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Compliance Portal
October 9, 2024
Providing Fair Value Insurance Products
Jill Hambley, MD of ICS, discusses the need for all businesses to review their approach to providing fair value.
As part of the product approval process, manufacturers (insurers) of insurance products must determine whether the products they bring to the market offer fair value, and perform a fair value assessment. The Financial Conduct Authority (FCA) defines fair value as a ‘reasonable relationship between the price a customer pays for a product or service and the benefits they can expect to receive’.
Five key elements of fair value assessments:
- Benchmarking is a good first step but not the only step; firms can refer to the FCA published insurance value measures
- Solid data and credible evidence
- Clear consideration of customer cohorts based on the target markets
- Clear examination of the total price paid relative to the benefits that customers are expected to receive over their lifetime
- Considerations of customer understanding, support and the options a customer is given within the overall considerations of value
Manufacturers should consider the value that a product (or package of products) is likely to offer throughout the life of the product – at inception, through the initial insured period and at subsequent anticipated renewals. Additionally, it must be clearly demonstrated how any non-investment insurance product, additional product or package provides fair value for a reasonably foreseeable period.
The fair value assessment is not just something to be considered by manufacturers at the product design stage. Distributors also need to conduct their own fair value assessment by obtaining evidence from the manufacturer of why it considers the product / service to represent fair value, and then assessing their own fees and charges commensurate with the scope and quality of service provided. This means considering the cumulative impact of remuneration added by each distributor in the chain. This is important, as fees charged by different firms along the distribution chain may together result in a higher overall cost that does not represent fair value.
In addition, distributors should also consider factors such as comparison to other products available in the market or their own portfolio, whether the method of distribution impacts price or value, i.e.online, telephone, face to face and the value of products and services sold as part of a package or alongside the main contract such as add on products and the impact of premium finance. In it’s recent thematic review, the FCA commented that...
“Most distributors don’t fully understand their responsibilities to consider their remuneration, its interaction with the services and benefits they provide, and its impact on the product’s value.”
So what can distributors do to support the fair value assessment process?
- Ensure effective product distribution arrangements and related governance
- Create clarity around governance structures and processes
- Ensure clear responsibility, rationale and evidence for key decisions
- Get appropriate information from the manufacturers – target market, distribution strategy, the product’s intended value
- Understand the target market and make sure it is aligned with the firm’s own
- Ensure the distribution strategy is consistent with the aim of providing fair product value (see below)
- Retaining appropriate MI and robust analysis of the firm’s own costs and the benefits and services to customers.
Distribution Arrangements
Product distribution arrangements must enable the distributor to understand the value that the insurance product is intended to provide to the customer as well as the impact of the distribution arrangements (including any remuneration) on the intended value of the insurance product. Any distribution strategy the distributor sets up or uses must be consistent with the aim of providing fair value to the customer.
Key issues for distributors to consider:
- What services are being provided by the firm and any others in the chain that justifies the income being earned by the firm (and the effect this has on fair value)?
- Has the firm bench marked its pricing, fees and charges?
- Is the firm able to demonstrate how the fees/income being earned for a particular market aligns with its budget?
- Has the firm retained proportionate evidence of its approach?
- Does the firm have sufficient MI such that it can take prompt action if fair value assessments show a lack of fair value.
Need help?
Speak to ICS; our insurance compliance consultants can assist in reviewing clients' product oversight and governance regimes, and can help identify how your business can demonstrate that you’re achieving good outcomes for customers.
