The FCA are due to release their policy statement on general insurance pricing practices this Friday, 28th May 2021. Although not immediately obvious, pure protection products sold by life insurers will also be caught under some aspects of the policy statement.
The proposals in the consultation paper consist of a package of remedies designed to address issues identified during the FCA’s recent market study of general insurance pricing practices. The majority of the proposals (centred around pricing remedy, auto-renewal and reporting requirements) relate to general insurance but the new rules on product governance, which are covered in Chapter 4 of the consultation paper, will also apply to pure protection products sold by life insurers.
The “pure protection” umbrella covers life, sickness (including income protection) and personal accident policies, all with no investment element. As such, Holloway sickness policies are not included. The relevant rules of the FCA Handbook are contained in PROD 4 (Product governance: IDD and pathway investments).
Life insurers with pure protection business will already need to be complying with the existing PROD 4 rules, but only for new products manufactured, or significant adaptations to existing contracts made, on or after 1 October 2018. The FCA proposal now is that these firms will need to apply the PROD 4 rules, including some new additions, to ALL contracts regardless of manufacture or adaptation date.
In summary, the changes for life insurers are as follows:
An extension of the rules in PROD 4 to all contracts regardless of manufacture date
- This means that firms have to apply their formal product approval processes (as appropriate) to all existing products which do not currently fall within scope of PROD 4.
- For those products where PROD already applies, firms will need to update the approval process to take account of the new requirements on fair value (see below).
- This should all be completed within one year of the new rules coming into effect and firms must make sure that products continue to provide fair value going forward.
Enhancing the requirement to ensure products offer fair value to customers
- FCA define ‘value’ as the relationship between the total price to the end customer and the quality of products and services. They will provide factors that firms must take into account when carrying out a value assessment.
- They will require manufacturers to consider the value of the product through the product approval process and ensure that the products are designed/intended to provide fair value to the target market.
- FCA intend to introduce an 'evidential provision' to make clear where they consider certain price optimisation practices would not offer fair value.
Senior manager responsibility
- Governing bodies will need to be fully aware of their responsibilities with regards to PROD 4 or elsewhere.
- FCA have issued a reminder that all firms must have a senior manager responsible for compliance with the regulatory system. This includes product governance and pricing.
Ongoing review and remedial action
A new minimum requirement to review products at least every 12 months will be introduced. Additionally, new provisions will be introduced setting out the action firms could consider taking if they find their products are not providing fair value. The FCA has warned that they will be closely monitoring how firms implement their change programs and will be checking progress regularly.
Requirements for product distributors
There are also changes proposed to the rules for product distributors. Distributors will, amongst other things, be required to understand the assessment of fair value that the manufacturer has carried out and be able to translate that into their distribution process accordingly. Product manufacturers will need to be engaging with distributors as part of these processes.
The FCA have so far maintained that their proposed date for the new rules to come into force will be 4 months after publication of the policy statement. With the policy statement being published on 28th May 2021, this indicates an effective date of end September 2021 for the new rules to come into force.
We understand that, within one year of the new rules coming into force, firms will need to:
- apply a product approval process (as appropriate) to existing products which do not currently fall within PROD scope, and
- update their approval processes (for all products) to take into account the new requirements on fair value.
However, there is some ambiguity around this and we await the policy statement to confirm.
Cara Spinks commented
The title of the consultation paper does not communicate the intended application to pure protection policies, and it is not obvious that they should be considered alongside general insurance business. The proposed new rules have the capacity to be onerous for life insurers, particularly if they are to be applied to historic products that are no longer distributed, as implied by some of the comment in the associated Q&A document. We await the publication of the policy statement with interest.
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