19 April 2021
What does fair value mean in insurance?
It’s almost 15 years since the launch of “Treating Customers Fairly” – a set of principles designed to overlay the financial regulator’s rulebook and get companies thinking harder about the customer outcomes that they were delivering.
For many in financial services, it was intangibly frustrating. It’s easy enough to understand that you must issue a keyfacts document, or that you can’t take commission on investment sales – but how exactly do you test the abstract concept of fairness? Some might say that fairness, like beauty, is in the eye of the beholder. Certainly, it means different things to different people.
I’ve always been a fan of principles-based regulation, as it forces companies to move away from a tick-box approach to compliance and look at the outcomes they are driving. Its weakness, however, is that the subjectivity of the principles means they are rarely upheld and enforced against.
Nevertheless, the FCA has decided to push further down this path over the last few months – with “fair value” now being the test that growing parts of the financial services market are being asked to assess themselves against.
And – much to the frustration of TCF haters – insurers will soon be obliged to carry out an assessment of whether they are meeting the bar at least once a year.
With a concept as broad as fair value, there’s a risk that this becomes yet another box ticking exercise – laudable in its intention but doesn’t amount to anything substantial. Surely every insurer can prove that they offer fair value from one angle or another.
The FCA's fixation with price
What worries me about the early stages of this debate is that the FCA seems keen to frame it primarily in the context of price. In its insurance pricing practices market study report, published in September last year, 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”.
But the cost to the customer is not to my mind the key test of fair value. Many consumers are not particularly price sensitive and may be willing to pay more for one product over another because they value the brand or the service.
I feel much more comfortable with the International Accounting Standards definition of fair value which defines it as the amount that’s paid by “knowledgeable, willing parties”. The key point in that definition is that price has very little to do with determining fair value. Instead, the test is whether your customers understand what they are buying, and know what they would pay for the equivalent if they went elsewhere. If at that point, they are willing to pay a higher price – that doesn’t mean the fair value test has been failed.
I think there’s a real opportunity to use the new fair value assessments as a chance to raise standards in the sector. But to do that, we need to come up with a more robust definition – and set a bar that is objectively stretching in terms of what good looks like. That’s what we are developing and would love to talk to insurers who want to participate in that debate.
Defining fair value
If fair value is, as the IAS says, about transactions between knowledgeable and willing parties, then part one of what good looks like has to be about the sales process.
If you are selling in a non-advised online environment, can you say you did everything possible to help your customer make an informed decision? Did you ask them enough questions to ascertain their needs, and use your expertise to help them think about the elements of cover which they may not know they need? Did you also help them understand what your product doesn’t do – and do you have a feedback loop from your claims and complaints team to ensure that improvements to your journeys are made in response to misunderstandings and misconceptions? Do you have policy documents that are comprehensible for most adults, with a low reading age?
Arguably, even more important than the assessment of your promise, is an assessment of your ability to keep your promises. Are your claims processes easy to follow, and are your team incentivised to facilitate or repudiate? Do you have systems which allow customers to be given the benefit of the doubt, or have you built in rigidity that drives poor outcomes? Are your staff trained to spot and deal appropriately with vulnerable customers? Do you have a culture of meaningful continuous professional development – or is CPD a box-ticking exercise?
Beyond that – yes, of course price is a factor. But if your customers are buying in a price competitive environment such as a comparison site – you should be able to tick that box quite easily. And if they’re not, then can you help them understand a comparative price point through better disclosure?
These are our early thoughts and we’d love to hear yours.