6 July 2021
Helping insurers evidence fair value
From later this year, insurers will need to start proving they are offering fair value to their customers. It's a broad challenge that some will see as another tiresome box-ticking compliance exercise. But there's an opportunity to use it as so much more.
It's fair to say that the insurance industry has had its challenges in terms of consumer trust and confidence over the last couple of decades. Particularly in retail markets, where comparison sites have shifted the focus to price, many customers have walked away with products that didn't meet their needs, and let them down in a moment of truth.
The FCA's fair value challenge is asking insurers to find ways of proving not only that their customers are paying a fair price for their policy - but also that they understand what they were buying, and that insurers are delivering effectively on the promises they make.
If the industry takes the new rules in the spirit they were created, they provide an opportunity for insurers to take a big step forward in terms of rebuilding customer trust.
Working with insurers to define fair value
Over the past few weeks, we've been speaking to a number of insurers about what we believe fair value looks like. We want to not only help insurers prove they are offering fair value, but also set a high bar for what excellence looks like - providing an accreditation for those who achieve it.
As I wrote a few weeks ago, the starting point for our interpretation of fair value is the International Accounting Standards definition - which sets price in the context of whether the person buying the service was "knowledgeable and willing".
As a result, our fair value framework looks to evidence that customers understand what they are buying, that insurers deliver on their promises, and that the customer is clear what they could pay for an equivalent policy from other providers.
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 a similar quality.
Importantly, when it comes to price, we do not think that a customer paying significantly more than the market rate for a product necessarily indicates a failure of fair value. For those less price sensitive customers, they may well be willing to pay significantly more for the peace of mind that using a familiar brand brings them. The important thing to demonstrate is that they were aware of how much they could have paid for an equivalent product - and therefore met the definition of being both knowledgeable and willing to pay more.
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