Has regulation designed to protect policyholders instead created uninsurable cohorts?
Insurance Times
The leading information, analysis and insight brand in UK general insurance, part of Newsquest Specialist Media Ltd
Delegates at Insurance Times’ Broker CEO Forum raised concerns that the FCA’s focus on fair value has had a detrimental unintended consequence of making cover inaccessible for some demographics
Back in its 2008 Insurance in the UK: The benefits of pricing risk report, the ABI defined “the basic principle of insurance” as being when “the losses of the few are paid for by the premiums of the many”.
Although this mantra has been the cornerstone of UK general insurance for many moons now, delegates attending Insurance Times’ Broker CEO Forum at Lainston House on 14 November 2024 raised concerns about the FCA’s fair value rules – which were fully effective from January 2022 as part of the General Insurance Pricing Practices (GIPP) reform – detrimentally impacting this underlying principle.
This regulation eliminated price walking?–?the practice whereby new insurance customers were offered more competitive premiums compared to renewing customers – and placed a new emphasis on fair value and product governance throughout the value chain.
One attendee questioned whether the regulator’s fair value focus could, in fact, lead to the creation of uninsurable customer cohorts.
They explained that as part of the lengthy fair value assessment process, insurers had to review their personal lines products in granular detail to ensure they delivered fair value to end customers – not just in terms of price, but the overall proposition and elements of cover too.
However, this laserlike attention on individual products and lines means that insurers are less able to adopt a wider, more holistic view of their complete risk pool – so, they might be unable to subsidise a high risk motor book through also operating a lower risk property book, for example.
The delegate feared whether this dynamic could lead to groups of uninsurable customers.
A panellist with regulatory experience noted: “We have seen a number of issues around products where people have become uninsurable”. This includes, for example, those seeking insurance for properties built on flood plains that fall outside the remit of reinsurance scheme Flood Re.
Insurer response
One attending insurer agreed that the delegate had made a “really fair observation”.
He said: “When you look at fair value assessments, [this requires] you to have a fairly dominant position to be able to weather impacts [such as pricing changes] to your book.”
Without this line leadership position, the insurer continued, certain classes of business could become “untenable moving forward”, in turn leading to market exits.
The insurer additionally referenced the Labour party’s taskforce to investigate motor insurance, established in October 2024, as an influence that could affect insurability. ?
“If I look at the motor insurance review that's been announced, there's a danger that [this could] challenge the very base of insurance and we can't allow that to happen because that's not what our market is,” he said.
“[Insurance is] not providing energy, it's not providing anything else. It's providing risk support on a pooled basis and we just have to make sure everyone understands how the market works and why it's set up the way it is.
“Otherwise, I'm really fearful of the consequences to be quite honest.”
A second insurer agreed that this topic is “a concern”.
For him, data plays an interesting role in this conundrum. For example, if a firm has a lot of exclusive data on a particular demographic to underpin underwriting, this could see the organisation grow to write “significant volume”.
To stay competitive, rival companies operating in the same line of business may look to utilise similar data, which could point insurers to protect one, specific cohort, while another remains as the potentially uninsurable “anti-selection”.
He continued: “Tech is going to take us [to] a place with data [where you are] going to have segments that just create 20% your claims severity.”
Showing concern
Insurance Times understands that this is an area the FCA itself is worried about too, although the regulator would also most likely raise concerns about insurers subsidising high risk books with lower risk ones in other classes.
Considering that the ultimate aim of the FCA’s recent regulation is around improving end customer outcomes, the fact that new rules themselves could be driving the creation of uninsurable policyholder pockets is a big challenge UKGI needs to grapple with and innovate around.
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VP, Corporate Technical Claims @ UFG | Visionary Insurance Leader | Building High-Performance Teams | Driving #Scalable Operations | #Data Driven Decision-Making |Severity Management
3 个月Very informative
Insurance & Risk Leader | AI Governance & Innovation Expert | Transforming the Lloyd’s & Global Insurance Markets
3 个月Great article and well worth reading