For use when the Broker wrote the original policy
An Insurance Provider/Manufacturer can no longer discriminate against a customer on the grounds of how many years a customer has held their policy with them.
This means firms in these markets will no longer be able to dual price and effectively bans the practice known as “price walking”, where a premium is offered at an introductory price and is gradually increased over time at renewal, until it bears no resemblance to the premium that would be offered if the same customer was a new customer.
As yet it is unclear how this will impact overall pricing for consumers, but it is likely that this favours the intermediary market, as opposed to previously when it was felt that some of the internet-based aggregators were operating the price walking practices mentioned above. Prices through those sites were often lower than through intermediary channels and if customers were comparing the price available through an adviser versus an internet price, the internet price would have won.
Some Provider evidence suggests that in the last year around 75% of Household Insurance was sold through a different channel than where the mortgage had been arranged, and so the changes open the opportunity for advisers to compete on a more level playing field.
Will the new pricing rules apply to my firm?
If you write GI Business or earn commission from renewals then the simple answer is YES.
If you transact with any of the main GI Provider firms that Paradigm deals with and selects a standard price for the customer, you need to look at the commission levels earned in conjunction with the work you have done to effect the policy.
All of the GI Providers that you are registered with should have contacted you by now with how they are applying the rules.
However, to clarify the position, the FCA requires insurance intermediaries (such as advisers and property managers) to ensure they do not adversely impact the value of products they are offering. A key part of this is ensuring that the commission they receive has a reasonable relationship to the benefits their services provide and the costs they incur in providing these services. Where commission is based on a percentage of the premium, firms should be aware that higher premiums may lead to increases in the amount of commission, which are not justified by the benefits provided or by higher costs incurred.
Pricing rules will impact all intermediary firms either directly or indirectly, depending on the arrangements they have in place with Insurance Providers.
A firm will be captured directly if they:
- Set any portion of the renewal price of a home or motor insurance policy, including setting the price for any additional product offered to the customer at renewal (this includes retail premium finance). An intermediary that sets the gross price paid by the customer for the core product or sets the price of any add-on policy or retail premium finance, is deemed price-setting.
- Rebate any portion of its commission (the FCA deems forgoing commission to be a ‘cash or cash equivalent incentive’). Firms should ensure that where a commission rebate discount is given, it reflects the equivalent commission rebate discount that the renewing customer would be eligible for if they were a new business customer, and that the firm’s approach does not discriminate against customers of a longer tenure.
- Are a principal firm that has price-setting appointed representatives (ARs), as the principal firm is responsible for ensuring AR compliance with the FCA’s rules.
This means that if an intermediary has any input or influence on the price setting of home or motor insurance premiums, even rebating commission, they must consider their pricing models in conjunction with the specific Providers to ensure future pricing offers fair value to the end consumer.
These rules apply at every annual renewal of the premium.
The simplest way is to ensure that the advice you are giving on policies is appropriate to the customer need at the time of renewal. One way of doing this is ascertaining that the policy sold still meets the need of the customer, or addressing any changes that may have occurred over the previous year which might affect the policy.
To assist with this, we have created two templates of questions for you to use:
For use when the Broker did not write the original policy
These give some useful guidelines around what you should do to justify the commission paid at renewal and should help you create the compliance file. It is by no means definitive, but gives a selection of questions and a rationale for you as to why you are asking the client the questions.
In the first instance on the first template for example, we are all aware that materials and labour for building have increased significantly in the past 12 months, and can help in discussing why you are asking.
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