Spotlight: Fair play - keeping pace with personal lines compliance

How can personal lines insurers ensure they meet their regulatory objectives when pricing and serving customers, asks Laura Miller

In recent years, in response to changing consumer needs and behaviours, personal lines insurers serving the motor and household markets have faced a triple whammy of regulatory changes focused on improving customer protection, service and outcomes.

In 2021 pricing transparency, fair value and the prevention of loyalty penalties were baked into the Financial Conduct Authority’s (FCA) rules via the Product Intervention and Product Governance Sourcebook (PROD).

Renewing customers no longer pay more than new customers, with the same level of risk, under the General Insurance Pricing Practice rules (GIPP), introduced at the beginning of 2022.

Finally in this regulatory triptych, the Consumer Duty rules in 2023 stipulated “good outcomes” for consumers on products, services, pricing, and communication.

While these changes are welcome and necessary, ensuring compliance with the new requirements and remaining competitive requires a fine balancing act.

Aurore Lecanon, chief risk officer, Ageas believes the new regulations “have made a positive contribution to customer protection,” noting the insurer had equipped itself with a strong team of dedicated compliance experts to drive the changes needed and ensured that every business area knows and understands the regulatory principles and rules under which it has to operate.

It has also adapted in terms of resources, data and technology to keep pace with regulatory change.

“Ageas has taken a very pro-active approach to regulatory change,” Lecanon says. “For example we have invested in bespoke systems that map all applicable regulatory requirements.

“Coupling this with extensive training and a structured programme approach to managing those changes enables us to ensure enterprise-wide understanding and accountability for the implementing of all regulatory principles and rules.”

The sheer volume of regulatory changes has meant pricing and underwriting teams have had to get creative.

Ian Hughes, Consumer Intelligence

Ian Hughes, CEO at Consumer Intelligence, which monitors trends in the insurance market, says: “The sheer volume of regulatory changes has meant pricing and underwriting teams have had to get creative.”

The removal of introductory discounts, for example, has driven a wave of innovation in how insurers attract and retain customers while staying within the rules.

New thinking

Hughes points to a proliferation of new brands, cover levels, and product options as insurers try to balance compliance with commercial sustainability.

One of these new, innovative young brands is motor insurer Cuvva. Selling its first policy in 2015, it predates the recent wave of regulatory changes. But its ethos – that ‘everyone should have affordable access to a car, anytime, anywhere’ – and introduction of hourly car insurance via an app, fits the FCA’s direction of travel.

Adam Kent, Cuvva underwriting manager, says the motor insurer welcomes regulatory changes that “help make insurance more accessible, inclusive and encourage fairer outcomes”. He believes “there is a lot of room in the insurance industry to be more customer-centric”.

Kent noted that given Cuvva has a small team of 100, it has lots of flexibility. “We can adapt quickly… As we aim to operate with a heightened level of customer awareness and fairness across the business, when new industry regulations come into play, we tend to already be operating in that way, or close to it, and don’t generally have to make big adjustments compared to some of the incumbents, who may find it more challenging.”

Data driven

All this innovation is built on the new gold – data. Insurers are using every available source to gain an edge while staying on the right side of the regulator. The challenge is ensuring that data-driven decisions assisted by advanced technology align with regulatory expectations and deliver fair outcomes for consumers.

“The rise of AI and machine learning has started to add significant value, particularly in claims, underwriting and pricing,” says Chris Halliday, senior director at WTW. “For example, we have seen insurers achieve double-digit growth with improved margins from deploying these models directly into the market.”

But Halliday notes there are some increased risks with AI models by nature being more opaque, unstable and vulnerable to exploitation.

“The increase in value comes at a cost of greater complexity,” he says, which, “compounded by additional AI-specific regulations and guidance, means insurers need to refocus on governance to ensure value from these models isn’t destroyed by risk events.”

The FCA itself intends to examine how Big Tech firms’ datasets could unlock better insurance products, more competitive prices, and wider choice for customers.

We have seen insurers achieve double-digit growth with improved margins from deploying these models directly into the market.

Chris Halliday, senior director, WTW

Consumer Intelligence’s Hughes warns, for example, that data can be used to create what he calls the “vanilla-verse…” where “…insurers are gravitating towards low-risk, mass-market customers where data is abundant, pricing is precise and risk is predictable”.

“But if, as a consumer, you don’t fit that mould, perhaps due to limited data history, you risk exclusion. Vulnerability isn’t always about financial hardship; it can be about being ‘data poor,’” he says.

If an insurer can’t confidently price you, the default response is often caution, which can mean higher premiums or even no offer at all. “It’s a little like ‘stranger-danger’,” Hughes says, “that’s an unintended consequence of a data-driven world that the industry must address”.

Home and motor insurer Urban Jungle was launched in 2016 to “change the insurance industry for good”. To get rid of the “hidden fees, baffling questions and inflexible policies”. To “do better”. This long-term approach to compliance and regulation is currently standing it in good stead in light of the new rules and FCA focus, says Stephen Cowap, chief insurance officer at Urban Jungle.

“We have a company value called ‘Customer First’ and it’s all built around that. By taking that approach, we’ve been able to stay ahead of the changes, and when they come along, it’s more about process and reporting than it is about changing company strategy.”

Cowap says “it’s pretty obvious ‘price walking’” – the practice where an insurance company gradually increases premiums for existing customers at renewal – “is bad for customers. That’s why we’ve never done it and why, when GIPP came in, it was a relatively easy change for us”.

Monitoring the trends

That’s not to say everything has been smooth sailing. The new rules have created some residual challenges.

“There have been some lumps and bumps in the reporting and documentation required by the regulator on these changes as they’ve rolled them out, especially Consumer Duty,” Cowap says, “but nothing more than you would expect with any new regulation”.

One thing he has his eye on in respect of GIPP is how things shake out as the market starts to soften. Since GIPP was introduced, there have been inflationary pressures on prices. So even though price-walking hasn’t been allowed, the outcome has been similar, given existing customers tend to convert better into higher renewal prices than do new customers.

“As prices come down, this may force some insurers to look at their strategies again and, in particular, their cost base,” Cowap says.

Urban Jungle runs its own systems and data platform, so spends time looking at a rich set of data to make its decisions. The technology tags vulnerable customers, or customer groups, to make sure they are treated fairly.

In this way, as the world changes, the firm can change its systems to make sure that everyone who needs data to make compliant decisions is getting it – including underwriters and pricing staff.

Cowap says it’s relatively easy to build in for rules like GIPP, but harder for principles like Consumer Duty. “There we rely on what we call ‘intuitive’ tests, which help make sure that all our pricing decisions make sense from a customer point of view,” he says.

As prices come down, this may force some insurers to look at their strategies again and, in particular, their cost base.

Stephen Cowap, Urban Jungle

The industry is faced with a conundrum. Compliance with the new rules has the potential to mean for every consumer brought into the ‘vanilla-verse’ of low-risk, low-price policies, someone else is potentially pushed into vulnerability.

Consumer Intelligence is seeing cases where a non-fault claim sends a customer over a pricing cliff – one renewal they’re competitive, the next they’re priced out. They feel like they didn’t do anything but the actuarial tables disagree.

“That’s a challenge underwriters and pricing teams are wrestling with, and one the FCA has started to highlight too,” says Consumer Intelligence’s Hughes.

“Smarter use of data should help smooth these extremes, but only if the industry applies it in a way that ensures fair and sustainable pricing for all.”

Urban Jungle’s Cowap suggests that when building any new product or system it is imperative that a business takes a forward-thinking approach, but concedes this can be difficult because it is impossible to know what issues a regulator may be looking into in five years’ time,

“However, a business can still incorporate flexibility into its builds and ensure that all data is extractable in a simple way,” he continues.

“Not only does this give future efficiencies when it comes to reacting to regulatory change but it also gives [a] business commercial flexibility and a valuable competitive advantage when it comes to iterating and improving [its] products and overall customer proposition.”

Investment in regulatory technology can also deliver enhanced transparency, accountability, and compliance management by simplifying complex processes and empowering senior managers with data-led oversight, according to Lecanon.

She concludes: “Looking ahead, Ageas will continue to invest in new and emerging technologies, including AI, to further enhance risk management capabilities. I believe that by leveraging the right capabilities and technology, regulatory change can be managed efficiently and effectively.”

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