Between taking insurers to court over business interruption wordings, implementing relief measures to support insurance customers during COVID-19 and publishing extensive reports on pricing practices in the market, it would be something of an understatement to say that the Financial Conduct Authority (FCA) has had a busy 2020.
The 31-page report issued by the FCA in September proposed to essentially remove the “loyalty penalty” facing many general insurance consumers. However, there are other elements to consider too, and, in discussion with Insurance Business, Richard Tomlinson (pictured), MD of Percayso Inform, highlighted the impact that the FCA’s consultation on product governance rules may have on the income earned by brokers when it comes to add-ons and premium financing options.
“We’re still waiting for the final guidance to work its way through and eventually become law,” he said, “and we could be nine months or perhaps a year away from that, depending on how these things flow through. But most of the brokers and insurers that I speak to are absolutely seeing that as something that will go through and are starting to gear up themselves up for that.”
Much more than insurers, he said, brokers have utilised the opportunities afforded by premium financing and add-on options as an additional service to offer their clients, as well as an additional income stream. And many brokers have been very fair in how they’ve administered these APRs (annual percentage rates) for premium financing though, as ever, there have also been a few rogues out there bumping these up.
And to be clear, Tomlinson noted, much of the time brokers are basing this at least partially on the risks involved. If somebody is riskier, it could be argued that it is fair to increase the APR in accordance with that increased risk. In insurance, as across other industries such as the rental sector, regulation is coming in to temper the worst extremities of such practices. Often, it’s not that brokers are making huge amounts of profit, it’s simply that this is seen as part of their business practice and their bottom line.
The problem, he said, is that in some cases the core premium cost may have been falsely reduced as the broker understands they will receive further remuneration on the premium financing side of the transaction, which is not in the best interests of transparency or of the customer. The message, therefore, from Tomlinson and the Percayso team, is that brokers should be building these costs into the premium in the first place.
“Put the true premium out there,” he said, “and yes, you’ve got to balance that against wanting to win as much business as you can. But you shouldn’t be winning it in a false way. And the good thing about the FCA piece is that it will create a level playing field and you will be competing on a like for like basis with your competitors.
“And hopefully, brokers won’t just wait for the regulations to make them come to this point. You need to be thinking about this now, because changes in prices and products can’t happen all that quickly. So, it’s better to do this in the short term, and to test and to learn and to embed these processes before you’re forced to do so.”
In addition to getting the premium right initially, Tomlinson recommends that brokers start to really evaluate the lifetime value of each of their customers. They must evaluate the range of services they offer and use data analytics to examine the propensity of their clients to purchase additional products. The more products a consumer buys and the better this experience, the greater their loyalty to a provider and the longer this relationship is likely to last.
“And brokers need to focus on building strong relationships with [their loyal customers], rather than trying to charge them a 15% or 20% interest rate on their premium because that’s not the best basis on which to form a long-term equal relationship,” he said. “So, look at how you can encourage that loyalty.
“And that’s about understanding firstly how likely the customer is to stay with you for a long time, but also what are the drivers of that? Is it solely about price? Or are there other factors in terms of the journey that you take them on, of the experience that they have, of the niche insight and the handholding and advice that you’re able to give to them, which drive that loyalty?”
