18 Aug 2016

On 10 August 2016, the Financial Conduct Authority (FCA) published Policy Statement PS16/21: 'Increasing transparency and engagement at renewal in general insurance markets – feedback on CP15/41 and final rules and guidance'. The policy statement contains new rules that will be added to the Insurance: Conduct of Business sourcebook (ICOBS) from 1 April 2017. 

This note explains the background and objectives of the new rules, and our high level view of their likely effect. 

Relevance 

The new rules set out disclosure requirements that will apply upon renewal of certain general insurance policies within the scope of ICOBS. The obligations in the new rules may apply to both insurers and intermediaries, depending on the particular arrangements or sales path. 

Background

The FCA has been concerned that the way in which policies are priced at renewal may result in poor customer outcomes. Customers may not understand the price they are paying for their renewed policy, and longstanding customers may pay more than new customers for the same product due to this lack of understanding and inertia when it comes to shopping around at the point of renewal.

In December 2015 the FCA published a consultation on new rules and guidance to tackle these issues. The draft rules and guidance have been reviewed in the light of responses received to that consultation; PS16/21 sets out the finalised guidance. 

Objectives 

New requirement Cause and effect Comment
Application
The new rules apply when a firm proposes to a consumer the renewal of a general insurance contract, which is not a group policy, and which has a duration of 10 months or more. 
Cause: the FCA was concerned that firms might try to circumvent their obligations by shortening policy terms to 10 or 11 months.

Effect: Insurers should be aware that this rule is extended to include 10 and 11 month term policies as well as the more common annual policies.
These rules are applicable to policies that are being renewed with 'consumers' ie any natural person acting for purposes outside his trade, business or profession. Therefore if the customer is not a consumer for these purposes, these provisions need not apply. However, some firms will need to consider whether their systems will capture that distinction.  If there is doubt about the status of the customer, ICOBS 2.1.2 requires the customer to be treated as a consumer. 
Notice 
The firm must provide the information set out below to the consumer in good time before the renewal of the policy.

Cause: the FCA aims to give the consumer more notice of the cost of renewal ahead of time, to improve  outcomes.

Effect: Insurers should seek to inform the consumer of their renewal amount in plenty of time for them to consider alternatives.

The requirements for this information to be sent out 'in good time' may be affected by both the nature of the policy and, in the case of policies that auto-renew, any notice period. Firms will need to consider how much time each of their types of customers will need. 

Presentation of new premium 

The firm must provide the proposed premium to be paid on renewal in good time before the renewal of the policy.

Cause: the FCA wants the customer to be able to compare their original premium with what is being offered at renewal.

Effect: Insurers should provide this original premium to the consumer in plenty of time to allow for comparison.

One of the aims of these changes was to avoid customers not understanding if the price that they were being charged for a new policy represented a change in that charged from the previous policy term, and if so why. The proposed premium price will be the reference point that enables the customer to shop around. We think it will be important to ensure that customers have enough information to understand what lies behind the prices that are being presented, possibly linking it to information about the extent of cover (see below). It will however be critical to strike a balance and not swamp the customer with information. 

Presentation of historic premium information 

The firm must also provide either: 

  • the premium paid by the consumer at the start of the policy; or
  • where one or more mid-term changes were made to the policy which the firm proposes to renew, an amount calculated by annualising (or otherwise adjusting as appropriate to the duration of the proposed policy) the premium in effect following the most recent mid-term change, excluding all fees or charges associated with those mid-term changes.

Cause: the FCA seeks to address concerns that consumers would not be comparing 'like with like' if their premium did not reflect their actual circumstances, in pursuit of principle 7 of their Principles for Businesses: that due regard is paid to customer's information needs.

Effect: Insurers are now required to provide an 'annualised' figure which accounts for mid-term changes, excluding any administrative fees and charges.

The provision for including a mid-term adjustment was brought in as a result of responses to the consultation, raising the point that simply providing the previous year's premium might not always be meaningful. The FCA has also suggested that if there has been a mid-term change in the premium, firms may also display last year's premium if helpful. 

Comparison invitation

The customer must also be provided with a statement 

  • inviting them to check that the level to be provided by the cover is appropriate for their needs, and 
  • reminding them that they can compare prices and levels of cover offered by alternative product providers. 

Cause: the FCA wants consumers to be aware that they should frequently check that their cover meets their needs and that they are getting the best price for it.

Effect: Insurers have discretion over the exact wording they use for the prompt, and they are able to formulate it as a question, e.g. "Have you checked that your insurance cover still meets your needs? Have you considered shopping round to find the best deal for the cover you want?"

One point that was raised in the responses to the consultation was that in some cases, for example pet insurance, switching policy providers could result in loss of cover for pre-existing conditions. This is a point that this comparison will need to flag in a suitable way where appropriate. Firms may also want to consider reminding customers of the key benefits of their current policies to enable them to perform a more complete comparison that is not just based on price. 

Fourth and subsequent renewal 

Where the proposed renewal will be the fourth or subsequent renewal the consumer has entered into in respect of the policy, the firm must add the following statement as an alternative to b) above.
"You have been with us a number of years. You may be able to get the insurance cover you want at a better price if you shop around." 

Cause: the FCA provides a prescribed statement which must be used after the fourth consecutive renewal of a policy as an additional prompt for customers to engage with their policy, in the spirit of improving consumer outcomes.

Effect: Insurers are required to adopt the exact wording prescribed alongside the other information, on the fourth or later renewal of a customer's policy.

This additional requirement is to tackle 'sticky' customers and to prompt them a little harder to consider whether they could get a better deal on their policy elsewhere. 

Communication means rule

The firm must communicate the comparison and 4th+ renewal information:

a) clearly and accurately;

b) in writing or another durable medium; and

c) in a way that is accessible and which draws the consumer's attention to it as key information. 

Cause: the FCA has sought to achieve the right balance between being prescriptive and allowing flexibility.

Effect: Insurers must present the information clearly, accurately and prominently in renewal notices, in a place that makes it easy to compare with the renewal quote.

Presenting all this information in a way that is clear and simple for customers to understand will be very important to avoid confusion about what they are being told, especially where there has been a mid-term adjustment. Firms should also consider the means of communication eg emails, texts etc. 

Other key considerations 

Auto-renewal:

The FCA also published non-Handbook Finalised Guidance FG16/9 (Finalised Guidance) to supplement the above rules.  In the Finalised Guidance, the FCA has flagged 'auto-renewal' policies as requiring particular consideration by insurers to ensure that their customers are given sufficient information about how the auto-renewal term will operate, and what customers should expect on renewal, as well as the timing issues regarding what 'in good time' means, as mentioned above.  There has been criticism from consumer groups that the FCA has not gone far enough in this area.

Cancellation:

The FCA also reminds firms that once the policy has been renewed, the customer will have (unless an exception applies) the standard 14 day cancellation period, and information about this right must likewise be provided to them 'in good time' before the conclusion of the contract. 

Relevant disclosure:

Another question posed is whether it is fair to expect customers to remember all the information that was provided to the insurer when they first took out the policy: firms should consider whether it would be appropriate to remind customers of this information at the time of renewal. This information reminder may be more relevant for certain types of insurance policies, for example annual travel insurance policies.  

Fees:

The Finalised Guidance also specifically calls out firms' obligation to comply with rules about fees and charges and to treat customers fairly in this respect: the renewal disclosure should make clear any additional fees and charges.

Next steps

The rules are effective from 1 April 2017, by which time firms must ensure that they are fully compliant with the rules. This date has been extended by 3 months from that originally proposed, to give firms extra time to prepare for the transition. However we recommend that if possible, firms seek to ensure that they are compliant in advance of that date, so that appropriate disclosures are sent to customers whose polices come up for renewal from 1 April onwards.