We set out our findings from our multi-firm review assessing how firms satisfied themselves that they do not systematically discriminate against motor and home insurance customers based on the number of years they have held their policy, including any renewal (tenure).
We ask firms to consider our findings, examples of good practice and areas for improvement in the context of our pricing rules, and to address any shortcomings.
Why we did this work
In May 2021, we published Policy Statement PS21/5[2] (updated in PS21/11[3]) which included our final home and motor insurance pricing rules[4] set out in ICOBS 6B (‘our pricing rules’) which came into effect on 1 January 2022. Our pricing rules were designed to:
- promote competition through ensuring consumers have a realistic picture of the long-term cost of their chosen product when purchasing it and incentivising firms to compete for consumer business on this basis
- protect consumers by ensuring that they are placed in a position where they can understand the long-term cost of their product
- end price walking by ensuring that consumers renewing their home and motor insurance pay no more than they would as a new customer, when using the same distribution channel
We undertook this review to gain some assurance that firms had taken appropriate steps to comply with our pricing rules, including implementing appropriate systems and controls to enable them to do so, thereby achieving the intended outcome of these rules.
Summary of findings
Overall, the evidence provided indicated that most firms in the review had taken appropriate action to comply with our pricing rules when they came into effect on 1 January 2022 and on an ongoing basis thereafter.
We found:
- Larger firms in the market, mainly insurers, were generally able to show that they had taken appropriate actions to comply with our pricing rules, including putting in place an appropriate governance framework for ongoing monitoring and compliance with our pricing rules. When working with the firms we found that records were compiled. However, not all the information that was reported to the person responsible for the attestation was made available to us, in line with the requirements of ICOBS 6B.2.57R.
- Many of the smaller firms in the market had few or no records to show how they had complied with our pricing rules. These firms mainly set the price of additional products sold with home or motor insurance, set fees, or give incentives.
- Some firms provided a statement or limited information asserting that their pricing model, before our pricing rules came into effect, did not differentiate between new and renewing customers. However, in most cases no evidence or records were provided to substantiate how these firms had satisfied themselves that they were and are on an ongoing basis complying with our pricing rules.
- We did not identify any issues regarding these firms’:
- compliance with the incentives’ rules
- judgements regarding potentially reportable breaches of our pricing rules, where firms had identified instances where the price for consumers renewing their home or motor insurance policies was higher than the equivalent price for a new customer, using the same distribution channel.
The attestation and the records supporting it are not the only information we are relying on to gain assurance that firms are complying with our pricing rules. We will also, for example, analyse the pricing data submitted by firms in line with SUP16.28 and have further discussions with firms, where needed.
Our expectations of firms
We expect all firms that set the price of motor or home insurance to consider our findings and the examples of good practice and areas for improvement, in the context of their activities and the applicable rules. Where applicable, we expect firms to take appropriate action to address any shortcomings identified and be able to evidence this.
The timely provision of the attestation by a senior manager and submission of a pricing information report by firms are both regulatory obligations under ICOBS 6B.2.60R and SUP 16.28, respectively. Both are required for each calendar year commencing 2022 and must be submitted annually by 31 March, following the end of each calendar year. Where we see firms and individuals failing to meet these regulatory obligations, we will act using the full range of supervisory and regulatory tools available to us.
Who this applies to
This review is relevant to all firms carrying out any of the following activities for a home or motor insurance policy or any related additional product sold to a consumer:
- setting the renewal price
- setting the price for any additional product offered to the customer at renewal
- determining the level of remuneration, including any fees earned by the firm when distributing a product at renewal
The scope of our pricing rules in ICOBS 6B covers:
- home insurance
- motor insurance
- additional products sold with home insurance or motor insurance
- fees charged at renewal for home or motor insurance
- incentives (cash or cash-equivalent) given to new business customers where the party providing the incentives is involved in the renewal of either home or motor insurance or any additional products sold with them
In line with ICOBS 6B.2.60R, every firm subject to our pricing rules is required to attest annually that they comply with ICOBS 6B and that their pricing does not discriminate against customers of longer tenure. This attestation must confirm whether they have complied with our pricing rules throughout the reporting period, and that relevant sales practices are consistent with the objectives of the rules.
The attestation must be provided by a single person, who holds a senior management function in the firm or where a firm is not an SM&CR firm, by a director of the firm. It must be provided by 31 March each year for the previous calendar year.
For the first attestation only, firms were required to attest whether they were compliant on the day the rules came into effect on 1 January 2022 and whether they had elected to exercise the transitional provisions to implement the rules from the effective date of 1 January 2022.
What we measured and sought to establish
We wanted to understand the extent to which firms have complied with our pricing rules, whether this was done consistently across the market, and whether any action is needed to rectify failings or improve firms’ understanding of our rules.
We assessed whether the actions firms took and the quality of the records that the senior manager relied upon when attesting, were in line with the expectations set out in our pricing rules. We also considered firms’ ongoing monitoring and compliance with these rules after 1 January 2022.
We assessed incentives offered to customers during the first 6 months of 2022 and potentially reportable breaches of the pricing rules identified by firms, but not reported to us.
What we did
We requested information from a sample of 18 insurers and 48 intermediaries of varying sizes and business models. These firms set the renewal price of a home or motor insurance policy or additional products sold with a home or motor insurance policy, set fees, gave discounts or a combination of all or some of these. The selected firms account for over 70% of the UK home and motor insurance market.
We requested and analysed information based on the records keeping requirements of our pricing rules as set out under ICOBS 6B.2.51R - ICOBS 6B.2.54R; ICOBS 6B.2.55G - ICOBS 6B.2.56G; ICOBS 6B.2.57R; and ICOBS 6B.2.58G. These records must show how a firm satisfies itself that it is complying with the pricing rules under ICOBS 6B.
We also requested and analysed information on:
- the policies and procedures firms had put in place to ensure ongoing compliance with our pricing rules
- any potentially reportable breaches of our pricing rules firms had identified but which had not been reported to us, where consumers renewing their home or motor insurance policies were charged a premium higher than the equivalent price for a new customer using the same distribution channel
- whether firms’ attestations included consideration of delegated authority business
- the pricing incentives offered since our pricing rules came into effect on 1 January 2022
We then had follow-up meetings with 15 of the 66 firms attended by the individual who had attested (‘the attestor’) and other relevant staff. This was to gain further insight into and confirm our understanding of actions taken by firms to comply with our pricing rules.
Key findings
We set out our key findings, examples of good practice and areas for improvement. Where we reference good practice, these are positive examples we have found from our multi-firm review.
1 The individual attesting
Our pricing rules require that a firm’s annual attestation be provided by a single person who holds a senior management function in the firm or, where a firm is not an SM&CR firm, by a director of the firm.
We expect firms to select an appropriate senior person capable of judging whether the firm complies with the rules. We have seen that most firms gave appropriate consideration as to why the attestor was the appropriate individual to do so.
Four of the 48 intermediaries in our review provided an attestation where the person attesting was not an SMF function holder and it was not clear from the information provided that the person, where relevant, was a director of the firm. Examples included attestations being provided by compliance/operation managers, without any indication that these individuals meet the requirement of ‘director’.
Breaching this requirement risks that the attestation, and more importantly a firm’s compliance with our pricing rules, is not given sufficient prominence or consideration. Also, should any firms fail to end price walking for their home and motor customers we want to be able to hold the firm and appropriate individuals to account.
Good practice
In most of the SM&CR firms, the attestation was provided by an appropriate individual which included the Chief Executive (SMF1), Executive Director (SMF3) or the Chief Underwriting Officer (SMF23). Based on the meetings held with firms as part of this review, the attestor had good knowledge of the firm’s pricing practices including actions taken by their firm to ensure compliance with our pricing rules. They were able to confidently talk about the process they used to gain assurance and the records/evidence relied upon to attest compliance to our pricing rules.2 Appropriateness and quality of supporting records
ICOBS 6B.2.51R to ICOBS 6B.2.54R require a firm to make and retain written records to show how it satisfies itself that it is complying with our pricing rules. Under ICOBS 6B.2.57R, a firm must provide these records to the person responsible for the attestation, and to us on request.
We asked firms to submit the records/documents that were provided to the attestor ahead of providing their first attestation. This was to enable us to assess whether the records relied on by the attestor were sufficiently informative or granular to meet our expectations in:
- demonstrating that firms had taken appropriate steps to ensure they would be compliant with the rules on 1 January 2022
- enabling the attestor to attest on behalf of the firm their compliance with the requirements in ICOBS 6B (and the requirements in ICOBS TP 2 Other Transitional Provisions, as relevant)
While firms can have their own processes, under which multiple people can report information to the attestor, we require attestation from 1 person. They will need to be satisfied that the firm as a whole meets the rules and that they are content to make the attestation on behalf of the firm. As part of the record keeping requirements, firms must also record how they continue to satisfy themselves that they do not systematically discriminate against customers of longer tenure.
We found that 11 of the 66 firms provided records in response to our request that met our expectations. However, the information provided by 28 firms was not sufficiently informative or granular for the attestor to attest compliance with the requirements.
The remaining 27 firms provided records that clearly set out the approach and actions taken, and the controls they had to ensure compliance with the pricing rules. This included information that these firms had evaluated their controls were working as intended, a description of changes to, and testing of the pricing models. However, the records provided by these firms still fell short of our expectations as they did not include evidence that the controls were working as intended. They also did not include evidence that prices being generated by the pricing models were considered against the requirements of ICOBS 6B.2.39R, to ensure they did not discriminate against customers based on their tenure.
As only 11 of the 66 firms provided records that met our expectations, we met with the attestors of 15 of the 66 firms. This was to understand whether the evidential records existed in their business and whether the attestor had relied on records other than those provided to us. Through these meetings, we were generally able to gain sufficient assurance that this was the case. Most of the attestors we spoke to had extensive involvement in and/or knowledge of their firm’s approach to assessing the applicability of our pricing rules to the firm, and any work programme undertaken to ensure compliance with them. They were provided with the outcomes of any testing done throughout the work programme but not at the time they were attesting. As a result, these records were not provided to us.
Good practice
1. We saw some good examples of records being provided to the attestor to support the attestation, clearly and concisely setting out:
- A well-designed programme of work that sets out the approach with actions defined to address gaps identified and ensure compliance with our pricing rules along with appropriate governance.
- The responsibilities of the attestor and the process of how they gain assurance that the firm is compliant with our pricing rules.
- A framework/accountability matrix where the attestor relied on others within the business to provide assurance that our pricing rules are being complied with. This included their responsibilities for compliance with our pricing rules and the evidence they relied on.
- An appropriate assessment of our pricing rules applicability to the firm and its products, which included a gap analysis between the firm’s current pricing practices and our pricing rules.
2. The records also included evidence:
- On material decisions taken by the firm on any areas of discretion, ambiguity, or uncertainty with regards to the applicability/compliance with our pricing rules. This included the escalation of issues where appropriate.
- That shows the governance and controls put in place to ensure compliance with the pricing rules is achieved and maintained. This included key decisions made at project/steering committee, other committee and/or board meetings and the information relied on to make these decisions.
- Of the testing undertaken to establish firm pricing models were compliant with our pricing rules and ensured that customers of longer tenure were not systematically discriminated against.
- That the equivalent new business price for renewing customers does not systematically exceed the price for new customers.
- That shows where there is no close matched product, the renewal price for customers in these closed books are not systematically higher the longer a customer’s tenure.
- That the prices of additional products at renewal offer fair value to customers of longer tenure.
- That the fees the firm charges to customers of longer tenure do not systematically exceed those charged to new customers.
3. Firms having appropriate independent oversight of the assessment of compliance and controls. This was provided either by a firm’s own internal audit department or an external party.
Areas for improvement
We saw a range of examples where firms provided records that did not meet the record keeping requirements of ICOBS 6B. This included:
- Many firms provided records to the attestor that clearly set out their approach to ensuring compliance with our pricing rules including the governance framework. However, key evidence was often omitted. This included, but is not limited, to there being no evidence or evidence containing insufficient detail.
- Documents such as underwriting or pricing guides being submitted which did not support or show how a firm satisfied itself that they were complying with our pricing rules.
- Firms setting out they had satisfied themselves that:
- their pricing model did not result in dual pricing
- that they were compliant with our pricing rules
- Internal audit reports being provided to attestors and relied on as the main, if not only, evidence base for a firm’s compliance with our pricing rules.
- Reliance being placed on senior firm employees signing-off off/attesting to compliance in a document provided to the attestor, with limited evidence as to how those individuals had satisfied themselves the firm was compliant with our pricing rules.
- Governance and policy documents not having been updated to reflect a firm’s approach to our pricing rules.
3 Ongoing compliance from 1 January 2022
We asked firms to provide us with the policies and procedures they had in place to ensure ongoing compliance with our pricing rules. These rules include a requirement that firms make and retain written records of how they continue to satisfy themselves that they do not systematically discriminate against customers based on tenure, in line with ICOBS 6B.2.39R.
Most firms provided pricing governance and controls, and procedure documents to demonstrate compliance with ICOBS 6B. These set out their ongoing oversight and compliance processes including management information (MI) that evidenced that renewal prices being generated did not discriminate against customers based on their tenure.
However, we did not consider that the information provided by more than a third of firms adequately showed how they were complying with the requirements under ICOBS 6B. This increases the risk that firms may systematically discriminate against home and motor insurance customers resulting in harm to consumers.
Good practice
- Firms comprehensively detailing their governance processes and policies including setting out:
- how the reporting and MI framework aligns to the relevant elements of our pricing rules and is designed to provide assurance and compliance with them on an ongoing basis
- the regularity of the reports, the intended purpose, and the committees to whom the reports will be submitted to
- their record keeping processes
- Product governance, pricing and oversight policies being updated to reflect changes required and arising from the pricing rules.
- Firms having appropriate MI that clearly shows whether the firm is compliant with the pricing rules.
Areas for improvement
- Governance and policy documents not being updated to reflect the changes firms made to be compliant with our pricing rules.
- Firms setting out a control framework to ensure ongoing compliance with our pricing rules but not using them.
- Documents and records containing limited or no relevance to the subject of a firm’s ongoing compliance with our pricing rules, or not specifically setting out a firm’s:
- process for evaluating whether the equivalent new business price for customers of longer tenure systematically exceeds that for new business customers
- controls to ensure that any pricing model it uses to generate its equivalent new business prices, or the renewal prices for customers in closed books where a firm is unable to identify a close matched product, does not generate prices which are systematically higher for longer-tenure customers
- Firms stating they are compliant with ICOBS 6B.2.39R, with no information or framework as to how compliance was being achieved.
- Firms stating they have quality assurance/monitoring processes or MI reports in place to monitor compliance with our pricing rules on an ongoing basis. However, no detail was provided on assurance testing or its regularity, to provide the necessary evidence that those processes deliver an appropriate oversight and compliance framework.
4 New business incentives
Our pricing rules require firms to ensure consumers are quoted a renewal price that is no more than they would be quoted as a new customer through the same channel (the equivalent new business price). When calculating the equivalent new business price, a firm must include any cash or cash-equivalent incentives that it gives to new business customers and that the renewing customer would be eligible for if they were a new business customer.
We asked firms to provide a list of the new business incentives they offered on the products in scope of ICOBS 6B including on cash back sites and those offered by a third party but funded by their firm.
Of the 66 firms in the review, 22 gave their customers some form of home or motor pricing incentive during the first 6 months of the year. These included premium discounts, cashback offers, free add-ons, ‘refer a friend’ bonuses and charity donations. Many firms have now discontinued the use of incentives altogether. Our review did not identify any material issues or concerns regarding these firms’ compliance with our pricing rules for incentives.
5 Potentially reportable rule breaches
SUP 15.3.11R of our Handbook requires firms to notify us of any significant breach of a rule. Several firms notified us of individual issues potentially constituting reportable breaches of our pricing rules set out in ICOBS 6B. This included instances identified of discrimination of customers of longer tenure, where the price for consumers renewing their home or motor insurance policies was higher than the equivalent price for a new customer using the same distribution channel.
As part of our review, we asked firms to detail any potentially reportable breaches of our pricing rules involving the discrimination of customers of longer tenure that they had identified, but which had then been assessed as not being reportable to us (and their rationale to support this assessment), aside from those breaches already notified to us.
Nine firms provided details of potentially reportable breaches occurring in the first 3 months of 2022, which they had assessed were not significant enough to:
- require them to be reported to us under SUP15.3 .11
- have affected the firm’s attestation
We looked at the firms’ rationale supporting their decision-making process, and, in all cases, we considered that they had properly identified the issues to be notified to us at the time for the purposes of SUP 15.3.11R and did not impact the firm’s attestation.
Good practice
- Firms acted swiftly to investigate or resolve the issue and, in all cases where there had been customer detriment, timely remediation was provided either directly to the customer or via a charitable donation.
- Firms considering whether potentially reportable and reportable breaches impacted their attestation.
Next steps
We will continue to monitor firms’ compliance with our pricing rules to assess the extent to which they are complying with them. Most firms have now submitted the pricing data required under SUP16.28. We will analyse this data to assess whether firms are meeting the requirements of the pricing rules and are not systematically discriminating against motor and home insurance customers based on their tenure.
We will continue to actively review and scrutinise firms’ attestations and the systems and controls that underpin these, aligned to their pricing data submissions, and expect firms to make improvements to address the issues identified in our findings. Where we see firms and individuals failing to meet their regulatory obligations, we will act using the full range of regulatory tools available to us.