month, the profitability of household portfolios relies on that ‘loyalty bonus’, the consequences are enormous too.
And by contrast, the relative simplicity of the regulator’s emerging response is interesting. We’ve had principles based regulation for some time now. Some would point out that it hasn’t stopped the present situation around pricing from becoming rooted in market practices. It’s almost begging the question of whether new or revised principles will make a great deal of difference.
That however would be seeing only one leg of the stool upon which the regulator’s likely response sits. Of the other two legs, the second is already in place, and the third will be in test. Their combined impact will be enormous. That’s why the market has to focus really hard on the steps it takes next.
Losing the Narrative
One of those steps will be to manage the impact of the narrative taking hold around the so-called ‘loyalty penalty’. Last weekend, the City Editor of the Financial Times (the leading UK business newspaper) wrote a scathing article, in which he addressed the excuses he’d been hearing from insurance executives for loyalty penalties:
“…this is so much corporatist twaddle. “Gouging” your most loyal customers is not reasonable. Indeed, the very fact that it routinely happens raises questions about what’s happening in the boardroom.”
And that last question will, I believe, be very much in the minds of the FCA, for the pricing review is going to be seen as the first big test of its Senior Managers and Certification Regime. How they handle that test will be watched by various political interests, whose expectations will have been primed by Citizens Advice and others. Remember Ossandón’s comment: “In insurance, business means politics”.
