We have built a framework to assess whether firms are providing good value, and to help them prove it – not just to the regulator but also to customers and other external stakeholders.
What is fair value?
There are many definitions of fair value. Indeed, the FCA has defined it in slightly different ways in different papers. In its general insurance pricing practices paper, it defines fair value as being “where there is a reasonable relationship between the overall cost to the end customer and the quality of the products and services”.
The International Accounting Standards defines fair value as: "The amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction".
What the FCA wants
From 1 January 2021, the FCA required all insurers to actively consider if their products offer fair value.
Within 12 months of 1 October 2021, all firms are required to do an assessment of their products to ensure they are delivering fair value. This must then be done at least annually going forward.
From February 2022, insurers will have to report data on claims frequency, average claims payouts and claims acceptance rates for almost all general insurance lines.
The FCA has already extended requests to certain banks to prove they are offering fair value across their entire product suite - and this looks likely to be an ongoing theme for the FCA over the coming years.
To pass our accreditation, insurers will need to pass our six tests:
- Customer needs. Insurers must be able to demonstrate they understand their customers' needs, and deliver products that meet them - or are clear where their products may fall short.
- Product quality. Insurers need to understand where their product sits relative to others in the market in terms of cover levels, excesses and fees.
- Communication. Insurers need to be able to demonstrate that they communicate clearly with customers both pre- and post-purchase to set their expectations appropriately and reinforce what their products do and don't cover.
- Customer experience. Insurers need to be able to demonstrate that their claims processes work effectively and do not place any unnecessary barriers in customers' way.
- Continuous improvement. Insurers need to be able to prove they have a feedback loop between their claims and complaints departments to their acquisition journeys - to demonstrate a commitment to continuous improvement and not repeating mistakes.
- Price. Insurers need to be able to demonstrate that their customers bought in a price competitive environment and were aware of how much they could have paid for products of similar quality.
Meeting the high bar
At Fairer Finance, we pride ourselves on having top ratings and accreditations that are hard to achieve. When we launched our Clear & Simple Mark in 2015, no documents in financial services met our stretching criteria. Today, there are more than 20 that do.
As a starting point, we would not expect any insurers to pass every element of our accreditation. But we hope a small number of insurers dedicated to the pursuit of excellence will step up to the challenge.
Given that the FCA's fair value challenge is to be closely followed by the introduction of a new Consumer Duty - there are clear and rising expectations from the financial services regulator. Let's use this as an opportunity.
If you'd like to speak to us about our Fair Value framework, please email us at: firstname.lastname@example.org