Complacent complianceConsumers should expect fair value when they buy insurance products and the insurers have a duty to provide it. But there is evidence that some insurers are not trying hard enough. So can the regulator push them to make better outcomes? And how can you make sure you’re getting the best value?
5 min read
In 2021, rules were introduced requiring insurers to make sure that their products provide fair value, which included submitting regular Value Measures Data to the Financial Conduct Authority (FCA), the latest data having been published by the regulator in September this year.
In September, as they published the data, the FCA wrote to insurers to warn them that they need to do more to ensure good consumer outcomes. The insurance firms were reminded that the FCA expects them to make sure they’re checking that their products are providing fair value to customers.
In particular the FCA has identified one big area in car insurance that is coming under closer scrutiny - so called Guaranteed Asset Protection (GAP) insurance. GAP insurance is an add-on to car insurance which covers the difference between a vehicle’s purchase price and its current market value. The FCA believes some of these products may be failing to provide fair value to customers. The gap between premiums paid and the benefits received by consumers seems large: the FCA recently published data for GAP insurance indicating that only 6% of the amount customers pay in premiums is paid out in claims. And to rub salt into the wound, the FCA quotes examples of some firms paying out up to 70% of the value of insurance premiums in commission to parties in the distribution chain, such as car dealerships. Pretty miserable outcome for consumers.
Insurers, they're coming for you
The FCA has warned insurers that the regulator is coming for them unless they clean up their act. And they have already come after a number of firms, including Direct Line, which is set to pay out around £30 million in compensation to customers who were overcharged when they renewed their car or home insurance.
Direct Line admitted to an “error” in implementing the FCA’s new pricing rules. The error meant existing insurance customers were charged more for their renewal than they would have done if they were a new customer, according to the FCA.
It matters because car insurance is now the third-biggest household bill, behind council tax and energy, with soaring costs driving many car owners to sell their vehicles and get out of it altogether.
What is ‘fair value’?
‘Fair value’ is a financial term that represents the estimated worth of an asset or liability in a transaction between willing and knowledgeable parties. It's the price that would be agreed between buyers and sellers in an open and unrestricted market. Fair value is often used in accounting, finance, and investing to determine the current value of assets and liabilities for various purposes, including financial reporting, investment analysis, and regulatory compliance.
Fair value is based on current market conditions and takes into account factors like supply and demand, market sentiment, and other relevant information. Determining fair value can sometimes be subjective, as it relies on judgement and assumptions, particularly when there are no readily observable market prices. Consequently, there can be variations in the way different entities or analysts estimate fair value for the same asset or liability.
But to put it simply, value is the relationship between the overall price to the customer and the quality of service or benefit provided.
For insurance firms, the FCA has three main concerns regarding fair value for consumers:
- the extent and quality to which insurance firms have implemented and embedded the rules introduced in 2021 overall
- certain firms and specific products where intelligence shows that customers may not be receiving fair value – and whether firms are able to show that their value assessment of those products is in line with the FCA’s rules
- initial indications from the FCA’s supervision of firms shows deficiencies in product governance and a lack of adequate management information
The FCA noted that some distribution arrangements fail to show how fair value is being delivered. There are high levels of commission where it’s not clear how the commission levels had been assessed to support the delivery of fair value. In layman’s terms, some insurers are ripping you off.
How can you keep down your insurance costs?
Keeping down your insurance costs is a smart move and in these cash-strapped times, one we should all consider. So, what can you do?
- Shop around: Don't settle for the first insurance policy you come across. Get quotes from multiple insurance providers to compare prices and coverage options. Shopping around can often lead to significant savings
- Bundle policies: Many insurance companies offer discounts when you bundle multiple policies, such as combining your home and car insurance.
- Maintain a good credit score: Insurance companies often use your credit score as a factor in determining your premiums. Maintaining a good credit score can help keep your insurance costs lower
- Raise excess: Increasing your excess for policies like car and home insurance can lower your premiums. However, be sure you have the financial means to cover the higher excess if you have to claim
- Drive safely: When it comes to car insurance, a good driving record with no accidents or speeding fines can lead to lower car insurance premiums. Some insurers offer safe driving discounts or usage-based insurance programmes that track your driving behaviour
- Install safety features: Fitting your home or car with safety features, such as alarms, anti-theft devices, or smoke detectors, can often lead to lower insurance costs
- Maintain a safe home: Home insurance premiums can be reduced by taking steps to make your home safer, such as updating the electrical system, installing a security system, or reinforcing the roof against wind or hail damage
- Take defensive driving courses: Completing a defensive driving course can sometimes qualify you for car insurance discounts
- Review your coverage regularly: Your insurance needs may change over time. Review your policies annually to ensure you're not over-insured or under-insured. Adjust your coverage as needed
- Ask about discounts: Enquire with your insurance provider about any discounts. Some insurers offer discounts for various factors, such as being a good student, being an OAP, or being a member of certain organisations
- Maintain a healthier lifestyle: For health insurance, leading a healthier lifestyle can sometimes lead to lower premiums. This can include things like not smoking, maintaining a healthy weight, and participating in wellness programmes
- Ask about usage-based insurance: Some insurers offer programmes that monitor your driving habits to determine your premiums. If you're a safe driver or have safe habits, this can result in lower costs
Saving money on insurance is important, but also make sure you have the right coverage to protect against unexpected events.
We can help
Rightly Save is our new service that can help you find the best deal for your insurance needs, for all your insurances whether for car, home, travel, pet, jewellery and so on. We help you use your data held by your insurers to give you control.
Rightly Save, automatically finds all your insurance policies and presents them to you in a single place, complete with renewal dates and the type of policy. To avoid your current insurer rolling you over each year, we’ll help you turn off auto-renewals in just a few clicks and help you get your insurer ready to negotiate a better price without you having to wait in phone queues.
And we’ll set up automatic reminders so you get plenty of notice of all your insurance renewals. That way you’ll have a chance to find a better deal, whether you decide to stay with your existing provider or move on to a new one.
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